To minimize the risk and help reduce the worry factor, I’ve put together the following checklist to evaluate a foreign developer or development project.
I use it myself when considering a new opportunity.
1. Does the developer or landowner 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? 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 (not the developer’s) check the title records to see if they jibe with what the developer is telling you. 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 entire project. If he hesitates on this point, you will 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 title 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.
2. Has the property been properly subdivided and have the plans for development been approved? Have the appropriate environmental impact reports been done, submitted, and approved? Has the lot plan been submitted and approved? Is there a homeowner’s association? Has it been registered? Are you comfortable with the terms it outlines? Are there any other government departments that need to review and approve the project?
Most countries have regulations and requirements for developing property, especially raw land and 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. I’ve seen this happen.
3. What is the source of potable water? Has it been tested? Is it free of contaminants? 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 for 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 as to 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.
4. 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 be in compliance with those requirements?
5. 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, don’t base your decision to buy on the promise of electricity that is coming — at least, don’t make payment until you see the lines with your own two eyes.
6. 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? 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, 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?
7. 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?
8. 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. I 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.
9. 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.
10. Does the developer have satisfied customer letters that you can review? Can he put you in touch with past buyers? Give you a list of customers you can call? You want to speak to as many past buyers as you can to get their opinions of the developer and details of their own experiences when buying. They may be happy but still have things to point out that you should watch out for.
11. What is the infrastructure plan? What infrastructure is already in place? Here, again, I want to make one point primarily: 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. If additional infrastructure (roads, electricity, water, telephone) and services (security, landscaping) are needed or promised, be 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, for example, 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. Editorial Note: Lief Simon, the editor of Global Real Estate Investor, lives and works in Ireland and the United States. He holds a master’s degree in international management, has owned real estate in Europe, Central America, and North America and has lived on five continents. These days, when stock-market returns are unreliable at best, diversifying your portfolio to include international real estate may prove the smartest, most profitable, move you can make.
Click here for more information: http://www.agora-inc.com/reports/REL/WRELD105/.