IL Postcard

Your Essential Real Estate Checklist

Date: 11/15/2008 Author: Ronan McMahon

Saturday, Nov. 15, 2008

Read more about investing in overseas real estate in International Living Postcards—Saturday Edition

Dear International Living Reader,

Buying in early into a quality development backed by a serious developer in a location poised for growth can lead to great returns. Just over four years ago I recommended beachfront lots on Nicaragua’s Pacific coast. The price then was $34,500. A similar lot listed this week for $249,000.

You do, however, need to do your due diligence. Don’t make any assumptions or rely on information and warranties other than what’s included in your contract. The temptation is to think...oh, I’m sure everything’s OK. This guy couldn’t be selling lots if he didn’t have all the necessary permits or if he didn’t have full and clear title to the land. Suffices to say, stranger things have happened. It’s very easy to get lazy and believe what you want to be the case.

To minimize the risk and help reduce the worry factor, I’ve put together the following checklist that will help you evaluate a developer or development project.

Does your developer/landowner have full title to the property?

This should always be your first question, especially in a country with a history of title problems. Is title insurance available? Has the developer obtained it? If not, why not? If he has, what are the policy’s exclusions? (This is critical. In Nicaragua, for example, title insurance policies can include what are known as “Sandinista exclusions,” meaning title to the property is guaranteed except with regards to any Sandinista confiscation or cooperative ownership.) 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?

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? Have your attorney check the title records to see if they match with what the developer is telling you. (And, importantly, use your own attorney, not the developer’s attorney, for this research.) Does the developer guarantee title in the contract?

Title insurance isn’t available in every country in the world, but if it is available in the country where you’re considering investing, the developer should be willing to help you obtain it for your lot or unit, even if he hasn’t arranged it for the project in total. If he hesitates on this point, you probably want to pass on the opportunity...or at least do considerable due diligence before proceeding.

In a country where title insurance isn’t available, enlist the services of a good attorney to research the history of ownership for you. Many European countries use notaries to transfer real estate. They are insured and are responsible for ensuring good title.

If something goes wrong, you can go back to your notary to resolve the issue, and he can be responsible for making good should any claim against your title arise. (Note: Unlike in the U.S., being a notary in most countries requires additional legal training and strict government regulation, and, typically, foreign notaries assume that responsibility for life.)

Do you have permission to develop on the site?

Most countries have regulations and requirements for developing property, especially raw land (and even more for beachfront land), but also often houses and apartments, etc.

You want to be sure that all approvals have been obtained and all necessary studies completed before making any deposit. Otherwise, there is the risk that the development plan could be rejected and the developer could walk away from the project...perhaps with your deposit, if it hasn’t been properly escrowed.

Does it have access to the essential facilities?

What is the source of potable water? Is water being supplied by the developer or is it up to you to provide your own? If supplied by the developer, is there enough water for the entire project? If it is a well, how high is the water table? How quickly does the water table replenish itself? Has the water been tested? Is it free of contaminants?

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 for an idea of how deep you will have to drill or how much a collection system will cost. You don’t want any surprise expenses when you go to build.

How will waste disposal be handled—septic or sewage (if near or in a town)?

If it is up to you to install a septic system, be sure you understand the local requirements. Is the piece of property large enough to allow you to build what you’re intending to build and still be in compliance?

Where is the nearest electricity? Is there electricity already run to the project? If not, when will the lines be run and who is running them—the developer or the government? Generally, my advice is to buy what you see. In other words, if you see electrical lines running to the property, then there is electricity. If not, there isn’t. Don’t base your decision to buy on the promise that electricity is coming; at least, don’t make payment until you see the lines with your own eyes.

How much experience does the developer have?

Does the developer have the means 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 because the developer isn’t tremendously experienced. What you want is 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 the developer’s ability to do the job.

Most important are the developer’s 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?

Over the years, I’ve seen many projects that have stopped short. A developer buys a piece of land, stakes off lots, puts up a few easels on the beach showing his vision for development (a pool, a marina, a clubhouse, tennis courts, stables, elaborate landscaping)...

People see the pretty drawings...look out at the view...and buy. Twelve and 24 months later, the development project is still nothing more than some drawings on the beach and lot stakes in the sand. Sales didn’t come as quickly as the developer had counted on, and the pool and the tennis courts had to be deferred...indefinitely.

Ask yourself: What happens if the project fails?

What if the developer never sells as much as he expected? What if he is forced to abandon his project? Will you still have the beneficial use of your property?

Who handles the closing?

What is the reputation of the developer’s law firm? Is it recommended by the U.S. State Department? Who else will be involved in the transfer of legal documents? Often, a developer will offer the services of his attorney for closing at no additional costs. We recommend that you hire your own attorney. Yes, it’ll cost you a little extra, but you need to make sure your interests are represented properly.

What are the details of financing and installment payments (if these are available)?

If the developer is financing, will you receive your title with a mortgage, or does the property not transfer until the final payment has been made? If you are making a deposit, will it be held in escrow? Make sure you understand if deposits and other monies are held separately or together.

Ask the developer for letters from satisfied customers that you can review. Speak to past buyers—the developer can put you in touch with them.

You should speak to as many past buyers as you can to get their opinions of the developer and details of their own experiences. They may be happy, but still could have things to point out that you should watch out for.

What is the infrastructure plan? What infrastructure is in place already?

Here, again, I want to make one 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. But 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, well, you need to evaluate the cost to you if it’s never completed. Maybe it’s a deal breaker, maybe it’s not.

Best of luck, and happy investing.

Ronan McMahon

P.S. These are just the beginning of the questions I ask myself before making a real estate investment. For more information on wise real estate investing and tips and tricks to become a successful property investor, read this.

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