Options Inflate Real Estate Values In Ecuador

Buying large parcels of land in Ecuador can be somewhat of a shell game as owners sell options to buy on their land, and buyers of options often …

Buying large parcels of land in Ecuador can be somewhat of a shell game as owners sell options to buy on their land, and buyers of options often make those purchases for the sole purpose of blocking out other potential buyers. An “option” to buy land is a small upfront fee that earns the potential purchaser the option of buying the land in the future with the hopes that the land will have increased yet more in value at that time. This is a common practice in Ecuador, but buyers should take note that these negotiations are often riddled with exaggerations and falsehoods regarding the actual value of the property. For more on this continue reading the following article from International Living.

“Don’t tell anyone in town that I am meeting you. Don’t talk about anything we discuss with anyone else. Oh, and let’s not meet at your hotel. There’s a little place down the side street near the plaza, let’s meet there instead. You have a driver?  Great. But hang on… is he a local from the town…and is he involved in real estate?”

Scouting larger land parcels in Ecuador is fun. You meet all kinds of people, from across the social spectrum. But in one location I felt as if I had a starring role in a real-life spy movie.

One seller insisted that I not tell anyone I was meeting him. Another made me promise not to reveal that he was the owner of his land to the locals (it subsequently turned out that they already knew). A third kept trying to ferret information from me to get a scoop on his rivals.

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Even my hotel wasn’t safe. The owner, it turned out, was in on the action, a broker masquerading as a hotelier. Conversations over breakfast were a struggle to avoid mentioning anything related to my scouting trip or real estate in the local area.

None of the sellers in this area spoke with each other. I was the only person speaking with everybody.  They all talked up the price per acre for their land parcels based on each other’s sales (my land is worth $5,000 an acre, because his land next door sold recently for $4,000, and his land isn’t as good). But I knew that none of them had actually sold anything. They based their sale prices on one thing: options.

Options are not actual sales. No money had changed hands on these land parcels other than an initial $2,000-$5,000 deposit. The buyer takes an option, a gamble on price rises. The land is maybe worth $2,000 an acre today. But the buyer agrees to pay more in two or three years’ time…maybe $2,250 an acre. He hopes that land prices will have risen to $2,500 an acre during that time. It doesn’t sound like a large profit margin. But multiply that $250 profit per acre by the hundreds or thousands of acres in these large land parcels, and it sounds a lot more attractive…

Many of the options buyers didn’t have enough cash to buy an acre, never mind hundreds or thousands of them. All they had was their “seed” money. Some were trying to make each other’s lives difficult…buying an option on land simply to stop a rival buying it…or in the hope that a buyer with more means would buy the option from them so they could still make a little profit.

And these options, these promises to purchase—which may never come to pass—had triggered a frenzy. It had doubled, then tripled, the actual price per acre in this location in a very short time. But the truth was, this wasn’t the best location. It wasn’t the nicest beach. It wasn’t (by far) the best value on the coast. But listen to the siren song of the local sellers, and you could pay way over the odds for a frankly average piece of land.

My advice? Don’t take anything at face value when it comes to property prices. Investigate to find out what fair market value is, and what it is based on. Talk to as many local agents, attorneys and notaries as you can. Look in the local newspapers and online news sources. And don’t commit to buying until you’ve done those checks. Remember, a bit like the plot turns in those spy movies, reality often doesn’t match what a seller tells you. It’s up to you to do your own research—and figure out the truth.

This article was republished with permission from International Living.


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