How to be Wise

Date: 11/26/2004

International Living Postcards– Saturday Edition

Saturday November 27, 2004
Paris, France

Dear International Living Reader,

He’s a nice guy; friendly, knowledgeable, and trustworthy…at least, as far as you know. The sun is hot. The sand is soft. The water inviting. Sitting beneath a palm tree, frozen rum drink in hand…there’s no reason to believe the land he’s trying to sell you isn’t everything he says it is, right?

As the dollar slides, opportunities for investment in non-U.S. property…in both emerging and developed markets…are increasingly attractive. And investing in a foreign development project can be one of the most financially rewarding foreign real estate investments you ever make. With that promise of a greater reward, though, comes greater risk…unless you know the right questions to ask.

You have to determine if the price is right to allow for the return you’re after (I’ll talk more about this in future Postcards)…but you also have to satisfy yourself regarding the developer/seller. This can be the tricky part. How can you be reasonably certain that all is as it has been represented to be…and that you won’t be in for unhappy surprises after you’ve made the investment?

To minimize the risk and help reduce the worry factor, I’ve put together a checklist to evaluate a developer or development project. This list of questions and considerations is the culmination of dozens of years experience (my own and that of friends and colleagues). I use it myself when considering a new opportunity.

I don’t have enough space to detail the entire list for you now, but here are, briefly, the top five questions to ask before investing in a foreign land development project. (Members of my private investment service, Global Real Estate Investor, can get the full checklist here).

#1. Does the developer or land owner you’re speaking with have clear and full title to the property in question?

This is always my first question, especially in any country with a history of title problems.

Is title insurance available? If so, has the developer obtained it? If not, why not? If he has, what exclusions does the policy contain? Will you receive title insurance for the particular piece of the project you’re buying, or is the policy written for the entire property only? For title insurance, I recommend Turalu Brady Murdock, Vice President of First American Title Insurance Company; e-mail: tmurdock@firstam.com.

If title insurance isn’t available, how long has the developer owned the property? Who did he buy it from and how long did they own it? Enlist the services of a good attorney to research title (that is, the history of ownership) for you. (And, importantly, use your own attorney…not the developer’s attorney for this research.) Does the developer guarantee title in the contract?

#2. What is the source of potable water?

Is it being supplied by the developer or is it up to each house/lot to provide its own source? If supplied by the developer, is the water source sufficient to supply the entire project? If it is a well, how high is the water table? How quickly does the water table replenish itself?

If you have to source your own water supply, i.e. drill a well or install a rain-collection system, you should request a feasibility study from the developer to give you an idea how deep you will have to drill to hit the water table or an estimate of the cost of installing a collection system. You don’t want any surprise expenses when you go to build.

Als Has the water been tested? Is it free of contaminants?

#3. How much experience does the developer have?

Does he have the wherewithal to deliver what he has promised or has he properly disclosed what he may not be able to deliver?

Don’t misunderstand. I’m not saying you shouldn’t buy just because the developer isn’t tremendously experienced. What I’m saying is that you want full disclosure. How many projects of the kind you’re buying into has he worked with in the past? If none, then make your own determinations about his ability to do the job he says he’s going to do.

Most important are his financial resources. Does he have the capital to keep the project moving forward on his own or is he relying on sales revenues to be able to progress the infrastructure?

#4. Which brings me to one of the most important questions…yet one that few potential investors think to ask: What happens if the project fails?

What if sales never come? At least not in the numbers the developer expected? What if he is forced to abandon his project? Will you still have the beneficial use of your property?

#5. What is the infrastructure plan?

What infrastructure is in place already? My point: Buy what you see.

Pin down what is promised and how much of it is already in place. And understand that all that’s guaranteed is what’s already in place.

I’m not saying that no developer ever follows through with his infrastructure promises. I am saying that I’ve seen many instances over the years where what is delivered falls far short of what was promised.

If additional infrastructure (roads, electricity, water, telephone) and services (security, landscaping) are needed or promised, make sure the promises are in writing. Services, for example, should be detailed in the owners’ bylaws.

Then determine the risk to you if these things are not delivered. If the road to your piece of the project isn’t completed at the time of your purchase…you need to evaluate the damages to you if it’s never completed. Maybe it’s a deal-breaker, maybe it’s not.

I’ll be in touch again next week,

Lief Simon
Real Estate Editor, International Living