We often hear about opportunities in investing in developing countries, however we rarely consider the difficulties associated with investing in unknown markets with different laws and approaches to real estate. Today, we’re lucky to have Claudia Gonella, co-founder of Reveal Real Estate, a site that collects location, price and amenity information for real estate developments in Panama, Costa Rica, Belize and Nicaragua. She’s going to give us a primer on the Central America market and talk about things to consider when contemplating investment in these countries.
Navigating the real estate market in Central America
Perhaps the biggest mistake US investors make when purchasing property in Central America is to assume the market operates in the same way as back home. The actors may be similar – you’ll find brokers, attorneys, surveyors and title insurance companies – but the workings of the market are quite different.
Here are five examples:
Reliable data is hard to find
To start with, the real estate market is far less transparent. Official property statistics are not published in Nicaragua, Panama, Belize or Costa Rica and there are no databases (such as an MLS) to draw on.
This means that it’s very hard to get a handle on how many properties have sold in a certain period, what they were sold for, how many properties are on the market, number of days on the market and so on.
Broker certification is weak
Most Central American countries have a governing body for the real estate industry but enforcement is weak. Brokers generally do not need to provide qualifications or demonstrate experience in order to practice.
Also, in the absence of an MLS-type system, open listings are the norm and duplication of listings among different agencies is common. Buyers have to view property with more than one broker in order to see all there is on the market.
Escrow services not widely available
When it comes to the closing process international real estate investors, especially North Americans are accustomed to having third party agencies perform duties such as escrow services and the ordering of surveys.
These services are less well developed in Central America and it is common for the buyer’s deposit to be held by the seller and not a third party – something to watch out for in the negotiation process.
Fewer financing options
You’ll be hard pressed to find the kind of financing products commonly available in the US. This is because Central American countries, with the exception of Panama, do not have capital markets developed for the selling of mortgage backed debt instruments. (This characteristic of the market, normally considered a weakness, was a key factor in helping the region avoid the kind of foreclosure crisis experienced in the US.)
Regional risks
From a property perspective some of the most significant risks to watch out for as part of your due diligence are legal issues with title, unclear zoning and permitting regulations, political instability, inadequate supply of infrastructure and inefficient government bureaucracy.
A useful resource on the most problematic factors for doing business in the region is the World Economic Forum’s Global Competitiveness Report 2009-2010. Here’s a summary chart for Costa Rica.
(click to enlarge)
Proceed with caution
Buyers in Central America have more negotiating power than they have had in years. Sellers are deeply discounting their properties and there are great deals to be had.
If you take the time to study the market, understand how it works and make the right adjustments, you shouldn’t have to take on more risk buying in Central America than you do at home.
These are just a few things to consider, what other obstacles may you encounter when investing in foreign markets?
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About the author: Claudia Gonella is co-founder of Reveal Real Estate, a site that collects location, price and amenity information for real estate developments in Panama, Costa Rica, Belize and Nicaragua.
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