Foreign InvestmentReal EstateWhat to know before buying that dream vacation home in another country – The Washington Post

June 14, 2019193
What-To-Know-Before-Buying-That-Dream-Vacation-Home-in-Another-Country-The-Washington-Post

By Sara Clemence from The Whashington Post

At their three-bedroom vacation home in Baja California, Mexico, Amy and Chad Wells have a wall of windows looking onto the Pacific Ocean, a beach right below their deck and an adobe fireplace in the den.

One thing they don’t have: a deed in their name.

“We’ve had the house for a year and a half and the bank hasn’t cleared it yet,” said Amy, 40.

Until recently, a previous owner’s claim to the property had been winding its way through the Mexican court system, which meant that although the couple paid for the house, renovated it, spends weekends there and listed it on Airbnb, their ownership hadn’t been finalized.

“For the price we paid to have what we have, we expected it to be a pain in the butt,” Amy said.

Their oceanfront home in a gated community 30 minutes from the U.S. border cost them $140,000. A similar property in San Diego, where they live, could cost millions.

“So we put up with it and hope for the best,” she said.

Their story illustrates some of the upsides and downsides of buying a vacation home in another country. Beyond bragging rights, buying outside the United States can be incredibly affordable — and even profitable. It allows owners to put down roots in a culture instead of being tourists. And, depending on the location, that second home can get you resident status or even a passport.

But buying abroad also comes with risks — and almost definitely will complicate your finances. There will be bank accounts to open, tax bills to pay, utilities to set up, Internal Revenue Service forms to file and logistics to manage. When problems pop up — and they eventually will — they’ll have to be solved long-distance, in another legal system and maybe even another language.

That doesn’t mean you shouldn’t buy the Tuscan cottage or Caribbean condo you’ve been dreaming of. But it does mean you should be clear-eyed about the issues you may have to navigate to make your second-home fantasy come true.

Know the nation’s laws

You don’t have to star in a spy movie to have multiple passports: Buy a house in Malta, Cyprus, Grenada, or several other countries with special investment programs, and you could be eligible for a second citizenship.

But on the flip side, many countries place restrictions on foreign ownership. Non-citizens generally aren’t allowed to own land outright in Thailand. Costa Rica has restrictions on its coastline. In Mexico, the constitution forbids foreigners from directly owning property in a “restricted zone” that extends 50 kilometers inland from the ocean and 100 kilometers from any national border.

That doesn’t mean that American owners — including the Wells — can’t own an oceanfront house. But it does have to be held in a bank trust, which increases the transaction cost. Setting up a trust can add a couple thousand dollars to the expense of a home, with management fees running about $500 a year, said David Connell, managing partner of Connell & Associates, a Mexican law firm.

“It’s a fairly straightforward process,” he said. “But it does add a little more work.”

Some countries have laws specific to agrarian property — which can cause problems even if you’re not looking to buy a farm. The complications with the Wellses’ home stem from the fact that the property was part of an ejido, a plot of communally owned land once used for agriculture.

Ejido land isn’t titled and can’t be transferred unless it goes through a special process, Connell said. Some foreign buyers aren’t aware of how long the titling process can take.

“Two years to a long time,” he said.

Ejidos aren’t limited to remote, rural areas.

“Cabo, Puerto Vallarta and Cancun all have agrarian communities that border them,” Connell said. “It’s one of the first things we look at.”

It’s one of the many reasons it’s important to work with professionals who are well versed in local laws and know how to navigate them. Wherever you buy, hire a reliable attorney to do due diligence. The last thing you want is to buy a house and find out later that it doesn’t belong to you.

Crunching the numbers

Most U.S. banks won’t give you a mortgage on a property in another country, points out Traci Getz, partner at the accounting firm Ryan & Wetmore, whose offices are in Maryland and Virginia. Unless you have enough cash on hand to buy the house, you’ll be requesting a loan from a foreign bank — and it probably won’t be as easy as working with one back home.

“It doesn’t matter how much money you have in the bank in the U.S. — you have nothing here,” said Anthony Scotti, owner of Perfect Spain, a boutique real estate agency in the coastal city of Valencia.

Your credit score holds no merit abroad, either. Scotti connects his clients with mortgage companies that are used to dealing with American buyers, but unlike in the United States, they will normally require a down payment of at least 30 percent. The same holds true in Italy, said Diletta Giorgolo Spinola, head of Central and Southern Italy sales for Italy Sotheby’s International Realty, and in other countries banks may lend even less of the total value.

Regardless of where you buy a home, you’ll likely be on the hook for extra taxes. Spain levies a 10 percent sales tax on real estate, Scotti said. Nonresidents buying in Italy have to pay about a 9 percent tax on the value of the land. On top of that, there can be ongoing property taxes. Although depending on where you buy, they may be a pleasant surprise.

“I think we pay 600 pesos for the whole year,” Amy Wells said, “which is like $30.”

But even tiny tax bills need to be tracked and paid — usually from a local bank account, which you’ll also need to pay for utilities, repairs, cleaning services and other maintenance costs. And if the value of your accounts go north of $10,000 at any point during a given year, you’re required to file a special form with the IRS, Getz said.

“It’s not that it’s a very onerous requirement,” she said. “But the penalties for not doing so can be steep.”

Renting your home out can help cover your costs, and in some cases even reap you a profit. But it also can trigger tricky tax issues; American residents are subject to U.S. tax law no matter where in the world they earn income, and if they own a home in another country, they are on the hook for taxes there, too.

“Honestly, you probably need a financial adviser and a lawyer,” Getz said.

Otherwise, you may end up having to pay the same tax in two countries or worse, running afoul of the law. The need for professional advice is also crucial for any capital or currency exchange gains you might incur when you sell, unless you relish the idea of handing over your profits to multiple governments.

Fixing it up from afar

The Wellses bought their house in Baja knowing it would need a makeover. They also knew the project would cost less than back home, though they didn’t realize how much less.

The family redid the bathrooms, added walls and a closet, put windows into a side of the house that had no ventilation, and resurfaced the interior and exterior walls.

“They were like, ‘That will be $2,500,’ ” Amy Wells said. “Not including materials.”

The price tag was shockingly low, but, like all renovations, the project came with its challenges.

“I speak okay Spanish, but it’s still hard,” she said.

Instead of removing old bathroom tiles, workers pasted new ones on top. That’s despite driving down to Mexico weekly to oversee the work and deliver materials, something that many home buyers aren’t able to manage. Long-distance buyers will want to think long and hard before undertaking a renovation. That cottage in need of some TLC will seem a lot less charming when your contractor walks off the job 3,000 miles away.

And though the Wellses didn’t come up against any building regulations, other countries are strict. In Tuscany, it can be difficult to get permission to build a new home, Giorgolo Spinola said. That’s one reason that old ruins of houses can be appealing to intrepid buyers. They come with permission to rebuild to the original volume of the house.

A watchful eye

Anthony Scotti will never forget the day he showed up at one of the apartments his company manages in Valencia. It was unoccupied at the time, or supposed to be.

“I walk into the apartment and the lights are off and I see movement in the bed,” he said.

Two people had broken in and spent the night, as well as smashed pictures and gathered up the electronics so they could carry them away. Scotti didn’t call the police. “I didn’t know what they would say,” he said.

He worried the trespassers would falsely claim to be squatters. Spain is among the countries with squatters’ rights. Although the practice is illegal, it can be difficult and expensive to evict people who are living in your property without permission. It’s a particular risk for absentee owners, though not the only one.

Another one of Scotti’s clients, a couple from Ohio, returned to their house in Valencia after a long absence to find their hot water heater had sprung a leak. Had the drip been caught in a day, it would have been a minor issue, but the leak had gone on for two months.

“It damaged three floors of the house, all their beautiful new wood floors,” Scotti said. “There was mold inside the walls.”

Even if you don’t make much money in the process, it can be worth renting out your home — or paying someone to look after the property while you’re gone — to prevent such catastrophes. Security bars and shutters may be a hassle to install and interfere with the view, but they can help you avoid a months-long court battle.

It also helps to have good insurance, which can be hard to come by in some countries. If you do buy coverage abroad, make sure it will pay for your costs in the event of a disaster. Some major U.S. companies now insure foreign properties for clients. AIG lets wealthy clients buy insurance on an overseas home that’s comparable to a domestic policy, covering the full repair or replacement cost, said Jeremiah Hourihan, president of AIG’s private client group.

“If you buy a villa in France that was built hundreds of years ago, it has features that would be, if not impossible, then almost impossible to replace,” he said. “Our guarantee will rebuild it as it was.”

Plan ahead

When you fall hard for a farmhouse in the South of France or a studio with a view in Hong Kong, your long-term thinking is often focused on how much you’ll enjoy it in the years to come. That’s not the wisest approach, experts say.

A lot can change over the years. A blossoming local economy might double your property value. Or, the government might change the local laws, and not in your favor.

One of Scotti’s clients in Spain recently found himself in a bind, when the Spanish government passed a law that gave his neighbors the right to collectively bar him from using his apartment as a vacation rental.

“They keep changing the laws,” Scotti said. “It’s going to change again.”

And though most buyers aren’t thinking about what will happen to their homes when they die, they should. Getz recommends that any overseas owners make sure their properties are listed as part of their estate and that they file a will both at home and abroad.

“Depending on what the laws of the country are, if you don’t have a will [your home] could go to the closest relative you have in that country, which may not be where you intended it to go,” she said.

Some countries — particularly in Africa and the Middle East — bar women from inheriting property.

No such limits exist in Mexico. The land dispute has been stressful, and Amy Wells has sometimes wondered whether it would have been easier to buy in another community.

“But it all seems to be smoothing over,” she says. “And we’re so happy exactly where we are.”

193 comments

Leave a Reply to idealistworld-896 Cancel Reply

Your email address will not be published.

previous
Escrow en México - Una Descripción General y las Preguntas más Comunes
next
El Uso de Firmas Electrónicas en México para Firma de Contratos
https://mexicolaw.com.mx/wp-content/uploads/2017/07/Connell-Associates-Blancos.png

Puerto Vallarta Office

Condominios Marina Golf
Paseo de la Marina S/N, Pto. Vallarta, Jal. C.P.48335
Toll Free USA/CAN: +1 (866) 425 0970
+52 (322) 2212588
info@mexicolaw.com.mx

Mexico City Office

Avenida Moliere # 310, piso 4, oficina 4002
Col. Polanco, Miguel Hidalgo CP 11510
Ciudad de México
info@mexicolaw.com.mx

Ixtapa-Zihuatanejo Office

Condominio Marina Plaza Local 25
Marina Ixtapa, Ixtapa, Guerrero CP 40880
+52 (755) 555 0400
info@mexicolaw.com.mx