Buy What You See

Saturday, March 22, 2008

Read more about investing in overseas real estate in International Living Postcards—Saturday Edition

“Buy what you see” has always been one of my mantras. The trouble is, you can’t always be sure what you’re looking at.

For example...what if what you see is nothing? That is, what if there’s no infrastructure…and the developer isn’t promising any infrastructure? What does that mean?

It’s a rare project where the developer doesn’t at least put in water, roads, and electricity. But it happens. And, when it does, you need to wonder why the guy would choose not to build in even those basic services.

One obvious answer is that he’s in it for the quick profits. By including no services or infrastructure whatsoever, he’s probably able to price himself well below other developers in the region…giving the illusion of a good deal. A novice buyer may not look beyond the price tag. And, if he does, he may not realize that the land is not the greatest part of the cost when you buy into a developed property. The cost to the developer of even basic infrastructure can run two to three times the cost of the land. If the development is to include amenities like a clubhouse, a pool, and tennis courts, the land price can, in fact, be a small portion of the total development cost.

Or…maybe the guy isn’t a cheapskate in it only for the quick dollar in his pocket. Maybe he couldn’t get the necessary approvals for development. Or maybe he doesn’t have the cash or the experience to do the work.

To state the obvious, all of these reasons should be red flags to the would-be buyer. One thousand square meters of sand isn’t worth much without electricity and water. You can’t always count on finding a greater fool.

I once invested in a lot project where the developer had no plans for installing infrastructure. The idea was that the lot owners would work together later to have electricity and water brought to the lots. The developer and a few lot owners decided they wanted to move ahead more quickly and in a bigger way than had been discussed. Not a bad idea on the surface, but the cost became prohibitive…certainly more than I had ever expected to invest. Furthermore, the developer added a premium to the direct costs for arranging to have the work done—a big premium. What were we lot-owners to say at that point? It had never been agreed that the developer wouldn’t charge a premium for arranging the work.

I wasn’t the only one unhappy with how things played out. Many owners simply refused to ante up, meaning those owners who did want the infrastructure work carried out according to the schedule and the fee structure proposed by the developer had to pony up the full cost. Their per-owner shares worked out to be multiples of the amount they had invested in the lots.

Another place where lots are sold without infrastructure is the Costa Maya, Mexico. In this case, it isn’t “developers” deciding to sell minus any improvements to the land. It’s land owners who have decided to carve up their own beachfront property and then sell off smaller lots. In this case, because of the geography of the area, the main beach road provides access to most all lots. However, individual lot buyers must rely on (and wait for) the government to bring electricity down the beach road...and they must dig their own wells for drinking water.

Brazil is another place where I’ve recently noticed these kinds of “no-frills” developments. Typically, there is a lot plan, but no road...no plan for electricity...and no water. When you tally up the cost (and the time and the hassle) of bringing in those necessary services yourself…often your cheap beach lot isn’t so cheap after all.

Lief Simon
For International Living

Editor’s note: Meet Lief at International Living’sUltimate Event in May, where he’ll show you how to turn real estate profits into an early retirement. Our theme this year is Protect Your Future by Looking Outside U.S. Borders. The world around us is changing fast. Each year, doors of opportunity are opening in select countries…while doors in others are closing fast. If you are concerned about protecting your wealth, health, and lifestyle, the Ultimate Event is the best way to get all the information and contacts you need to make your goal of a simpler and better life a reality within the next year.

Read related articles:

- Turn Every Dollar You Invest Into $1.20…Instantly

- A Beachfront Investment for Less Than $50,000

- How to Finance an International Property Investment