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The ten most common mistakes when buying property overseas

publication date: Apr 4, 2008
 | 
author/source: Tony Mckay
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mckayWhy not benefit from the experience of others? Agents may find the points below useful in their own dealings with clients asking for help in purchasing overseas. 

Not having a clear idea why you are buying abroad: 
Do you want to use the property as a holiday home or is it a pure investment? Will you be renting it out to the general public or will it only be used by you, your family and friends? If you are looking for a pure investment and you want to maximize the capital growth potential and rental return then you will need to put aside your own preferences and analyse the property from a cold investment perspective. 

Don’t be seduced by glitz, glamour and sun if it isn’t going to translate into a higher value for your property! A property on the beach might be great to use in summer but it is unlikely to achieve the same strong year round rental that an apartment in the heart of a city will. 

Assuming that the market is the same as the UK: 
The UK offers property investors a mature property market, with a robust legal system, considerable investor protections, and a clearly defined property ownership system. Many other countries – particularly the emerging markets - do not. For example:
Investors in Northern Cyprus could face future potential claims on their land from Greek Cypriots as a result of the ownership of the land being contested.
In Spain, thousands of UK investors face having their properties demolished as the properties were build without planning permission.
In Dubai (until very recently), developers did not have to put clients’ deposits into escrow accounts and hence investors could lose all their money if developers went bust.
In Thailand, foreign investors can not hold land in their own name. 

Failing to do sufficient research: 
Many investors seem to get caught up in the emotion of buying “a place in the sun” and abandon all the good sense they would exercise when buying in the UK. Don’t invest in a property in a location or country of which you have very little understanding. You must invest sufficient time in researching the country, the specific area, the developer, and the development. Ideally visit the country and explore the area thoroughly first hand. If you don’t do your research, there is every chance you will end up over paying for the property or buying in a location that will fail to deliver the return you are looking for. 

Failing to appreciate that “higher return” is accompanied by “higher risk”: 
The last 5 years have seen UK investors turn to increasingly “exotic” property markets. We have seen UK investors recently offered new build property in markets as diverse as Sabah (Malaysia), Belize, and even Mongolia. Many investors appear to have been lulled into a false sense of security by the strong performance of the UK property market over the last 5 years. Investing in property does entail risk and these risks are amplified when investing in emerging markets as you are exposed to additional risks such as political instability, civil unrest, major economic volatility, and currency fluctuations. 

Using the developers “solicitor”: 
You should always obtain your own independent legal advice. This is an incredibly important “check and balance”. Thousands of investors have come unstuck by using a “solicitor” recommended by the developer who later turns out to be a friend or accomplice of the developer and who invariably fails to inform the investor about factors such as lack of protection for deposits or absence of building permits. Furthermore, never sign anything that you do not understand. When buying abroad the contract will typically be in the foreign language so make sure you have the agreement translated. 

Accepting the “sales patter” unquestionably: 
Just because the sales person assures you that the empty block of land in front of yours will never be built on and block your view of the ocean or assures you that you will be able to put an extra storey on your house with “no problems” doesn’t mean that it is true! If there are important questions that will impact your decision to buy or not, you must get the answers yourself. 

Contact the local council, ask your (independent!) lawyer, and ask several other experts just to be absolutely sure. Be particularly sceptical about claimed rental values and achievable occupancy rates: do you really believe that your beach house is going to be fully rented for 10 months of the year? 

Falling victim to high-pressure inspection tours: 
Many property companies offer “inspection tours”. Typically these involve flying the investor to a country and then spending the next 2-3 days shuttling them at great speed from property to property, all the while pressuring them to put down a deposit before their trip ends. These tours can be a good way to get a first hand feel for the area and development but you must be careful. 

Don’t feel pressured to put down a deposit and if you do want to put a deposit down, make sure there is a cooling off period so you can change your mind and get your money back. Despite what the salesperson says, it is highly unlikely in most cases that you will miss out on the property if you don’t put down your money “that very instant”. It is always best to have some quiet time to reflect on what you have seen before you commit to such a substantial purchase. 

Blindly chasing the next “hot” market: 
Just because a television show says that a small African island is going to be this year’s hottest market doesn’t mean that you should plough your life savings into property there. TV shows and magazines are always looking for a “sexy” new country that will sell their product. What you need is a solid investment that is going to deliver an excellent return over the next 10-20 years, not the latest overhyped market. 

Thinking “cheap” is the same as “good value”: 
Many investors are lured in by the low price of some real estate in emerging markets, thinking that this must mean it is a bargain and that the amount is (relatively) so small that they can’t go wrong. Well you can. 

Investing in markets at an early stage (before prices rise) is obviously very attractive, but you need to be certain that the low price does not reflect other problems e.g. the fact that the construction is of a low quality, that the property’s location is poor (e.g. hundred of miles from the nearest airport), or that the property is being built in a location with thousands of other properties that are all going to be desperately competing for the same rental and re-sale market. 

The thousands of Bulgarian ski apartments that have recently been unleashed on UK investors might at first glance seem “cheap” but serious questions are already being asked about build quality, over development, and the lack of a sufficient rental market. Even a unit that costs £40,000 is not going to look like such good value if you can’t sell it or rent it. 

Failing to consider an “exit strategy”: 
Before you buy any property you must have a clear strategy for getting a return on your money. You are going to want to see strong capital growth and solid rental income. So make sure that the country you are buying in offers these. Many emerging markets have very immature rental and re-sale markets, with locals unable to afford the prices of high-spec new apartments and with foreigners more attracted to buying off-plan properties from the plethora of new schemes that are being built than buying completed units. It can take several years before these fast growing emerging markets settle down and a reliable secondary market emerges. So you will need to make sure you can weather this period. 

TONY MCKAY 
Chief Operating Officer, 
Instant Access Properties 

Tony oversees the sourcing of more than £500m worth of UK and international residential investment property for clients every year. 

A qualified chartered accountant, he began his career in the property industry in 1993 when he was recruited to acquire and add value to the property portfolio of Securum Property Holdings Ltd, a Swedish state-owned asset and loan work-out organisation. The portfolio was valued at £300m when Tony commenced, a value that had risen to £550m six years later. 

Before joining Instant Access Properties in May 2004, Tony was Managing Director of Chesterton International. 

Instant Access Properties is a large UK organisation which sources pre-vetted investment opportunities both locally and internationally. This figure currently exceeds £2.3 billion 

Visit www.instantaccess.eu.com for more information.