Unlike in the US, acquiring the right information needed to accurately assess a property’s value can be challenging in Latin America. Spending time in the market you’re interested in, doing thorough due diligence on similar properties, seeking out motivated sellers and working with multiple brokers, can all help foreign investors avoid paying “gringo prices” for Latin American properties. See the following article from Pathfinder International for more on this.
If there’s one thing I’ve learned from real estate scouting over the years, it’s this: don’t trust asking prices for property. Don’t take them as a true indicator of how much the property is really worth…and don’t rely on the seller to provide accurate information to justify his asking price.
We tend to blame inflated pricing on the fact that we’re “gringos”—foreigners that locals assume are rich enough to pay more for a property than a local buyer. But that’s not the whole story.
Finding a fair price is much easier in countries like the UK and the US. You go online, armed with only a zip code, and you’ll immediately see accurate comps for the property you’re buying or selling. I just checked the last property I sold on England’s south coast. I can see the original purchase price I paid for the apartment, and the sale price when I sold three years later. I can also see my neighbors’ properties…and how much they paid for them.
Armed with this information—along with an agent’s valuation—you can tell pretty accurately what a property is worth.
In Latin America, finding that information is almost impossible. You don’t have a handy online source for sale prices. Even where a property registry is online, as it is in Panama, you’ll need the actual title number or the registered owner to do a search. And even then it doesn’t guarantee accurate information. Buyers often register their properties at less than the price they paid, to avoid paying higher property tax.
Multiple Listing Services don’t exist either. I’ve seen some…that were actually a single real estate agent’s listings with a few from other agents thrown in.
Here’s how can you make sure you pay market value for your property, instead of gringo prices.
- Do your own research. Check out local newspapers and online listings. Check out those handwritten ads posted by owners on doors and windows. Meet with as many local brokers as you can. Ask your in-country attorney if they know of any other recent sales for similar properties. Ask about property auctions…and how banks deal with foreclosures. Talk to the locals, too. If you can’t speak the language, hire someone who does, that you trust, and get them to do some investigating for you.
- See as many similar properties as you can. Sometimes sellers genuinely don’t know the value of their property, or they’ll make the price up on a whim. But if you see 10 similar properties with different brokers, you’ll begin to get an accurate feel for what things are really worth per square meter. Compare the price for new pre-construction property with finished units currently on the market. All of this should give you a good idea of the average price of your desired property for that market.
- Don’t believe in the competing buyer. In emerging markets, you’ll hear that there are other foreign buyers in town looking at similar property, and the asking price will rise based on the expectation of a gringo bidding war. And often you’ll discover that the “other” foreign buyer is in fact you…looking at the same pieces of property…with a different agent. Sometimes, the “other” buyer is a phantom, created to give you a sense of urgency, and the property a sense of value.
- Beware of phony sales data. If the seller tells you a similar property sold recently, and quotes the sales price, check it out. I’ve seen frothy bidding wars on sections of beachfront land. Prices rose dramatically, caused by a number of “sales” to local and gringo developers. When I looked into it, I found that none of the developers had bought anything. They had taken out three-month options on land…on which they never followed through. Only relatively small amounts of cash—up to $5,000—had changed hands, yet these options had hiked land prices out of all proportion to similar land close by.
- Find a motivated seller instead of a wishful seller. Motivated sellers are more likely to have a realistic asking price. Some sellers have a “wish list” price, because they don’t really want to or need to sell. But of course they will sell, if you pay them their inflated asking price…sometimes double or triple what the land is worth.
- Be cautious of group dynamics. Dealing with one owner is simpler than dealing with a group of owners, for many reasons. One is that owners who want to sell can inflate the asking price, to persuade the reluctant owners to go along with the sale.
- Use more than one broker. Sometimes it’s down to the seller playing one broker off against the other…sometimes it’s down to a broker adding on an extra-juicy commission for himself…but you can find the same property listed for very different prices with different brokers. Real estate brokers overseas are often unlicensed, with no governing body, and no regulations. If you use only one broker, you could pay much more for your property.
- Don’t rely totally on advertising online. Brokers sometimes post super-low prices online for property they don’t own and don’t have a listing agreement on…to get you to use their services. Lack of regulation means you can’t rely on property descriptions, either.
Now, this all sounds tricky…but not paying gringo prices really boils down to one thing: local knowledge.
The more time you spend in the place where you’re buying a second home or investment property, the more you’ll find out about the local market. You’ll still be a gringo, of course—but a gringo the locals know, and who’s staying for the long haul. That makes a difference. You’ll figure out who you can trust. You’ll build up your own database of information on pricing over time, too, and be able to make an offer—safe in the knowledge that you’re not paying gringo prices.
This article has been republished from Pathfinder International. You can also view this article at Pathfinder International, a site discussing international real estate opportunities.