How It's Playing Out in Panama City

Date: 07/13/2007

Buying property pre-construction (off-plan) comes with risks, including the big and obvious one that the developer might

not complete the building. Indeed, several buildings that were selling pre-construction in Panama City have been canceled in the last few weeks. Now they won't be built.

What does this mean for pre-construction investors? Will they get their deposits back?

As far as I understand it, in these current cases, the developers are returning buyers' deposits. However, some buyers had already sold their contracts on to other speculators. What of these secondary buyers? They will get the original buyer's deposit back, but the premium they paid to the original buyer is the question. If these resale buyers didn't protect themselves (with some stipulation in the contract, for example, which, in truth, would be difficult to negotiate and to enforce) when buying from the original buyer, they don't have any recourse.

Buying pre-construction can be a profitable real estate investment strategy. However, you have to do your due diligence and buy smart. When buying from the developer directly, you should check his project history and gauge his ability to complete the project. Use your own attorney (not the developer's) to review the contract.

When you aren't buying directly from the developer, but rather from someone selling on his contract, you need to pay even more attention.

"Buy what you see" is our long-standing mantra. You've heard me and others within the IL group make this recommendation again and again. Now, this is not to say that you should buy only completed properties at full retail prices. It means, rather, that you should pay for what you can touch and feel. If you don't see it (the road, the electricity, the marina…or, indeed, the building, because it hasn't been built yet), then the price should reflect that reality. Don't pay as much for a lot in a new development as you would for a comparable lot in a project where utilities are already installed and amenities are already in place.

However, a piece of property priced 20%, 30%, or even 50% less than a comparable piece of property in a development that is further along in infrastructure improvements and amenities can be an excellent investment.

Bottom line--the earlier you buy in the development process, the lower the price should be. On the other hand, remember that buying early means you're taking greater risks, the biggest being that the developer flat out won't be able to fulfill on his promises. The more likely risk is that it will take the developer longer than expected to complete the project.

In at least one of the cases of the recently canceled projects in Panama City, the plan was halted for technical reasons. Remember, downtown Panama City is built on reclaimed land. Kinda crazy to imagine that, on this foundation, you could build something as tall as the Ice Tower was promised to be. The developers are now rumored to be planning a smaller building on the site. Meanwhile, they say they will refund deposits…but, again, they can only refund what they were paid. Secondary buyers may be out of luck.

So it goes. You make your play…you take your chances.

Lief Simon
For International Living