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Patricia Tan – Perspectives – International REAL Estate

International Real Estate – A Risky Business?

By Patricia Tan

I recently returned from a series of meetings in Washington D.C. While I was there, I was asked to present to a group of experienced international agents about ways in which they could manage risk in their business, and provide a better experience for their customers.

Let’s consider those real estate transactions where an American buys or sells property in another country. Such transactions are most certainly prone to greater risks in a number of areas, and buyers, sellers and real estate agents should exercise caution.

Each country has its own methods and structure for monitoring who owns a particular property, and passing title from one entity to another. Foreigners should consult with a tax and legal professional before they choose a property, so they can establish the most effective way for them to hold title – in their personal name, a trust, limited liability company, or a corporation. Each of these entities will be treated differently for tax purposes and the best fit will depend upon the buyer’s personal circumstances.

When buying a property overseas there is an added level of complexity. In some countries great care must be taken to prove the person selling the real estate has the right to do so. A local attorney must be employed to perform due diligence and ensure ownership of the land or building, and who exactly has the right to sell. Mexico is the top destination for Americans buying abroad, and land in Mexico that is designated as Ejidos land cannot be sold, rented or mortgaged. In Panama, properties can be sold as titled, or with possession rights. The latter is not recommended as they may be at risk of future ownership disputes, and cannot be used as collateral for a mortgage.

In some countries foreigners may not purchase certain kinds of land. Foreign ownership of agricultural and beachfront property may be restricted. For instance, the Mexican constitution does not permit foreign ownership of coastal land. This is, of course, the kind of land that is most attractive to foreigners who wish to live or have second homes in Mexico. The Mexican government implemented a regime that allows non-Mexicans to own such land through a bank trust known as a fideicomiso. Costa Rica also limits ownership of beach land. Some may be owned only by Costa Ricans or foreigners who have been resident in Costa Rica for at least five years.

Title insurance is available in some countries, and is usually offered through a U.S. title insurance company. This will give some peace of mind to buyers.

The other area that poses risk in an international transaction is that of currency fluctuation. This can have a major impact in those countries with more volatile currencies or problems managing their economies and inflation. Consider a home purchased in Brazil when the Brazilian Real (BRL) was trading at BRL1.8 to the U.S. Dollar. A property priced at BRL200,000 cost an American buyer around $111,000. Two years later that same American wishes to sell the property and repatriate funds to U.S.A. When the exchange rate is approximately BRL2.25 to $1 let’s assume the value of the property had increased by 25% and it is now worth BRL250,000. When the home is sold, the owner will realize $111,000 – exactly what he paid for it two years earlier. Fluctuation in the exchange rate effectively negated all of the property price appreciation. In this example, the exchange rate varied by only 25%. Historically, the BRL has suffered some extreme movements. In October 2002 it peaked at 3.95. If our hypothetical owner had sold his property then, it would have been worth the equivalent of only $63,000!

Some countries address currency concerns through “Dollarization”. Panama, for instance uses the U.S. Dollar as its currency and this has proved a successful strategy for encouraging real estate and other investment in their economy. Other countries may price, buy and sell real estate in US$ and buyers may feel protected against currency fluctuations.

Other risks in an international transaction exist in the areas of governmental controls, economic performance, banking regulations, immigration and taxes. Perhaps subjects for future articles!

patricia-tan-prudential-palms-realtyPatricia Tan was born in England, and her career in international sales and marketing led her to live and work in many countries around the world before moving to Sarasota in 1997. Patricia is a Certified International Property Specialist (CIPS), Graduate Realtor Institute (GRI), and Transnational Referral Certified (TRC). She is involved in global activities of the Sarasota, Florida and National Association of Realtors, and currently serves as NAR President’s Liaison to U.K. Her real estate business operates from Coldwell Banker on St Armands Key, where her focus is to bring international buyers to the local market. She regularly makes marketing trips to Canada, Asia and Europe, to promote Florida’s Gulf Coast and the Sarasota area in particular. Patricia may be reached at 941-504-9232 or Pat@PatriciaTan.com.

Copyright © 2014 REAL Exclusive Magazine
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