Top ten pitfalls when investing abroad

Tuesday, 1 July 2008 12:00 AM

With the property market experiencing a slow down in recent months, it is important to really understand your investment strategy and what you need to do to optimise your return and avoid any potential pitfalls.

Here Tony Booth, of overseas investment experts Property Secrets, highlights the ten biggest mistakes made by investors and how they should be avoided:

1. Adopting a high risk strategy

The lure of high returns from emerging countries has a tendency to blind some investors - always remember that higher return often goes hand-in-hand with higher risk. There is often an advantage to following others along a known path, rather than venturing into potentially unstable and uncertain regions where the gains may be high, but so too are the risks.

2. Believing what the salesman tells you

It is extremely foolish to assume everything the developer's salesman tells you is true. Potential rental income, tenant demand assertions and capital value growth expectations are all likely to be inflated and unchecked by an independent source.

The only way through this foggy path is to undertake your own exhaustive research to verify every element of a potential purchase. Consult the local authority over planning issues and future development in the area and always employ a local lawyer as well as one in the UK to verify the legal facts and status of ownership.

3. Assuming all property markets are the same

Familiarity with the way the property market operates in the UK can lead novice investors down a blind alley to disaster, if they assume things operate in a similar fashion in other countries.

Emerging countries rarely enjoy the same degree of stability or reliability - and very few impart the same level of legal protection. There are also often political or legislative issues operating in another country that a UK investor might be completely ignorant about, but these issues could severely affect the security of a particular purchase now or in the future.

4. Eagerly and blindly following the hot spot trail

Following the global hot-spot trail can be extremely risky, because success depends on the quality of information and just how up-to-date it might be. Bare in mind that an established hot spot could have capital values that have already peaked, so buying there may prove unprofitable.

5. Having vague and uncertain investment objectives

Investing on a whim or a hunch is always a mistake, particularly when a buyer has no firm objective of why they might be purchasing or how they intend using the property.

Investors need to have a clear plan, lots of information and time to research and reflect on the financial, legal and investment implications of a particular property in a particular country.

6. Not recognising the need for an independent solicitor

Overseas developers commonly offer the free or discounted use of their own conveyancing solicitor, which is all very well - but to put this 'offer' in context, would you be happy about using a vendor's solicitor when buying a property in the UK?

Always use your own solicitor.

7. Failing to verify an exit route

It's all very well buying a property abroad, but what happens if and when you decide it has become too expensive to maintain and manage or if the profit potential proves unattainable?

Buying a place in the sun might seem attractive, but always check whether the dream holiday home has the potential of becoming a millstone, if things go pear-shaped.

8. Falling for incentives
There is no such thing as a free lunch, so if a developer is offering free furniture packages or a 'sign-up now for a discount' deal - be aware that somewhere along the line the cost of the 'incentive' is likely to be factored into the price.

Do your homework, check and verify the real base value of the dwelling and consider any intention to buy on facts and statistics you have gathered yourself - while ignoring any lures or incentives proposed.

9. Ignoring construction quality

It is rare for overseas buyers of new development properties to have an independent survey undertaken, but sometimes it can prove essential, particularly if the developer and their reputation are unknown.

At the very least, inspect a property with an eye on its structural aspects, rather than the quality of furnishings and accessories.

10. Failing to quantify management fees and maintenance liabilities

Even a good quality property in the right location could prove uneconomic, if the running costs prove excessive. However, some less scrupulous developers reduce the purchase price of their properties, just to attract would-be buyers and capitalise on management contract income.

Make sure you and your independent solicitor examine a purchase contract carefully to ensure awareness of ongoing fees and liabilities.

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