The year was 2005 and I was on a roll. I was a keen and green real estate investor, hot to do deals and expand.
I had made my first real estate investments in my home country of Ireland. They were working out gangbusters and I’d just made the leap to international real estate with a highly successful investment in Panama.
I was on a high and feeling smart.
Through a friend of a friend I heard about a deal…
He told me there was a great opportunity to buy an apartment in the city of Newcastle, in the U.K., and bank serious rental returns. A big part of the appeal was the attractive financing. I listened as he walked me through details of how Newcastle was booming.
The British city of Newcastle was where I made my first international real estate investing mistake…but not something I regret.
It sounded good. Here’s how it worked…
For the sake of round numbers, the price was €200,000. But, I’d seen valuations of €230,000. I could get the mortgage based on the valuation of €230,000 which meant I could buy with little money down. Magic. Hardly any of my own money for immediate equity and what appeared to be positive cash flow. We had projections of rental income of €900 per month.
The deal was on pre-construction apartments. I saw that the population of Newcastle was around a million. This was the same as the Irish capital Dublin, where I was living, which was booming. Surely the economic vitality would be the same I reasoned. And in my naivety that was about all the due diligence I did.
The reality of Newcastle’s economy vibrancy was very different. Employment levels were limited. Jobs were mostly low-level service. The market for those high-end apartments was limited. And once a bunch of them were delivered, projected rental rates fell from €900 a month to €700 a month.
The number that didn’t change was the holding costs. The HOA fees were huge relative to the income, and there was also ground rent…all on top of the usual management charges. And when the extra supply hit the market not only did rents fall, but values did too.
I knew I’d made a mistake when I finally visited. I checked into a hotel near the apartments. It was late when I arrived so I couldn’t make out much but the neighborhood seemed pretty quiet.
And pretty much as soon as I left the hotel I sensed a problem. I couldn’t find anywhere to get coffee. I could see nobody rushing to work. The streets were empty. And when I did find a café it was staffed by locals—not a foreign worker in sight—which is not a good sign of economic vibrancy in a city.
None of this was a scam. It was just a serious schooling that has informed the many real estate investments I have made since.
I had made a classic mistake. I got greedy. I got carried away by the crowd. I didn’t even run the numbers properly. Even writing this today I flush with embarrassment.
But, I don’t regret that Newcastle investment. Truly. It was an incredibly valuable lesson and one I’m glad I learned early in my investing career.
On the two decades since, I’ve learned so much about real estate investing around the globe. I know how “it” works pretty much everywhere now.
And I’ve seen people make some basic mistakes that ended up costing them…money, time, effort and in some cases, their property.
So let me share with you some of the most common mistakes I see people make when buying international real estate…and my advice on how to avoid them.
Mistake #1: Succumbing to the “Margarita Effect” When Buying Overseas
There’s a strange phenomenon I’ve seen time and time again. Sensible, cautious people take a vacation somewhere exotic. They take an evening stroll on the beach, see a “For Sale” sign and suddenly all their common sense goes out the window. There and then, they decide they must have the little house by the beach.
This phenomenon happens to otherwise careful people. They don’t speak the language and can’t read or understand their contract. Yet they commit to buying a new house in a foreign country, without ever consulting a lawyer or doing the necessary checks.
Maybe it’s the effect of too much sun—or a margarita too many. Whatever it is, it often leads to buyer’s remorse.
You wouldn’t spend hundreds of thousands of dollars to buy a place back home without digging deeper into the deal, so why would you act any differently when you’re buying overseas. Follow the same tried and true steps you would at home.
Sun, sea, sand, and the “margarita effect” can lead to costly mistakes and buyer’s remorse.
Mistake #2: Not Hiring a Good, Local, In-Country Attorney
Using an attorney to vet your real estate deal is good. In fact, it’s essential.
But it’s not a good idea to use your attorney back home when buying overseas. Sure, you’ve got a comfort level with the attorney you’ve used for years. They know you, your personal situation, and they might know a lot about real estate in your part of the world.
What they don’t know is the legal system or the buying process in other countries. Without country-specific legal knowledge and experience, an attorney can walk you into trouble. To make sure you’re getting the best legal advice overseas, you need to find a competent in-country attorney.
Mistake #3: Failing to Fully Understand the Sale Contract
The sale contract spells out your agreement with the seller. It covers who pays what, how much, and when. It details what you get (kitchen cabinetry, air conditioners, light fixtures). And it lays out what happens if either you or the seller fail to comply with any of the contract clauses.
Ensuring that you understand your contract is essential. If you don’t understand what you’re buying, or you’re not happy with any part of it, don’t sign the sale contract.
Make sure that the contract you’re reading is the legally binding version. Sometimes a developer or seller will give you a sale contract or purchase agreement in English, but it may not be the binding contract. Only a contract that is in the official language of the country that you are buying in is legally binding. If you have a dispute with the seller, if you need to go to court, then the contract in the language of the country will be the one that you use.
Have your attorney translate the sale contract for you and ask them to explain any clauses or terms that you are not sure of.
Mistake #4: Failing to Check the Title Deed
A retiree once showed me photos of a house in Costa Rica he planned to buy. It looked luxurious with ocean views, wide balconies, and fancy finishes. But there was one big glitch… It wasn’t titled.
Freehold titled ownership is just one type of ownership, the one you’re likely most familiar with back home. But you’ll see other ways of owning property overseas.
One example is rights of possession property, known as derecho posesorio or ROP. The name says it all. With ROP, you get the right to live on the property, use it and enjoy it, until someone with a better claim shows up. In some cases, that doesn’t take long.
If you’re considering a ROP property and the seller says that he can get a freehold title for it, great. But get him to do that as a condition of purchase. No title, no closing. Don’t try getting it titled yourself. It’s often complicated, costly, and time-consuming.
So, before you get into the nitty-gritty of your sale contract, take a few minutes to ask your attorney the basic question: Is this fee simple/titled property? It can save an awful lot of headaches and hassle later on.
No matter where in the world you buy a property, be sure to check the title deeds.
Mistake #5: Not Having the Correct Permits and Approvals
Never take a seller’s or developer’s word that all the necessary permits are in place. It doesn’t matter if they seem to be the most trustworthy individual. A verbal contract about permitting isn’t worth anything. Get your attorney to check that all the promised permits are in place.
The lack of a particular permit doesn’t always mean a developer/seller is crooked though. Permitting processes can be slow in a lot of countries where in some countries, there are far more bureaucratic hurdles to get through before a permit will be granted. If you’re buying abroad, you need to be aware of that.
Also, have your in-country attorney check to make sure that your seller/developer has all the permits and approvals he needs to comply with current regulations.
Step #6: Not Understanding HOA Rules
Homeowners Associations (HOAs) apply when you purchase a condo or a home in a gated community. HOAs typically outline their rules in the Covenants, Conditions, and Restrictions (CCRs for short). The breadth and depth of CCRs differs from one HOA to another.
CCRs can cover what kind of pets, if any, you can keep. Some have restrictions on working from home. Some set out standards for maintenance—including how often you have to carry out work. Others might have restrictions on short-term renting which could be an issue if you’re considering investing in a property to earn rental income.
CCRs can dictate down to the smallest detail how you should maintain your home—right down to the color you can paint your house or what you can plant in your garden.
Of course, those restrictions can work in your favor, too. If you’re not happy that your neighbor has painted his house purple, the CCRs could be your best friend.
Make sure there is nothing in the CCRs that you can’t live with.
HOA rules can vary wildly…be sure you understand what they are before you buy your condo.
Mistake #7: Not Investigating Tax Issues and Wills
As Benjamin Franklin once wrote, there is nothing certain in life but death and taxes and you have to consider both when you’re buying property overseas.
To start, you should get an idea of your tax obligations before you buy property overseas. Your attorney or a good CPA/financial adviser with foreign real estate experience can discuss with you the best way to hold your property overseas. This is a personal matter that depends on why you’re buying the property, what you plan to use it for, and your current tax circumstances.
The other thing you need to consider is what happens to you in case of your death. You may need to have two wills, one in the country you are buying in, and one back home. If you are a couple, how would the death of one partner affect the property ownership?
Make sure to get good advice from both your in-country attorney and your tax advisor back home.
Ronan McMahon, Founder, Overseas Dream Home & Real Estate Trend Alert
P.S. If you have any questions about investing in real estate overseas, or if there’s a particular real estate topic you’d like to hear more about, please do drop me a line here.
P.P.S. Like I said above, I’ve been investing in overseas real estate for over two decades. I’ve made mistakes, but I’ve learned from them. In order to help you get started on your international real estate journey, I’ve put all my insider tips and knowledge into a book. It’s called the Big Book of Profitable Real Estate Investing…and I want to send you a copy for free. All the details you’ll need to get your hands on my most recent book are here.
