Once upon a time, not so very long ago, buying a property overseas was a breeze.
You went along to your local bank and they appraised the value of your home to see how much equity it had and (as if by magic) you had a credit line.
Then the great recession of 2007 rolled up. Home values plummeted in many locales. Banks went to the wall. Those that survived got sharp on their lending policies. And it was goodbye to the days of easy credit lines.
So, how do you buy a property overseas today if you don’t have wads of cash? Surprisingly, there are four ways—including one that lets you buy with as little as $4,000 down.
In Spain and Portugal, foreigners can get bank mortgages. This is really unusual. Banks in many countries say they offer loans to foreigners, but in practice there are so many hurdles (mountains of paperwork, endless restrictions, lengthy delays) that it’s impossible.
Banks in Spain and Portugal are happy to lend to foreign buyers. And their terms are very good. They’ll offer as much as 70% to 90% LTV (loan to value), for up to 40 years and at fixed interest rates as low as 1% to 2%. They’ll even consider applicants whose credit history is less than perfect. The only real restriction is that the loan must come to an end when the borrower reaches the age of 75.
You can use your own retirement funds (an IRA or 401K) to buy property overseas. You need to stick to some general rules. You can’t use the property yourself until you retire; any rental income from the property must go back into your fund; and you can’t buy a property that you already own using your retirement funds (you also can’t buy from close associates or family members). Plus, the custodian of your fund may have some specific restrictions that don’t allow you to buy an overseas property. If that is the case, you may need to switch to a new custodian or a checkbook IRA.
But, once you have bought, you can rent the property, flip it, remodel it…whatever you want.
Seller finance is not common overseas but you may come across it in a market that’s slowed or has a glut of homes for sale. Owners offering it can often get full list price on the property and a quicker sale. Plus, they get a higher interest rate than their money would earn in a bank.
For a buyer, seller financing is fast and it cuts out loan fees. If they’re cash-strapped, it may be the only way they can afford to buy.
The downsides? You’ll usually pay more for the home than a cash buyer. You’ll often pay a higher interest rate than you would on a bank loan back home. And if you stop making payments, you’re out. The seller takes the property back.
If you’re considering seller finance, get an attorney to help draw up a contract. Find out if the seller has any loans or liens on the property himself. (He should pay those off before you start paying him.) The contract should prevent either party taking out additional loans on the property or selling it. And it needs to spell out what happens if the loan is sold on to a third party.
The contract should clearly state who is responsible for repairs, maintenance, and paying property taxes and insurances…and what happens if either the seller or the buyer dies before the loan is cleared.
With seller finance when title is transferred is tricky. As a buyer, I’d want it in my name straight away. But, as the seller, I’d want it to transfer only when the loan had been paid in full.
Developer finance is where a developer finances a piece of property you purchase from him. Developer finance is usually offered on pre-construction properties. It’s also most common in markets such as Brazil where bank finance is extremely expensive.
With developer finance you normally don’t own the property until you have made the last payment. If you stop making payments, the developer simply takes the property back and keeps your money. He probably won’t even have to go to court to do that.
That’s why developers will sometimes approve you for finance without a credit check. It’s a win-win for them. You pay for the property…they are happy. You don’t…they keep your cash and find another buyer.
One exception is Brazil, where developers have to give you back some of your money if you stop making finance payments and they repossess the unit.
Developer finance is a big plus if you’ve got no savings or a poor credit history. If you have cash or a retirement fund, you should weigh up how much the developer finance costs against how much your savings or investments are making. If they are making 8% and the developer wants to charge you 5% it may be worth keeping your portfolio intact and taking the developer finance. But if your investments are yielding 1% and the developer is charging 5%, it’s probably better to forgo developer finance.
You should make sure you understand clearly the terms and conditions of the finance, and what happens if you can’t make payments. Check if the developer can sell the loan on and if your terms and conditions will still apply in that scenario. Neither the developer nor buyer should be allowed to use the property as collateral to get another loan elsewhere.
Finally, if you’re buying in a foreign currency, have some wiggle room. The foreign currency could appreciate against your home currency, leaving you with significantly higher payments.
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