Friday, November 12, 2021
Dear Your Overseas Dream Home Reader,
Looking for a dream home overseas is lots of fun. Picking your location…researching listings…figuring out where in the neighborhood your local café for your morning coffee and pastry is located.
It’s an exciting process.
But, and not to put too much of a downer on it, there is also a very practical side to all this. Actually buying that dream home. And buying in another country can throw up scenarios that you might not have thought about.
I often get questions from your fellow readers about the processes involved in buying a home overseas.
Today, I’m going to share with you some of the most popular questions I get asked about what you need to consider when buying a property overseas.
Let’s gets started…
Lisa asks: Is there anything to prevent an American citizen from owning a property oversees?
Or are there any drawbacks or negative aspects for an American to consider before buying? I’m very interested in owning an overseas property but I’m just getting started on the research.
Ronan responds: Hi Lisa. There are no restrictions specific to Americans in most cases. Some countries have restrictions and limitations on foreign ownership for all or most foreigners. This is the case in much of Asia and even parts of Scandinavia, unless you are going to become a full-time resident. In the main, in the places you read about here in this e-letter, Americans have the same rights to ownership as locals. My advice is to do your research and take proper legal and professional guidance each step of the process.
The biggest mistake I see people make when they buy overseas is due to what I call the “Margarita Effect.”
It works like this: they take a vacation, they get a lot of sun, have a few too many margaritas, and start getting loose with their money. Next thing they know, they’re putting down a deposit on a condo without doing any due diligence or following any of the basic steps they would follow if buying at home. Then, once the Margarita Effect wears off, they’re left with the worst kind of hangover.
Kari asks: Hi Ronan. I’m looking to make a move overseas in five to 10 years. I already have a mortgage, so financing is going to be a consideration if I choose to buy. Thinking about buying overseas is still a little scary.
So, knowing my financing options and how it all works would be really helpful. Will banks lend to a North American with a stable income?
Ronan responds: Hi Kari. Your financing options will change depending on where you plan to buy. In Europe, you can generally get bank financing. As a foreigner, you’ll pay a slightly higher rate than an EU citizen. However, as it stands, rates are incredibly low. In Portugal, for instance, banks are lending to foreigners at incredibly low rates—as little as 1% to 1.5%—with sometimes as much as 80% loan to value.
When looking for financing in Latin America, it gets a little trickier. Walk into a bank in Mexico or Costa Rica, for example, and if you are very lucky, they might lend you 60% and charge you 12% for the privilege. That’s after they’re done weighing you down with excruciating bureaucratic requirements. Then, and only then, will they decide whether to let you borrow money—they might still refuse.
One workaround I use for members of my Real Estate Trend Alert group is to negotiate pre-approved developer financing with our deals. Developer financing is, as the name suggests, where a developer finances a piece of the real estate you buy from him—he’s the bank.
It’s most commonly offered for preconstruction properties and also in markets where bank financing is extremely difficult to get for foreign buyers and/or prohibitively expensive.
In some cases, you can also find seller financing. For instance, if a seller’s home is worth $200,000 you can offer $50,000 now and the balance over 10 years at 5%.
Finally, you can finance a real estate investment with a self-directed IRA, so long as the custodian accepts real estate as an asset class, and specifically foreign real estate. However, the big issue here is that real estate held within an IRA must be entirely for investment purposes. Neither you nor any relatives can live in the house, nor run a business from the house. If you do, you will disqualify the IRA and potentially face penalties.
Dora says: Hi Ronan. You mention in some of your articles that one should “do your own due diligence.” What exactly would this consist of?
Ronan responds: Hi Dora. When buying a property anywhere, home or abroad, you need to make sure that all the right legal work is in place, that you have full rights to ownership, and that there will be no nasty surprises down the line.
When you’re buying something as valuable as a home, you want to make sure of what you’re paying for. That’s the purpose of your due diligence. It’s insurance against the unexpected.
The good news is, you’re not doing it alone. Your attorney will help you with the process. My suggestion is to hire a good, local, in-country attorney. Your U.S. or Canada-based attorney may work wonders for you…but they’re not likely to be familiar with the intricacies of buying a property in your chosen country.
Your attorney should be bilingual and work only for you. They should not represent anyone else in the transaction. That may sound like a given, but in many countries, an attorney can legally represent both sides in a transaction.
If you are unsure about how to find a good local attorney, do what you would do back home. Ask friends, family, or colleagues if they have bought property in that country, and if so, which attorney they used. Failing that, First American Title Insurance has a list of approved attorneys they work with in foreign countries. You can ask for their list of approved attorneys in Costa Rica, for example.
Your attorney will help you with the sales contract, check the title deed in the registry, and make sure that your seller/developer has all the permits and approvals they need to comply with current regulations.
In some locations, you should consider title insurance. Title insurance is available in some countries overseas and it’s affordable. It covers defects in title, property taxes, boundary disputes, hidden defects—up to the point when you buy the property. Basically, it gives you peace of mind. If someone challenges your title, then the title company should defend that title. They either cover your defense costs, or they pay you your actual loss if they made a mistake, up to the amount of the policy.
When it comes to the sales contract, if it’s in a foreign language, have your attorney translate it for you and read it yourself. Ask your attorney to explain any clauses or terms that you are not sure of.
I’d also suggest doing a thorough check of the site of the property itself. You need to make sure that the property has clear access, and there are not any issues with right-of-way (your attorney can check this).
Also, make sure all the infrastructure is in place. Ask the seller as many questions as you need to ask to feel comfortable before proceeding with the sale.
For instance, check the situation with the water. Is there potable water, good pressure, mains supply? Is the electric in place? If not, what timeframe are you looking at? And will it be aboveground or underground? What’s the situation with the roads? Are they paved or unpaved?
And if high-speed internet is an absolute necessity for your job or your business, check that it is available in your area (preferably with a service provider).
To sum up, I get that there are hardly two words in the English language as boring as “due diligence.” Together, they have the effect of sucking all the romance out of your overseas adventure. However, in my experience, once you have a good attorney on board, it’s all very straightforward, and relatively hands-off. Getting it done at the beginning means you’ll enjoy your overseas home with full peace of mind once you’ve finally moved in.
Wishing you good real estate investing,
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Ronan McMahon, Real Estate Trend Alert
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