New York – Charming Tuscan villas lure with views of lush olive groves and ancient hill towns. Beachfront retreats in the Caribbean call like modern sirens. While traveling abroad, who among us hasn’t been tempted to splurge on an exotic vacation home?
But international real estate is more than an impulse buy–or, it should be if you’re smart.
Along with the appeal of owning a second (or third, or fourth) home, there are pragmatic reasons for buying abroad. It can be a way to diversify an investment portfolio or provide rental income. Buy in Dubai, and you automatically receive a visa that permits you to do business there. Some international purchases made a decade ago would be considered very wise today.
“It turns out investing in Europe has been a good idea, because the euro has increased in value to the dollar,” says Delores Conway, director of the Casden Real Estate Economics Forecast at the USC Lusk Center for Real Estate.
Of course, there are risks as well: Currencies can slide, taking with them the value of overseas investments; political changes can affect ownership laws; and the buying process can be complex and confusing. So while it may seem like a lark, international buyers should put even more care and thought into purchasing internationally than at home.
“You should make no assumptions whatsoever that the system is like your own,” says Ian Payne, vice president and managing director for Europe, Middle East, Africa and Asia Pacific for Cendant Mobility, a global relocation firm that is part of Cendant (nyse: CD – news – people ). “Everything from how it’s marketed to the tax system can be different.”
There are some principles that should be followed when buying real estate anywhere. It is common sense to make sure that the person selling you your dream home–whether it’s in Miami or Mexico–has full title to the property. Check that the company behind that new development in Thailand or Toronto has a rock-solid reputation.
Every country has different rules and conventions, which means prospective buyers need to take a number of issues into consideration, including ownership restrictions, tax ramifications, development regulations, currency issues and political climate–before they fall in love with a home.
There are no statistics available on the number of people who buy real estate abroad. But U.K.-based estate agent Knight Frank says international markets are burgeoning. Overseas home ownership by British households rose by 95% between 1993 and 2003, according to a report by the company. Buyers have been encouraged by increasing affluence, as well as by a travel industry that has made the world easier than ever to explore.
“I think it’s safe to say that more people in this country are looking overseas,” says Jim Gillespie, president and chief executive of Parsippany, N.J.-based Coldwell Banker Real Estate. “The world is smaller. There are more job opportunities overseas.”
But before you jump into a deal, experts say it’s smart to get to know a place in more than a passing fashion. Gillespie advises that prospective buyers take several trips to an area and rent a house instead of staying in a resort.
“Real estate is very local,” Conway agrees. “You require enormous local information about the investment–it is not like simply buying into a mutual fund of overseas companies.”
Check whether you are legally able to own property as a foreign national. Until a few years ago, foreigners could not own in Dubai, says Tony Layson of Elegant Properties Realty, which is marketing new developments there. Mexico’s constitution bans foreigners from owning within 30 miles of the coastline or 60 miles of the U.S. border. So, until a dozen years ago, ownership was only permitted through a 28-year trust, says Chris Snell of Snell Real Estate in San Jose del Cabo. The regulations have been relaxed; though foreigners must still own through trusts, they now last for 50 years and can be extended indefinitely.
Once you ascertain that you are willing–and able–to buy, you may discover that there are differences in how properties are marketed.
“The multiple-listing system that you enjoy [in the U.S.] is not prevalent in Europe,” Payne says. “You have to go from real estate agent office to real estate agent office and put together your own schedule of viewing.” That’s especially true in Spain, where many properties are offered privately and require local contacts to track down, he says.
Offers may also be made differently. In the U.K., when a buyer’s offer is accepted, there is no deposit required, Payne says–but also no contract.
“Between that point and the point of any binding agreement, you have mortgage applications and inspections,” Payne says. “You would end up spending money before you even have a binding agreement.”
When buying internationally, it’s important to consider currency risks as well as government controls.
“If I invest my U.S. dollars in Italy, does the seller take U.S. dollars, or do I need to convert them to lira to pay him?” says George Damianos, of Damianos Sotheby’s International Realty in the Bahamas. “Once I sell my property, am I able to freely take out my money without being taxed by that country?”
In the Bahamas, he explains, you can obtain a verification from the government that you have invested in the country. If you sell and want to wire $1 million back home, you can easily exchange the money and send the cash from a commercial bank. That may not be true everywhere, however.
Tax and estate laws are another concern. Some countries have no taxes, other have very high taxes. Some levy taxes only on legal residents, others may tax foreigners at a higher rate. Will there be a huge capital gains hit if you sell for a profit? In some places, if a property owner dies, the government automatically divides the estate evenly among survivors, Payne points out.
“Also check with your tax person here in the U.S.,” Gillespie says. “You can’t escape paying taxes just by buying a house in France and saying you’re living there.”
And if concerns about historical restrictions (local laws may say that charming stone cottage can only be repaired using original materials), security (who will look after the place in the off-season?), transportation (Costa Rica is known for rutted and bone-jangling roads) and utilities (in some countries, a water connection isn’t part of the real estate deal, Conway says) aren’t exhausting enough, there are political issues to consider. Is a place safe? Is it stable? Does the government respect property rights?
Conway knows people who have bought in Shanghai, hoping to see dramatic appreciation in their investments. But they acknowledge, she says, that their ownership cannot be taken for granted.
She points out that–in addition to tax problems, historical restrictions, security concerns and possible devaluation–in some countries, the government can repossess your property. “It really is not for the faint of heart.”
Wade through the challenges, and the rewards of owning property internationally can be endless. But choose the wrong place, and the hassles can be endless as well.