Five Reasons Never To Buy Real Estate In A Foreign Country

Date: 05/19/2007

International Living Postcards-- Sunday Edition

Sunday, May 20, 2007
Paris, France

"This guy must be out of his mind," Bill declared, walking into my office with one of those glossy international property magazines open on a "Case Study" page.

"Look at this, Kathie," Bill continued, handing me the magazine. "This upholsterer from South Wales has bought a house on the island of St. Vincent…and two others in the Dominican Republic. He says these investments 'give him great peace of mind.'

"But he's never been to the Caribbean…never stepped foot on these islands. And he's buying retail in developed markets! Certain, that, nevertheless, the values of the properties he's investing in will go up…because, I guess, well, real estate values always go up, don't they?

"He has no idea what he's doing. It's nuts."

Sure enough, when I looked at the article Bill pointed to, Paul from Caerphilly has just invested $700,000 in a two-bedroom house on St. Vincent and The Grenadines. As he explains, "I am not even looking to visit the development but rather to sit back and watch my investment work for me."

Ah, dear reader, if only it were that easy. But you and I know better.

Bill walked out of my office shaking his head. "This is just what we've been warning readers of International Living not to do all these years."

Indeed. And I'll take this opportunity to remind you again of a few fundamentals:

First, never buy in a market where you've never been. Lief and I broke this rule once three years ago, and we're regretting it. Without question, if you're buying with any thought to personal use, you want to spend time in a place before committing to a real estate purchase. But even if you're buying only for investment, you should pound the local pavements (or beaches) with your own two feet. No amount of research can substitute.

Second, buy only what you see. The developer or real estate agent may promise a marina, a clubhouse, paved roads, and a helicopter landing pad…but if those things don't exist the day you sign your contract…they don't exist. And you're not buying them. Maybe, someday, they'll be built. But don't figure them into your purchase price.

Third, if you're buying for personal use, rent first, for at least six months. You may have visited the country several times…you may feel you know it well…but you know it as an outsider. You need to give yourself a chance to get to know it as a local. If possible, arrange your trying-the-place-on-for-size visit during the least appealing season.

Fourth, if you're buying for investment, don't buy at the top. Talk about stating the obvious, I know…but you'd be surprised what people can be persuaded to do. Reasonable investments are found ahead of the infrastructure, as Lief Simon, our resident global real estate investing guru, reminds his readers regularly. You want to buy before the roads go in…and you want to pay pre-road prices.

Finally, recognize that real estate values do not always go up. Look at Buenos Aires in 2001 (following devaluation of the peso)…Ecuador in 2000 (following dollarization)…London in 1989. Property markets go up (sometimes exuberantly and beyond reason)…and they go down (sometimes crashingly). As an investor, you're as interested in the downturns as in the years of appreciation, for the falls often afford you buying opportunities.

Lief has been reporting lately, for example, on the current and ongoing decline of the Spanish property market. Leigh Fergus, Euro-editor in Paris, commented this morning on the most recent interest rate hike in the UK. Further rate rises in the UK and Ireland could (and we believe will) contribute to the decline (finally) of these frothy markets.

All opportunities to watch.

But don't pursue any of them, dear reader, from your armchair. And don't buy because you're certain an overseas property investment will make you rich.

Kathleen Peddicord
Publisher, International Living

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P.S. As Bill commented this morning about our friend the upholsterer from South Wales, "This guy can't have any idea what he's gotten himself into."

"Probably not," I responded. "But, Bill, on the other hand, no one who makes a property purchase in another country really knows what he's in for. If we knew in full up front what would be required to make every investment of this kind pay off…none of us would ever buy anything."

But that's a conversation for another day…