The overseas property sector is not like the UK market. You may think this is obvious, but do you really understand how the process of buying abroad works?
Enter it without proper knowledge at your peril! Here we take a good look under the bonnet to help demystify the world of agents and developers...
When the overseas property juggernaut came to a grinding halt in 2008, the property world changed overnight - hopefully, for the better. Out went the hard sell and the bulk-buying, the 100 per cent mortgages and the fly-by-night developers peddling empty promises. Now, the re-emerging markets are dominated by savvier, often cash-rich, buyers, agents who have weathered past peaks and troughs and developers who can finance their schemes without relying entirely on banks or pre-sales.
We look beneath the bonnet of the overseas property market to find out just what is going on...
The role of the agent
Agents exist to sell property for a client - whether a private vendor or a developer - and, in return, they receive a commission. That commission will vary wildly, depending on the country and whether the property is resale or new-build.
As Marc Pritchard from Taylor Wimpey España explains: "It's much easier selling for a developer. Resales usually involve far more work for the agent." The commissions are also higher than in the UK. In Spain, for example, the average commission is 5 per cent. Some agents during the boom were charging up to 20 per cent.
"Buyers need to ask what the agent will do for them," says Xavier Wiggins from the EcoHouse Group. "Some people think that if any agent is getting a high commission, they will take responsibility if things go wrong. It's not the case."
Good agents should carry out their own due diligence before agreeing to sell a property. The bad ones will leave the buyer (or their solicitor) to find out whether the property is legal or legitimately owned.
To push the sale along, the agent may offer other services, such as obtaining tax numbers, opening a bank account or introducing the buyer to mortgage advisers, but their basic role is to sell a property. They are not there to give legal advice or act for the buyer,” says Peter Esders, a solicitor at Judicare.
Reputable agents should also explain to buyers what their role is, where their obligations stop and what their exact relationship is with the seller. In some cases, the agent is the sales arm of the developer, but set up as a separate company.
The role of the developer
The developer owns the land, obtains the relevant building licences and planning permission and then builds the project. That's the ideal. There are plenty of examples of developers who did none of those things but continued to take the buyers' money.
They may stick around and continue to manage the resort for owners - or they may move on to the next project after the final brick is laid. They may also be the agent for their project - and that can be an advantage for buyers, as it cuts out the middleman.
Taylor Wimpey has been building resorts in Spain for decades, and has onsite sales consultants. “That way, our agents know everything is 100 per cent clear and clean,” says Pritchard. “If an agent starts selling for a developer, they need to make sure the developer has all the building licences, finance is in place and payments are secured by bank guarantees.”
Robin Barrasford, from Barrasford and Bird, also acts as agent and developer on some projects he sells, including Halcyon Retreat, in Limousin, France, “to ensure we are building a product we want to sell.
Otherwise, developers can get it very wrong, building something that's nowhere near an airport, for example”, he says. “Also, if there are problems - such as the kitchen tiles aren't the ones the buyer was promised - we can sort it out directly rather than struggling to deal with the developer.”
When buying a new property, buyers should question everything that the developer claims. “If they say they've sold 300 properties, returns are 20 per cent and they'll pay back in a year, ask them to prove everything. Don't be afraid to ask basic questions, such as 'how is my money being protected?', and 'how is the escrow account operated?' says Wiggins.
Also bear in mind, says Esders, that “the purchase contract is between the buyer and the seller. Therefore, any action by the buyer for failure to complete is against the seller - the developer - rather than the agent”.
Buyers need to know what will happen in the worst-case scenario that the developer goes bust. To get an idea of the developer's past projects and reputation, look at online forums. “Be aware they are easy to manipulate, positively or negatively, but it can be a useful way to see what other investors think,” says Wiggins.
“Make sure you use an independent lawyer” is the mantra - and it's a crucial one. Too many buyers have come unstuck because they used the lawyer recommended by the agent or developer (who turned out to be his brother on kickbacks). Then they encounter a conflict of interest, sheer unprofessionalism or possibly - as many buyers in Spain found a few years ago - deep-rooted corruption.
Either find a lawyer yourself or by recommendation from someone other than the agent, the developer or the vendor. A good starting point is the Association of International Property Professionals, which has law firms as members.
Subsidised viewing trips
You might imagine the old-style viewing trips — free flights and accommodation, wall-to-wall property viewings and piña coladas and the agent pinned to your side from the moment you step off the plane to the second you're back on it again — are a thing of the past. Not so, according to Barrasford.
“Plenty of agents still do them all over the world. They get clients drunk, then get them to sign.”
Barrasford has a rule on his viewing trips. You can't sign or buy anything until you are back home. “You don't buy a car without seeing it. Why would you buy a foreign property unseen? But people come abroad with a rose-tinted view, so we make sure they go home and reflect before they make the decision to buy,” he says.
Taylor Wimpey still offer trips, “but we see them more as business trips. You don't need more than one night/two days. That's enough to see three or four developments. We pre-qualify clients in depth, and we leave them alone in the evenings”, says Pritchard.
Wiggins from The EcoHouse Group says that many agents/developers no longer want to take the financial risk of subsidising trips. “In the old days, the big guys, such as Parador and MacAnthony would have converted 80-100 per cent of buyers on trips. Now, if any product has holes in it, it will get found out.”
When an agent has paid for your trip, he or she will naturally want to dictate what you do, and don't, see. That means no rival properties or chances to fully explore the area, warts and all.
“It's generally better to see properties under your own steam. But inspection trips are a good way of identifying properties that match your requirements if you don't know the area and don't have time to explore fully,” says Esders.
With banks reluctant to lend on new projects, developers need alternative approaches. Some can finance the project themselves - PGA Catalunya, near Girona, for example, or Taylor Wimpey's projects in Mallorca, Costa del Sol and Costa Blanca, or Montenegro's Sea Breeze project (see our feature 'Montenegro: a small place with big plans') — so they don't rely on sales to complete the project.
A number of developments have recently ground to a halt, because of funding issues and unsuccessful off -plan selling.”
If the entire construction is funded from sales and deposits, the whole project is at risk if sales dry up. Developers may also invite investors to enter the project early for a discount, to obtain seed money to get the ball rolling.
“Developers rely now on upfront payments from off -plan sales more than before the crisis,” says Alice Watson-Smith from Fine and Country Cannes. “The larger and more established developers still have the capacity to proceed on schedule, even if sales are slow. It is a very good reason to look closely at the developer's record. Delivery date is very important to buyers, and the last thing a buyer needs is to have the date delayed, again and again in some cases.”
Rental guarantees usually work in one of two ways. One, you overpay for the property, so the rental guarantee is your own money drip-feed back to you over the stated period.
“People sign up, as they think the same rental levels will continue after the guarantee period,” says Esders. Two, it's a genuine rental guarantee, which is only as good as the organisation offering it. “If the rentals don't come in at the level expected, will that company still be around and pay you the difference?,” he adds. “Either way,” says Esders, “take rental guarantees with a pinch of salt and don't rely on them.” If a tour operator is signed up to the project, contracted to bring in a certain number of guests, the rental guarantee has more credibility. But if the tour operator goes bust, the contract ceases too. That's unlikely to be a problem at Castelfalfi, a restored Tuscan hamlet, which is owned by the German tourism giant TUI, so owners can reasonably expect a good number of rentals.
If there's a hotel already up and running on the site, you will also have some concrete evidence of rental demand.
At Dubrovnik Sun Gardens in Croatia, the new-build properties were rented out before they were made available for sale, so buyers can see exactly what rental income each unit achieved.
As an alternative investment - in Brazilian social housing (in which a development company builds affordable housing for domestic end-users) - the EcoHouse Group promise returns of up to 20 per cent return a year.
“You can't say it's a guaranteed return, but if anything went horribly wrong - which is highly unlikely, given the massive imbalance between demand and supply of low-cost housing in Brazil - we can still make payouts to our investors,” says Wiggins.
Barrasford says he never uses the word “guarantee”. He prefers “assured” rentals.
“I'll only offer that assurance for homes on a resort with a hotel - not pure holiday homes — and that rental assurance is based on independent financial planning documents,” he says.
Off -plan sales are tentatively re-emerging, even in Spain, where buyers could choose from the millions of empty, already-built properties instead. Taylor Wimpey has sold all 69 units released as its new Los Arqueros beach development, near Marbella, “which is extraordinary - that's not the norm”, says Pritchard. The reason? High quality, low prices, with two beds from €195,000 (£166,800) and a good location.
“A lot of Spanish developments pre-crash got it all wrong. They built inland and nowhere near local amenities,” he says. Buyers will probably need to make stage payments throughout construction, so that the developer can finance the build, so, before you sign anything, establish how your money will be protected.
That may be by an escrow account (where the money isn't released until a certain point in the construction), a trust structure (which protects buyers during the build) or a bank guarantee/insurance product that will repay the buyer if the developer goes bust.
“Buyers should make sure the contract stipulates that stage payments are made according to construction - for example, when proof is given that the foundations have been built, then another payment when the basic structure is in place. Don't just pay on certain dates, whether construction has taken place or not,” advises Esders.
Ask to see proof of planning permission, building licences and mortgages on the property - and get a lawyer to check it. Also, ask if there is a specific date for completion, penalties for late completion and full specifications for the property, to set out exactly what you are buying.
For many people, house-hunting abroad now starts online, through property portals such as Rightmove, PrimeLocation or our very own aplaceinthesun.com. It's a great way to compare what's available from the comfort of your home. Such portals are advertising windows for agents, giving them access to a far larger number of potential buyers.
“The agents will normally pay to advertise on the site. The agent still gets their commission from selling the property,” says Esders.
How it works in...
Agents must be licensed. They should also be affiliated with a regulatory body (La Fédération Nationale de l'Immobilier, Syndicat National des Professionnels Immobiliers, or Union Nationale de la Propriété Immobilière) and have a carte professionelle to trade legally. The agent's commission (about 5 per cent) is paid by the seller, and the buyer pays the notaire's/transfer costs, which are about 6-7 per cent for properties over five years old and 2-3 per cent for new-build.
Most agencies will “share” their properties with other agencies, “so if you find an agent you like and trust, that agent can gather information and organise viewings for you from a very wide pool,” says Alice Watson-Smith from Fine & Country Cannes. She also advises asking about whether your should buy the property in your own name or through a small limited liability company, as the inheritance tax implications will vary.
“The whole house-buying process in France is much more regulated than in England, with far fewer variants,” adds Roddy Aris from Winkworth France.
Spanish agents tend to cover only their local area, so to add to their reach they often belong to multiple listing service networks — where they share properties with other agents. “That's OK, so long as the agencies split the commission, rather than increase it, as more often happens. It also explains why you often see the same property advertised at very different prices by different agents,” says Tania Hitchins from the Almanzora Group, who act as both agent and developer for Desert Springs in Almeria. The seller pays the commission. Sometimes the estate agent is entitled to their commission once a deposit contract has been signed and the deposit (usually 10 per cent) paid by the buyer — even if the sale then falls through. So agents will often push buyers towards paying a deposit, whatever their financial circumstances. Anyone can be an estate agent, and the industry is unregulated, “so there is nothing to stop cowboys setting up and tarnishing our industry,” says Chris Mercer, who has been selling property in Spain for 30 years.
The seller usually pays the agent's commission. US agents must be licensed by their respective state, and should be a member of the National Association of Realtors (NAR), which sets the standards that agents, by law, must follow. All realtors use a multiple listing service (MLS), so they can see all properties on the market at any time. The standard commission is 5-6 per cent, paid by the seller and split between the seller's agent and the buyer's agent.
|This article appears in the Summer 2013 issue of A Place in the Sun magazine, on sale at all good newsagents|