Beware the foreign property scams
Buying cheap property abroad may seem like the path to rich pickings. But it can just as easily leave you nursing a hefty loss, particularly if you don't do your homework first. Investors have few rights and little redress when things go wrong.
Take Daniel Simmons, 42, a web and social media consultant from Hither Green, south-east London. He thought he was being sensible investing in foreign property six years ago. After all, he'd been advised to do so by a firm of financial advisers called Perfect Day.
"In 2005 I put down a deposit of £5,000 on an off-plan, one-bedroom flat in Tallinn, Estonia", he says. "I was told property was very cheap there and I'd double our money, but after two years alarm bells began to ring as there didn't seem to be any progress on the development.
"Other investors began to get suspicious too. Then we found out the police had got involved because the Estonian developer had run off with all the money. It was a total scam. The financial adviser filed for bankruptcy soon after."
Daniel's business partner also lost £10,000 in the failed venture. "We didn't get any of our money back," says Daniel. "We felt duped and totally stupid for being so trusting : we didn't do enough research and didn't even visit the site. I vowed never to use a financial adviser again after that experience."
However, this wasn't the full extent of Daniel's foreign property speculation. Perfect Day had also recommended investing in another off-plan development in Manique, near Estoril, Portugal.
Investors were told they were buying at a 20% discount to normal market rates. So Daniel invested around £20,000 on the deposit, furnishings and legal costs and took out a euro-currency mortgage for €250,000 to finance the two-bed luxury apartment.
At least this development was built. However, Daniel says: "We now rent it out for around €700 a month, although the mortgage costs €800. Also, because of Portugal's economic situation, property prices have fallen, so the apartment is just about worth what we paid for it in 2005.
"It's hardly been a money-spinner - and when the bills for ground rent come in, I wonder whether it's really worth it. I don't think I can afford to keep it much longer."
Owning and renting out foreign property isn't as straightforward as it's sometimes made out to be, Daniel warns.
"You have to put in a lot of effort if you want to do it yourself. Sorting out cleaners, meeting tenants, mending washing machines - it all takes time and money. If you lead a busy life back home that gets increasingly difficult.
"Of course, you can hand all this over to a management agency. But it'll take around 15% of your income; when the rental's barely covering your mortgage costs, you don't really want to do that."
Daniel isn't the only investor to have hit problems. In 2010 Brits owned an estimated 370,000 second homes abroad, worth nearly £48 billion in the eurozone alone, according to estate agent Knight Frank.
But the numbers have been dropping as more owners sell up in response to the global economic downturn that took hold in 2008.
Research by currencies.co.uk, a foreign exchange broker, has found that more than half of people who own property in the eurozone are thinking of selling up in 2011, thanks to lower-than-expected occupancy rates and rental incomes in 2010.
Overseas interest remains
None of this seems to be putting off prospective buyers, however. Many smell a bargain. Economic downturns and property slumps in eurozone countries, such as Spain, Portugal and Greece, present interesting buying opportunities for the intrepid property investor.
Property website Rightmove reports that interest in buying foreign property is actually picking up, with overseas property website searches increasing by 1.2% in March.
Market researcher Mintel reported in January that consumer interest in overseas property is returning to pre-recessionary levels, with a third of those it surveyed expressing some interest in property abroad and a tenth declaring an interest in buying a holiday home.
David Kerns, dealing manager at Moneycorp, a foreign currency broker, says: "Although the euro remains stable, interest in houses in Portugal has risen by 14%, and by 4% in Spain, due to the potential bargains to be found in these countries."
However, investors are also extremely cautious about actual commitment, with 70% citing the fear of fraud and legal difficulties as major disincentives.
Rightmove detects a shift away from interest in emerging markets in favour of more established and predictable markets, due to the unsettled political situation in many former property-buying hotspots.The recent uprisings in Tunisia, Egypt, Syria and Libya have vividly illustrated the perils of buying in potentially unstable regions.
But the difficulty for investors is that political and social instability is hard to predict. For example, Moneycorp reported a 100% increase in the number of its clients buying property in Egypt between 2009 and 2010, all of them presumably blissfully unaware of what was round the corner.
Matthew Adams, 35, a recruitment consultant from Barnet, north London, was one such investor. In 2007 he bought a one-bed off-plan apartment in Sahl Hasheesh, near Hurghada, Egypt for €88,000. He put down a 30% deposit, then two further payments of 10%. The 50% balance had to be paid to the developers, Orbit Group, by the end of April 2011.
He now finds he can get neither a mortgage because of the recent instability, nor any rental income as tourists have deserted the country.
"Even though my apartment is complete, the rest of the development isn't, and people aren't going to want to stay in a building site," he says. "I might not get any rental income for years to come. And now it looks like the property was way overpriced anyway."
Another off-plan apartment Matthew bought for €30,000 in the well-known resort of Sharm el Sheikh was completed 20 months late, and the company he paid a deposit of £3,000 to for furniture went bust.
"The whole thing has been a complete nightmare", he says. "My advice to people wanting to invest in property abroad is: don't. The risks are just too high, particularly with off-plan investment. I don't know if I'll ever get my money back."
As well as political uncertainty and the risk of fraud, another major drawback of buying an overseas property is currency fluctuation.
Buyers renting out their foreign properties can suffer a double whammy if the native currency strengthens considerably against sterling, reducing both the value of the rental income and the capital value of the property should they need to sell quickly.
That's if you can rent out your property at all. Domestic recessions discourage foreign holidaymaking, so occupancy rates tend to fall. Added to which, the cost of maintaining the property becomes more expensive.
One way of hedging this risk is to take out a foreign-currency mortgage if sterling is particularly weak, or vice versa if the scales tip back the other way.
The process of buying foreign property, and the associated risks, can vary widely from region to region.
Commercial property consultant Jones Lang LaSalle publishes an annual global transparency index, ranking countries and cities by risk. It comes as no surprise that emerging markets such as Egypt, Tunisia and Morocco have a low transparency level, whereas developed economies with strong legal systems are rated higher.
For example, if you buy a property near a site of archaeological interest in Egypt, you run the risk it being reclaimed by the government for excavation works. While you might get some compensation, you're not guaranteed to get back the full costs.
Your ownership rights are very limited in these circumstances. Even finding out your title rights can prove very difficult in a country known for its excessive bureaucracy.
You should always consider hiring a local lawyer who knows the country's legal system inside out, and be aware of all the other costs you may incur, such as tax, legal, valuation and agents' fees. Also bear in mind that rental income on foreign property is taxable in the UK.
If you have to pay a deposit, don't pay it direct to a developer, pay it to a trusted third party such as a well-known bank operating a deposit guarantee scheme. Again, legal advice is a must, particularly if a developer is promising 'guaranteed' levels of rental income but hasn't written this into the contact.
In short, buying property abroad - particularly an off-plan development - is a very risky business. Seek advice first, don't take anything on trust, and do as much research into all the parties involved before committing any money.
Your rights when buying abroad
When you buy property abroad, you leave yourself at the mercy of the host country's laws if things go wrong.
That's why local legal advice from an accredited and reputable source fluent in both English and the language of the country is essential before you sign on the dotted line.
There are usually consumer bodies in more developed economies that can help. For example, the UK European Consumer Centre (ukecc.net), run by the Trading Standards Institute, specifically advises on problems with goods and services bought within the EU, Iceland and Norway.
In the US, you can complain to the Better Business Bureau (bbb.org/us/Consumer-Complaints/) or the Federal Trade Commission (ftc.gov/bcp/consumer.shtm). And in the case of global cross-border complaints, 26 countries have signed up to Econsumer.gov (econsumer.gov).
Of course, as a last resort, you could always go to court, but this can be very expensive and time-consuming, and you won't necessarily be guaranteed a favourable result.
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
An off-plan property is one sold to the buyer before it has actually been built and so the prospective buyer relies heavily on architect drawings, scale models and the assurances of the property developer in order to “see” what they’re buying. For investors or speculators, in a rising market, buying off-plan means you buy at this year’s prices and, when you take possession, the market value will have increased. The biggest risks with off-plan are the developer will go bust or not complete the project or that the market will fall and the completed property will be worth less that the agreed purchase price.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
A person (or business) unable to pay the debts it owes creditors can either volunteer or be forced into bankruptcy – a legal proceeding where an insolvent person can be relieved of their financial obligations – but loses control over their bank accounts. Bankruptcy is not a soft option. Although it may wipe the financial slate clean, it is extremely harmful to a person’s credit rating (it will stay on your credit record for six years) and will adversely affect your future dealings with financial institutions. Bankruptcy costs £600 paid upfront.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.