Real Estate

Guest article by: Ron Richards

In 2008, my colleague Steve Perez and I pondered what our next move would be. The “Housing Crisis” was in full-effect, and the company we worked for at the time had just dissolved. The company we worked for was a real estate investment brokerage. We learned a lot and thought the show was over based on where the economy was headed. Despite the economic downturn, we felt that the investment real estate business model was still solid. We were confident in our knowledge and knew that with a little capital, we could make it better. Our idea of making the industry better is what motivated Steve and I to collaborate and start Altura Investment Realty. Having a good grasp of the industry, we wanted to build something special. We kept asking ourselves, “Wouldn’t it be great if…?” Well, after successfully implementing new guidelines for our company, the rest is history. Since 2008, Altura has bought and sold approximately 1,500 residential properties, on and off market, with a focus on selling homes to clients who wanted to build rental portfolios and UP NOW perform “flips.” In the end, we have created a successful boutique firm selling inventory to investors all over the United States and abroad. It’s been a great run, and Altura continues to do great things.

As we continue to innovate, we find ourselves asking the same question, “Wouldn’t it be great if…?” However, this time our collective knowledge gained from running Altura allowed us to adopt the perspective of the investor. For the last several years, Steve and I have both been heavily active in building our own rental portfolio and perform several flips a year. We took note on how investors made decisions on which properties to buy and adopted best practices to build lucrative portfolios. This new perspective generated a lot of questions about the number of resources readily available to help investors make sound investment decisions. At that moment, Steve and I asked each other, “Wouldn’t it be great if…?”

This September, we will be launching an Orlando-based tech startup catering to the real estate investment space. Soon thereafter, we will be introducing the platform across other Florida markets and then nationwide. And it will be 100% free for any user.

This new company is called Kuzza. Yep, just pronounce the U and you have Kuzza, an online real estate brokerage that is data-driven, analytical, and socially engaging – and here’s why we are so excited to bring this to market:

DATA
Locating inventory can be very challenging, especially in our investor-savvy locale, Orlando. But, in order to get the best deals, one must have up-to-the minute data. If a property sits on the market for a few days, then chances are there are many others who have beat you to the punch. At Kuzza, we don’t want that happening, and that’s why have we have a direct data-feed from the Multiple Listing Service (MLS). Having this direct feed gives you access to a property as soon as it hits the market. Not the next day, but the very minute it’s listed. At the same time, Kuzza has licensed to receive the largest source of “off-market” inventory. Driving around looking for “For Sale By Owner” signs is called “Driving for Dollars.” A great technique for sure, as I have done so much of it myself, but wouldn’t it be great to have that data faster and at your fingertips? Kuzza will provide you the most current list of properties on and off market to help you build a list of prospective investments. Further, with the use of custom, saved searches, Kuzza will notify the user via email as soon as a property hits the market.

ANALYTICAL
Having the tools to analyze a property and its return on investment (ROI) is as equally important to finding the deal itself. So, wouldn’t it be great if you could have access to sales comps, rental comps, and investment calculators? Yes, of course it would! At Kuzza, we are providing the tools to help you assess deals and provide multiple levels of due diligence with respect to valuations. First, we provide a Sales Comps Map with the most similar comps available matching the subject home allowing a user to know if the offer is worth the value. Second, we provide a Rental Comps Map displaying similar homes and their rental amounts in a given neighborhood. And third, Kuzza is introducing to its map feature a boundary overlay, which will allow a user to compare a property to other sales in a geographic location. The boundary overlay was customized specifically for Kuzza users. From a map view, every parcel will have specs of a home (beds, baths, and square footage), the sales price, and the month and year of that sale. Kuzza aims to turn users into their own appraisers. While everyone else wonders how much he or she should offer when it’s time to submit a contract, Kuzza users can utilize one of the online investment calculators. It doesn’t matter your strategy – rental or flip – Kuzza has a calculator for each. By giving the user sales data coupled with investment calculators, each user will be able to determine their ROI and make offers with confidence.

SOCIALLY ENGAGING
The real estate investment community is driven by each day’s success story. Just take a look at the investor clubs here in Orlando. They have a lot of members who meet monthly to discuss potential deals and other ways to help ensure success. Many times, members will partner on deals because they each bring a certain strength to the table. For me personally, I have often found it helpful to call or email a peer within the industry for advice. So, wouldn’t it be great to collaborate with other investors on the same platform all while researching properties? What if users had the ability to socially engage with a market’s leading lenders and vendors (including contractors)? How about joining group discussions regarding investment topics of interest to you? If you answered yes, yes, and yes, then Kuzza is definitely worth checking into.

We anticipate launching Kuzza in September 2015 to be a resource for real estate investors. The site will not be live until our official launch day, but every day prior to launch our tech startup will be working hard to fill investor needs for making better and more lucrative investments. Wouldn’t it be great if you had Kuzza at your fingertips? To learn more about our launch, and to stay updated about our new venture, visit www.kuzza.com to join our mailing list.

Ron Richards, co-founder of Kuzza.

Guest article by Augie Byllott:

I am often asked the best way to acquire investment properties. My answer is usually, “It depends…” Those of you who know me, know I have a sense of humor, but this answer is not intended to be either evasive or funny. My favorite acquisition technique is with owner financing, but that usually requires a free and clear property. How many of those free and clear properties come along with a motivated seller attached? Certainly there aren’t as many as I’d like.  Then there’s buying with cash…I’d rather save that resource for the killer deals that have to be closed quickly in exchange for a massive profit.

For houses with an existing mortgage, my favorite way is to purchase the property using the T.O.P.S. method (Taking Over Payments System) also known as “buying subject to” the existing mortgage.  The general problem with the term “subject to” is that most people just don’t understand it. T.O.P.S.is so simple a child can understand it!

It’s a great way to buy pretty houses without spending a pretty penny. Simply put, I step into the seller’s position and begin making their payments at an agreed upon date. The ownership of the property is transferred to me or my entity and the mortgage remains in the seller’s name until I, or more typically my tenant/buyer, pays it off when they obtain new financing and purchase the home.

Why is this a good deal for the seller, you ask? The first thing you have to remember is that successful investors only deal with motivated sellers! This is a good deal for the seller because I can close within a matter of days, as there’s no lengthy loan qualification and approval process.  Additionally, I can typically pay them a higher price because I don’t have any financing costs.

Why is this a good deal for the bank? In many cases, the seller is either in default or soon will be. Banks make money by taking in deposits at one rate and lending them out at a higher rate; simply, they earn a spread on their depositor’s money.

When a loan, which is an asset, becomes delinquent, the lender’s income stream is interrupted.  When their assets become non-performing, the lender is required by the Fed to increase their reserves.  These reserves reduce the amount of capital available for new loans. So, does the bank prefer payments or would they rather foreclose and take the house back? The easy answer: with foreclosure costs running at about $40,000 per house; banks want payments, not houses!

Finally, why is it good for the investor? First, we have no funding cost.  Second, since the loan is not in our name it doesn’t appear on our credit report. Third, our creditworthiness doesn’t come into play because we are not qualifying for a new loan.  But the best reason is that “subject to” transactions offer you the broadest array of exit strategies!

Additionally, even if you have a super credit score, most lenders will limit you to a maximum of 4 loans (if you can get them) and you’ll be required to make a substantial down payment (25 – 30%).  If the loans aren’t in your name and you don’t have to qualify for them, just how many of these will you be limited to? That’s right, no limit!  I met an investor from Ohio who has over 200 properties; not a single mortgage was in his own name. That’s quite a retirement portfolio he’s built.

My preference is to be a “transaction engineer” rather than restrict my business to any one strategy, technique or area of investing.  I love finding profitable opportunities in all types of transactions from pre-foreclosures to renovation projects or owner financing, to split funding.  But a core element of my acquisitions strategy is using “T.O.P.S.” transactions and it should be a critical part of yours.

By the way, did you know that you can do T.O.P.S. transactions for buying real estate with your self-directed IRA?

Augie Byllott helps people buy and sell homes and investment properties in all price ranges without using lots of cash or credit. He is a full time real estate investor, speaker and coach with Personal Action Coaching & Training. He is also a founding member of Common Wealth Trust Services, LLC a land trust service provider.

Guest Article by Michael Cobb:

If you had a time machine and could see the future, would you be able to make better decisions? Would you be a better investor? They seems like silly questions, but we would make better decisions if we knew the future, wouldn’t we? If we could see what was going to happen, we would develop products and services that everyone wants and needs, and then of course, we’d do very well for ourselves.

While we can’t go forward in time for a sneak peek, we can spot emerging trends. When the macro-demographics line up behind that trend, get ready. There is going to be a lot of money to be made by somebody. Why not you?

I was among those fortunate enough to be a part of the early computer wave of the late 1980’s and early 90’s. Now the truth be told, it wasn’t foresight that put me there…just plain luck. But there I was, and it was a great time to be in the computer business.

The major reason the tech sector performed so well when it did was the combination of two factors. The Baby Boomers moved into management positions in industry at the same time that the personal computer became a product mature enough to be of significant useful value for individuals and corporations. It was a powerful convergence of two factors that lead to the great adoption of PC’s and their massive widespread use. It also helped that the Baby Boomers generally rebelled against centralized authority.   Remember the Apple commercial railing against Big Brother?

The success of the PC and the fortunes made is a great example of the convergence of demographics and scarcity. More people wanted PC’s more than were available for a significant period of years. It produced huge opportunities for investors and entrepreneurs. Profits from computer and software sales were enormous because initially scarcity reigned. Consumers demanded a product and production facilities were not in place to produce the quantities demanded.

Over a period of about 10-12 years, the scarcity element waned because thousands of factories were built to supply the components needed to assemble the millions of PCs required each year. Prices and profits fell. The number of players in the market also constricted substantially leaving only the companies that produced a high quality product.

Interestingly, the names of these companies are largely the same as the ones who entered the market first, IBM, Dell, HP, Toshiba, Apple, and Microsoft. Those that arrive first, and perform well, stake a strong claim in the most fertile territory, and reward customers and shareholders alike for the long term.

A huge convergence of demographics and scarcity is happening again. This time it is in preparation to serve Baby Boomers as they retire and age.  There are numerous sectors like health care poised to do well, but much of that future success has already been priced into the market. In order to really profit from this convergence, one must look under different rocks as my friend Steve Sjuggerud says.  Find opportunities others are overlooking. That is where the real pay dirt is.

One such opportunity is under our noses right now. We all know that the real estate sector has been hammered over the past 5 years and rightly so. In many parts of the world, price gains were fueled by a speculative bubble. The true consumer demand wasn’t there to feed the ultimate usefulness of the product and prices tumbled in response. It was a bloodbath for many, but the strong survived. The companies in business right now are those that stayed true to the consumer and produced a product that people wanted to own and use.

Products People Want – Sun City South-of-the-Border

The most successful retirement community brand in North America is Sun City. The developer, Del Webb, wanted to provide real community to active senior adults, and then let the retiree decide what part of the United States made the most sense for them. They developed communities in the deserts of Arizona, along the coasts of Florida and California, in Texas and the Mid-West, and the piedmonts of the East Coast. Del Webb knew how to build the services and amenities that everyone wanted and then offered clients the option to choose what type of climate and environment suited their needs and wants best. Their success has been unparalleled in the industry.

It is now possible to advance the Sun City concept one step further and create a menu of attractive lifestyle options to serve the millions now searching for retirement homes in Latin America. This is an already large market and it continues growing quickly. However, once outside of North America, a new set of considerations becomes critical.

Today’s consumers largely take for granted the basic comforts of reliable electricity, excellent water pressure, high-speed bandwidth for internet, access to top notch medical care, and quality construction.  In Latin America, many developers fail to provide even these basic services. They are often little more than a collection of barren lots with limited infrastructure. Most have few or no homes or residential product in place. The major reason that so few projects achieve this lever of product is that it requires that significant resources be invested up front. These “ghost towns” are likely to remain just that.

Boomer retirees want life, activities, neighbors, and community, something that the majority of these projects, sadly, cannot offer. Only a few developers deliver the excellent infrastructure and amenities needed for a high quality of life experience that North Americans have come to expect. A “Sun City of Latin America” would provide high quality products in a variety of climates like a home along the Pacific or Caribbean coasts, in the cool tropical mountains, or in the arid, high deserts of South America. Investors and companies who can provide such a product are likely to do very well.

The Demographics

The Baby Boomers represent more than 84,000,000 individuals in the United States and 9,000,000 in Canada. Over the last 60 years almost everything that was popular with the baby boomers became a huge commercial success. They have produced a disproportionate impact on the economy at each stage of their lives and companies that placed themselves in the path of this “age wave” did very well. This wave of opportunity continues right now as they enter the age of retirement.

Today 500,000 U.S. retirees receive Social Security checks overseas. These are people who were born before 1946 and are not part of the huge demographic bubble about to hit the market. The Baby Boomers proper, people born 1946 to 1964 are just now entering retirement and many will be relocating and building warm-weather, retirement and second homes in Latin America.

With a half a million already retired outside the US, the projected demographic data is even more powerful. Several large surveys map the nature of emigration attitudes in North America. The Zogby Company surveyed 103,000 Americans and discovered that 18% of the respondents representing more than 26,000,000 Americans have a desire to move or own property outside the United States. 4,500,000 listed Latin America as their first choice.

TD Waterhouse recently surveyed Canadian Baby Boomers. 45% of the respondents plan to spend one month or more outside Canada in retirement. With 9.3 million Canadian Baby Boomers this equates to over 4 million retirees who will be renting or owning property outside Canada in their golden years.

The bottom line is that Baby Boomer retirement will largely drive this market over the next 20 years. The trend is in its infancy. As many more retirees look to the tropics for affordable, yet enhanced retirement lifestyles, phenomenal growth in these in these already large numbers is likely.

Why Latin America? 

The region of Latin America is growing by leaps and bounds. Proactive policies on the part of the countries themselves have become instrumental in attracting foreigners, and hence their capital, to the region. More than 1,000,000 North Americans reside in Mexico part or full time, 40,000 Americans have homes in Costa Rica, and 20,000 call Panama home part of all of the year. Each country in the region has its own attractions and incentives that draw tourists and permanent residents alike, and they are all competing to provide excellent retirement packages.

Latin America is in the middle of a successful transformation with real GDP increasing at a rate of over 5% per annum through 2008. While the period 2009 – 2010 slowed, the region is already rebounding economically and GDP growth for 2011 was over 6%. Growth in conjunction with improving economies and regional stability drives the improvement of infrastructure, economic situation, and position in the global marketplace. These, in turn, make the region more viable economically, while at the same time improving quality of life, safety, and marketability of the countries therein.

But perhaps the most important reasons retirees are looking at Latin America are the “soft” factors like proximity to the US, Canada, family, and friends. Flying north to south limits the time zones crossed to two or three making travel and communications back home simple and easy. Safety, stability, and services are important base lines, but convenience is perhaps just as, or more important in the end for consumer satisfaction.

Financial Factors and Emigration

Ernst & Young produced a study in July of 2008 that predicted 60% of US retirees would need to cut back on spending in retirement or face the prospects of outliving their nest eggs. What would you cut back, food, medicine, heat? Imagine living your life every day wondering if you were going to outlive your funds.  It’s a scary proposition.

In addition, the U.S. Commerce Department reports that Baby Boomers are now saving almost nothing. Although the recent economic shocks are changing that trend, for most Boomers, there is simply not enough time to accumulate what was not saved or lost in the markets in 2008. Even today, almost half of U.S. Boomer retirees (48%) expect to count on Social Security during retirement and 15% expect to rely on it for most or all of their retirement needs.

This is a dire situation for many. Where can they do that and have a high quality of life in North America? The ability to enjoy the kind that they’ve always dreamed of is simply not feasible in the United States on the limited funds and Social Security payments they posses. More retirees will look elsewhere, many to Latin America, looking for ways to cut costs in retirement. Wonderfully they will also discover that they can enjoy a higher quality of life on a budget that they can afford.

Capitalizing on a Crisis of Supply

When one examines the supply of high quality home sites in the region, one quickly sees the impending shortage. If one considers the amount of residential product with world-class infrastructure and amenities, the shortage is magnified immensely. Knowing why there is a shortage of supply is critical to understanding why investment in the region makes so much sense.

Most developers in the region sell a speculative type of product. It has also been called “cut and run.”  This literally means that a developer buys a large tract of land, adds the minimum infrastructure like dirt roads and electric poles, then sells the lots to speculation buyers. Large expenses like water and sewage treatment are often offloaded onto the consumer, who must drill wells and build septic systems if they decide to build a home. In many cases soils are heavy clay which won’t perk, and water tables are located deep underground. In addition to the obvious environmental issues, this ends up costing buyers much more than their share of a centralized system.

A 2009 developer survey by Christopher Kelsey & David Norden clearly points to the growing consumer demand for products with high levels of infrastructure, amenities, and “reality.”  Prior to the real estate and economic crisis in 2008, most consumers were willing to “bet on the come” and buy pre-construction and speculative product. Today their attitudes are very different.

When surveyed again in 2011, developers agree by an overwhelming 94% that consumer’s expectations for clarity and commitment from the developer for the delivery of promised amenities will be greater. 92% agree that consumers will want to see the infrastructure and amenities complete before purchase. 85% see an increased trend by consumers to purchase completed homes and condominiums rather than vacant lots and pre-sales opportunities.

Consumers who are now retiring want and need something different as the Norden survey and other research data suggests. Retirement overseas is already happening with more than 500,000 receiving Social Security checks outside the United States. If the Ernst and Young State of Retirees report is accurate, then we will see this trend grow even faster as more people search for ways to lower their cost of living without giving up the important quality of life issues.

The Sun City of Latin America

The Baby Boomers are about to enter their next stage of life with more time and more money than any other demographic group of people in history, this even after the 2008 meltdown in the financial markets. As a result of longer life expectancies, these consumers know that they will have many more years of life after retiring than the majority of their predecessors ever did or do. With this time, they want to travel, continue working, and even start new careers. They want infrastructure, amenities, activities, neighbors and community. They are willing to pay a premium to get it.

Latin America offers exceptional and diverse climates with a high quality of life at an affordable price.  Our company, ECI Development is already serving this market and is, right now positioned to capture an even larger segment as it grows and expands.

You may want to look at what we are doing and how you can participate. Visit our website and be in touch. The opportunities are dramatic and timely. We don’t often get the chance to spot the trend this early with vehicles in place to ride the wave. Seize the moment. You’ll be glad you did.

Michael Cobb

Chairman and CEO

ECI Development

www.ecidevelopment.com

Guest article by Michael Cobb:

Part three of the 15 Critical “Must Ask” Questions when Buying Real Estate Overseas deals with “Knowing the Developer” and using the marriage analogy here is appropriate. Not many of us meet a girl in a bar and get married the next day, but it does happen. When it does it might fall under the category of “Margarita Madness,” a malady that sadly affects many travelers to Latin America as well as they are struck by marriage at first site.

So when you decide that you want to own a piece of property outside North America, you should consider it like a marriage. Generally, we get to know several ladies in our lives, find one that is a very good fit, court her for weeks, months, or even years, and then after we know her pretty well we ask her if she’ll marry us. If she says yes, we tie the knot.

Tie the knot is a great way to look at owning real estate overweas. In the previous article we discussed big brother and here is the good news/bad news about big brother again. Good news, he isn’t generally around much south-of-the-border. Bad news, you are responsible for what happens. Just as there are few or no zoning laws as discussed in part two of this series, there are also no bonding agencies, or fair reporting commissions to protect you from outright lies at one end of the spectrum, or just good intentions gone awry at the other.

The questions in the “Know the Developer” section below is all about who the developer is, why they exist, how they plan to get from point A to point B, and do your philosophies and values align with their own. A very simple way to know a lot about the developer is to ask them for a business plan. Do they have one? Developing real estate is a business after all and a wing and prayer is hardly the best way to come about it. Ask to see the business plan. Read it and make sure it is comprehensive and makes logical sense to you. Also, who are the people on their team? What experience do they have? Is there a proven track record or is this their first experiment with you as a guinea pig? What is their commitment? When the going gets tough what is keeping them there to grind it out through the middle of the marathon? Everything takes longer and is far more difficult in Latin America. Why will they stay? Look for answers in this case that make sense in your heart.

Again, owning a piece of property is like a marriage. If it’s a good one you’ll be happy. If not, you’ll be stuck with the developer for the next decade or two. You might want to know who they are a little better than what you can learn over a few drinks under some palm trees in paradise.

A great sales psychologist states that “we buy emotionally and justify logically.” Margarita Madness sets the euphoric mood to buy emotionally. These 15 critical questions, the last 5 of which are below, show us how to justify logically. Both parts of our brain, the emotional and the logical, are critical for happiness and satisfaction with property ownership. It’s a marriage after all. Get it right the first time. Divorce is expensive.

Knowing the Developer

How will you build your home from thousands of miles away? Who can oversee the construction of the home, and what is included? Look for projects that show homes as examples of what you will actually receive. What are the written specifications? What do the Architectural CC&R’s dictate? Are you in agreement with them? Have they planned property for 220v water heaters and air-conditioners, are there hot water lines to all the sinks and showers? Are lights, fans, faucets and other fixtures included in the price? Are appliances and AC units included? Is there a dryer vent or a water line to the fridge? How about the telephone and cable TV wires? Are they included in the price? What are the engineering guidelines? Who is going to validate these specifications as the home is constructed? All of these things and more we assume as North Americans. Verify and assume nothing. Remember, you get what you inspect, not what you expect.

Is the Development Company financially solid and do they have a record of success? Is financing available for Property Ownership? Remember buying a property in a foreign country is like getting married. You should know very well who you are marrying. Hopefully the developer will be around for many years and, if so, you want to be sure you are comfortable with the long term association. Ask to see a copy of a business plan. Ask to see financials. You are the buyer and you have every right to ask to see financials, especially if they’ve promised something like future amenities. You need to know who they are and if they will be around for a long time. Remember, you are going to send them your hard earned money. There are no bonding agencies holding their feet to fire to complete anything they promise. You are counting on the people and company involved to make good now and for upcoming years.

If they’ve promised an ROI on rental return, ask to see cancelled checks to owners. If they’ve returned 8-12 percent returns to owners, they’ll be proud to show you the cancelled checks. In addition because financing is rare in the region, the developer should provide a form of financing as a buyer’s option. This shows financial stability. It also will indicate that they are not using your money to build promised infrastructure and amenities. Build outs based on sales flow can stall in down markets leaving buyers with half built projects to complete and fund as a HOA.

Is there a central sewer system? This may seem like an odd question to put under the heading of “Know the Developer,” but here’s the logic. When a developer doesn’t plan a central sewer system, what they are in fact doing is pushing the cost of the waste disposal off to the property buyer. Depending on soil type, this may or may not be a big issue. But either way, property owners will be responsible for paying for and installing septic systems. If septic is the provided solution, request to see a copy of a perk test. Many soils of Latin America are heavy clay. Lot owners may be forced to install expensive systems to meet environmental codes. Worse, without proper zoning and environmental inspections from big brother, many property buyers may not install what is hygienically required leading to a nasty situation, especially in rainy season.

What about safety and security access? Around the clock security should be provided at any public entrance with cooperating backup from local and national police. Generally, the municipalities will not have the funding or staff to provide the kind of security North Americans are used to. Prevention and deterrence is the key here, and a strong visible presence prevents the kind of petty theft so often happening in the region. Be sure it exists and works. Were you let through the gate no problem? Who else can get through? A tough time getting in through the gate yourself, means others will face it as well.

What kind of title guarantee can be provided? If you can’t get title insurance, you should seriously reconsider the purchase. There are no legitimate reasons you should not be able to get this protection from a major company like First American or Stewart. This is a black and white issue. Either the seller has title and you can get a policy, or you should walk away. There will always be a story. Believe it at your own peril.

About Michael Cobb

At the height of a successful career in the computer industry, Michael Cobb left to pursue pioneering opportunities in the emerging markets of Central America. He formed ECI Development, a multi-country developer with projects in 5 countries: Belize, Nicaragua, Costa Rica, Panama, and Ecuador. The model is based on the Del Webb Sun City active senior communities in the U.S., and it serves North American consumers with familiar product in multiple geographies.

Guest article by Greg Fencik:

In real property law, title is the means whereby a person’s right to property is established. Title should not be confused with a deed. A deed is merely a piece of paper that serves as evidence of title. The possessor of a deed may not, in fact, have legal title to the property described in a deed. For example, a deed may be forged. A deed may be one of multiple deeds issued by a prior property owner. A deed may stem from a deed that was one of multiple deeds issued by a prior property owner. There may be a mistake in the description of the property in a deed. In these instances, the person who has the deed may not have legal title.

Title isn’t just a piece of paper, be it a deed or otherwise. Title is the right to do with the property whatever the title holder sees fit (provided, of course, that it’s legal). Title insurance is a means by which buyers of real property and mortgage lenders protect their respective interests in the property against losses due to flawed titles.

Most people are familiar with health insurance, auto insurance and homeowner’s insurance. Each of these types of insurance provides coverage against future losses – things that may occur in the future. For this future coverage, healthcare insurers, auto insurers, and homeowner’s insurers charge periodic premiums from the date of purchase of the respective policy until the policy is cancelled or non-renewed.

Title insurance provides insurance against defects in the title to real property. Title insurance ensures that the purchaser/owner of real property to which the policy applies has legal title – the right to do with the property whatever the title holder sees fit (e.g. develop the property, sell the property). Unlike providers of healthcare insurance, auto insurance and homeowner’s insurance, title insurers charge a one-time premium for the provision of what is essentially a lifetime insurance policy. There are a number of title insurance providers in Florida – First American Title, Stewart Title Guaranty Company, Old Republic National Title Insurance Company, and Fidelity National Title of Florida, to name just a few.

In Florida, title insurance is regulated by statute and by administrative rules. See, generally, Fla. Stat. §§ 627.7711 – 627.798.

Florida statutes define a title insurer as:

Any domestic company organized and authorized to do business under the provisions of chapter 624, for the purpose of issuing title insurance, or any insurer organized under the laws of another state, the District of Columbia, or a foreign country and holding a certificate of authority to transact business in this state, for the purpose of issuing title insurance. Fla. Stat. §627.7711(3).

By statute, title insurers are obligated to perform title searches and to examine information upon which a determination can be made that there is valid legal title:

A title insurer may not issue a title insurance commitment, endorsement, or title insurance policy until the title insurer has caused to be made a determination of insurability based upon the evaluation of a reasonable title search… has examined such other information as may be necessary, and has caused to be made a determination of insurability of title… in accordance with sound underwriting practices. Fla. Stat. §627.7845(1).

A title search is “the compiling of title information from official or public records.” Fla. Stat. §627.7711(4). What constitutes such other information as may be necessary is not defined by statute. It stands to reason that a title insurer will engage in a thorough investigation of title before providing insurance for the title so as to minimize the likelihood that it will have to pay a claim. [1]

Title insurance is issued to owners and/or to lenders (e.g. North American Savings Bank or NASB). Title insurance policies are, thus, referred to as owner’s policies and lender’s or loan policies, respectively. First American Title explains the difference here.

The premium charged for title insurance in Florida is dictated by statute and by administrative rule. SeeFla. Stat. §627.727, Fla. Admin. C. 69O-186.003. The premium charged for an original owner’s policy is a function of the value of the property to which the title applies:

Fla. Admin. C. 69O-186.003(1)(a)1.a. [2]

The premium for a loan policy, which the Florida Code refers to as original mortgage title insurance, is the same. For a one-time premium, title insurance policy holders obtain insurance against a number of covered risks. Covered risks typically include:

1. Someone else owns an interest in the title.
2. Someone else has rights affecting the title because of leases, contracts, or options.
3. Someone else claims to have rights affecting the title because of forgery or impersonation.
4. Someone else has an easement on the land.
5. Someone else has a right to limit the use of the land.
6. The title is defective due to:

6.1 Someone else’s failure to have authorized a transfer or conveyance of the title.
6.2 Someone else’s failure to create a valid document by electronic means.
6.3 A document upon which the title is based is invalid because it was not properly signed, sealed, acknowledged, delivered or recorded.
6.4 A document upon which the title is based was signed using a falsified, expired, or otherwise invalid power of attorney.
6.5 A document upon which the title is based was not properly filed, recorded, or indexed in the public records.
6.6 A defective judicial or administrative proceeding.

In the event a policy holder suffers a loss as result of a covered risk, the title insurance company will generally do one or more of several things:

1. Pay the claim.
2. Negotiate a settlement.
3. Bring or defend a legal action related to the claim.
4. Pay the policy holder the amount required by the policy.
5. End the coverage of the policy for the claim by paying the policy holder the actual loss resulting from the covered risk, and those costs, attorneys’ fees and expenses incurred.
6. End coverage for certain risks by paying the policy holder the amount of the insurance then in force for the particular covered risk, and those costs, attorneys’ fees and expenses incurred up to that time.
7. End all coverage of the policy by paying the policy holder the policy amount then in force, and those costs, attorneys’ fees and expenses incurred up to that time.
8. Take other appropriate action.

Given all of this, it should be obvious why lenders such as NASB require title insurance. To understand why purchasers of real property, such as IRAs should insist upon title insurance for themselves, consider the following hypothetical scenario:

1. An IRA purchases property in Florida.
2. The purchase price of the property is $100,000.
3. 70 percent of the purchase price ($70,000) is financed by means of a non-recourse loan provided by a lender such as NASB, which lender requires the purchaser (the IRA) to obtain mortgage loan insurance or loan insurance.
4. All that is obtained is mortgage loan insurance or a loan policy; there is no owner’s policy obtained.
5. The loan policy is obtained from a company such as First American Title.
6. The IRA pays for the title insurance. [3]

In this scenario, the cost of the insurance policy would be $402.50 (the premium is a function of the amount of the loan, $70,000, not of the value of the property). That cost would be paid by the purchaser (the IRA) as part of the cost associated with obtaining the financing – it was required by NASB.

In this scenario, because the policy is a loan policy, the policy would only protect NASB. The limits of coverage would initially be $70,000 (the amount of the loan), not $100,000 (the value of the property at the time of the purchase). The amount of coverage would decrease as the loan to NASB is paid off until, eventually, when the loan to NASB is paid in full, there would be no coverage at all.

Now, in this scenario, First American Title likely did a good job investigating the title of the property. It was obligated to do so by statute, and good business practices would dictate as much, as well. As such, one might think: though the IRA did not obtain a title insurance policy in its name (an owner’s policy), it did, nevertheless, have the benefit of the title search and assessment of title resultant from the title examination First American Title conducted prior to issuing the loan policy. But bear in mind: title companies are not infallible; they sometimes make mistakes. And if First American Title made a mistake, the IRA would be left to suffer the loss of a title defect on its own, without insurance.

Consider this, alternative hypothetical:

1. The IRA purchases property in Florida.
2. The purchase price of the property is $100,000.
3. The IRA pays for the property in cash; there is no financing.

In this scenario, there is no financing. That means there is no lender to insist and require that the IRA obtain any kind of title insurance. In the absence of a requirement that the IRA obtain title insurance, the IRA might not obtain title insurance. If the IRA does not obtain title insurance, it assumes the risk that it may have acquired defective title; and the IRA would be left to suffer the loss of a title defect on its own.

Now in either of the two scenarios discussed herein above, the IRA could hire a company to perform a title search. In such a case, in the event the title search company performed a bad search, and the IRA suffered a loss due to a defective title, the IRA might have recourse against the search company.

If the IRA pursued a case against the search company, the IRA’s recourse would be limited by the terms of the contract between the IRA and the search company. It’s likely that the contract would limit warranties of the work performed by the search company. As such, the recourse would be not nearly what the IRA could hope to obtain in the form of benefits from a title insurance policy.

So, consider this hypothetical scenario (a variation of the first hypothetical):

1. An IRA purchases property in Florida.
2. The purchase price of the property is $100,000.
3. 70 percent of the purchase price ($70,000) is financed by means of a non-recourse loan provided by a lender such as NASB, which lender requires the purchaser (the IRA) to obtain mortgage loan insurance or loan insurance.
4. A loan policy is obtained.
5. An owner’s policy is obtained as well.
6. Both the owner’s policy and the loan policy are obtained from a company such as First American Title.
7. The IRA pays for the title insurance.

In this scenario, the total cost for the two policies would be $600. That’s based on a $575 premium for the owner’s policy and a $25 premium for the loan policy.

Understand that the premium for a loan policy, alone, in the amount of $70,000 would be $402.50. And an owner’s policy, alone, in the amount of $100,000 would be $575. In this scenario, because both a loan policy and an owner’s policy are issued, the premium for the loan policy is reduced or discounted to $25. This is commonly referred to as a simultaneous issuance discount. In this scenario, the IRA obtains the title insurance required by its lender, NASB; NASB is satisfied. And, for just $25 more, the IRA obtains title insurance for itself as well; the IRA has piece of mind.

The loan policy will eventually cease to exist. The owner’s policy (the IRA’s policy), on the other hand, will last for so long as the IRA owns the property. If the policy issued by First American Title tracks the language of the policy promulgated by American Land Title Association or ALTA (and it likely would), coverage afforded under the policy (the Coverage Amount) would actually increase by 10% of the Policy Amount each year for the first five years following the policy date, up to 150% of the Policy Amount. Thus, the IRA has a title search and analysis and title insurance (essentially, a warranty by the title insurance company, First American Title, of its search and analysis). After considering the various scenarios presented herein above, it should be obvious that an IRA engaged in the purchase of real property should not forget the title insurance.

About the Author

Greg Fencik is an attorney licensed to practice law in Florida since 1992. He is admitted to practice before Florida state courts, the U.S. Supreme Court, the 11th US Circuit Court of Appeals, and the Federal District Courts for the Middle and Southern Districts of Florida. He is a certified circuit court mediator. He received his bachelor’s degree from the University of Pennsylvania. He received a juris doctorate degree from Tulane University. He engages in business law, business consultations, and real estate law, as well as handles financing placements and credit facilities. In addition, Greg teaches real estate law at the University of Central Florida. He may be reached by email here.

Disclaimer: Anything read in this article is not to be taken as legal advice. It is up to the reader to consult with their own local attorney for any and all legal questions. This article is for educational purposes only. NuView IRA, Inc. does not render tax, legal, accounting, investment, or other professional advice. If tax, legal, accounting, investment, or other similar expert assistance is required, the services of a competent professional should be sought.

Author Notes

[1]  To get a better idea of what exactly title insurers do when it comes to the investigation of and assessment of title prior to providing a policy of title insurance (underwriting), consider Chicago Title Insurance Company’s 333 page Basic Underwriting Manual.

[2] Many title insurance companies offer online title insurance premium calculators. First American Title, which utilizes policies promulgated by the American Land Title Association (see ALTA.org), provides an online calculator here.

[3] Either the purchaser or the seller of real property may pay for title insurance; in general, it may be negotiated in the purchase agreement.

Guest article by Michael Cobb:

Part two of the 15 Critical “Must Ask” Questions when Buying Real Estate Overseas will focus on “Owning Community.” While this seems like a no-brainer to most folks from North America, it really goes to the heart of what big brother does for us in North America and just how much we unconsciously depend on him. Would you think to ask to see a copy of the local zoning laws? You would likely be surprised to find there are none, and that in fact, your neighbor can legally build anything they want next door as far as the government is concerned. This is real freedom isn’t it?

But freedom and responsibility are a double edged sword. You the buyer must take the responsibility to ask the right questions to learn what you need to know so you can make the right decision for you and your interests. But how do you know what questions to ask? How can we know what we don’t know? Obviously we can’t, but a strong dose of humility goes a long way, as does turning off our filters and confirmation bias. These issues were covered in part one of this series in the last issue of To the Point.

Owning community is important, not just in zoning, but also in who will be around, or more importantly, will anyone be around. A build requirement on the part of the developer is a key piece of the community puzzle. Without something to mandate home construction, most projects of Latin America are long to be ghost towns and a collection of sold, empty lots waiting for their investor buyers to come build a home.  Most wont. They bought the lot as an investment to flip in a few years. Maybe they can, maybe they can’t. But a community is something else entirely.

Community is a tough word to define, but the subjective experience is real and we know it when we sense it don’t we? In fact, this soft fuzzy feeling can be and is quantifiable by the free market. Developments that achieve this sense of friendliness and warmth sell at higher prices initially and retain much higher resale values over time. The velocity of sales, even in down periods, outpace projects close by that lack this so important sense of community. Case studies abound and several are contained in ECI’s Business Plan.

Other factors too contribute to community and the financial and personal benefits that accompany it. Walkability is a huge factor. So are spaces where people can meet casually and get to know one another. Sure, there are a few Jeremiah Johnsons out there, but the vast majority of people want to have other people around to golf with, fish with, play tennis, swim, hike, play cards, share a drink or a meal and a multitude of other activities that we enjoy socially. But if there are no other homes around, no restaurant or fun places to congregate, no amenities in place to play a round with friends, how will this happen? Buy what you see is extremely relevant here too.

Owning Community

What kind of construction and design standards are in place and enforceable?  Is there building requirement of any kind? Zoning is almost non-existent in Latin America. Unless the developer has written and implemented CC&R’s, your neighbor can do whatever they want. Read the CC&R’s and make sure you agree with what is allowed and what is not. Know what deed restrictions are in place or you may be unpleasantly surprised by a neighbor whose tastes are radically different than yours. Empty lots on the beach are great for a picnic, but don’t create much of a living environment. Community means homes around you. If you want to have neighbors around, be sure that there is a requirement that property owners build a home in order to avoid living in a ghost town.

Are there amenities for use by owners and visitors? Buy what you see should be the basis for 90% of your due diligence evaluation. Is there a golf course, restaurant, bar, tennis court, fitness center, dock, dive shop, in place and serving clients. Or are they just promised. Promises can be alright, but your due diligence should include the verification of hard funds needed to complete the promised infrastructure, amenities, and services. Without the money, you are buying a dream.

Are there state-of-the-art telecommunications or fiber optics for fast and reliable worldwide communications? This question could fit in either “Buy what you see,” or “Own community.” But in a time where we take internet and phone service for granted, and community is being more and more defined on the web, this vital component must be in place, and in place well. Understand the reality of telecommunications infrastructure. How is the phone service provided? Can you get the bandwidth of internet you need? Is the service flexible and expandable to grow with the future needs?   

What about the Home Owner’s Association?  Are the fees high enough to cover maintenance of existing and planned infrastructure? Yes, high enough. You should worry about low fees because they are usually a sales tool to show how cheap the cost of ownership is. Let’s be honest, nobody likes to pay monthly fees. However, please realize that fees set too low equate to unexpected surprise assessments in the future and/or a drastic rise in HOA fees when the developer is gone and the true costs of maintenance are carried by property owners.

What about green belts, common areas, and the future of the development? True community requires spaces and places for people to meet and enjoy each other’s company. Club houses, parks, sidewalks, and maintained open space are critical to foster a spirit of enjoyment for residents. If public spaces are important to you, be sure they exist and are protected in the master plan. Remember too that there needs to sufficient resources for the care and maintenance of these areas. Knowing and agreeing with the vision of a project is important too. Be sure that the developer’s long term plans align with your goals and desires as a homeowner in that project. Ask to see a copy of the developer’s business plan if they have one and make sure it makes sense over the long run for you.

About Michael Cobb.

At the height of a successful career in the computer industry, Michael Cobb left to pursue pioneering opportunities in the emerging markets of Central America. He formed ECI Development, a multi-country developer with projects in 5 countries: Belize, Nicaragua, Costa Rica, Panama, and Ecuador. The model is based on the Del Webb Sun City active senior communities in the U.S., and it serves North American consumers with familiar product in multiple geographies.

Guest article by Michael Cobb:

Everyone buying property outside of North America needs to remember the famous words of Dorothy to Toto after being dropped into Oz, “I don’t think we are in Kansas anymore.” When going offshore, especially to places that feel familiar, we must be very, very careful. In fact, the more familiar it seems, the more caution we should apply. But how do we do that?

Take a look at a favorite saying of mine, “I don’t know what I don’t know.”

Please stop and reread that…

Really! But how can we know what we don’t know? We can’t obviously, but we can be open to new possibilities and realities that vary greatly from our assumptions. The analogy that makes sense here is one of a radar screen. A small radar screen is easy to manage. In the world of “North American normal” we can get away with that. But overseas, a larger radar screen serves us well. It makes sense to expand it greatly so that anomalies are picked up way out, not close in.  Give yourself time and space to examine this data, process it, and then understand it.

Humility is the one attribute that really helps us to be open to the fact that we don’t know what we don’t know. It gives us a willingness to listen, hear what doesn’t make sense, acknowledge it and try to fit it into our analysis. It also allows us to let others with more experience guide us in unknown territory. The choice is really humility or tuition.

The other piece of this puzzle is our assumptions mentioned above. Have you seen the word “assume” defined as making an ass out of you and me? When we come to Latin America we bring our assumptions with us. We have to because they are part and parcel of who we are.

Assumptions are like filters. In the back of the brain, right at the top of the spinal cord, resides a special part called the Thalamus. This is one of the oldest parts of the brain and it is the brains chief filtering mechanism. It hears and senses everything. Billions of sensations per second, yet our conscious mind gets only about 1% of that information because that is all the conscious “I” can handle and process.

A good example is when you have a small baby in the house. It is possible to sleep through a raging thunderstorm, but a tiny squeak from a newborn will rouse the mother instantly (and dad sometimes). This is the Thalamus hard at work, sorting out the needed info from the not needed.  This filtering mechanism lets us live our lives. If we had to pay attention to every noise, movement, sensation around us, we’d be overwhelmed. So we filter.

But this filtering mechanism can be an Achilles Heel unless we understand that we are indeed filtering and are prepared to try and turn it off as best we can. But it’s not easy to turn the filters off, live “on your toes,” and be ready to see something that doesn’t make sense. In fact, it can be hard work. But it is necessary to if we want to make wise property ownership decisions overseas.

When you see it, turn off your confirmation bias, acknowledge it, and respect what your logic says. Push your radar screen out further. Give yourself time and space from the awesome emotional experience of palm trees, margaritas, and friendly sales guys. Process the hard data and do your homework. Look for evidence that contradicts what you want to believe.

The bottom line is that there are numerous wonderful properties out there and some of them are right for you. But you are in a different country, with different rules. There is no big brother looking out for you, so be sure you are smartly looking out for yourself.

An educated buyer is a happy owner. The answers to the questions below should be an important part of your property selection process. There is no right or wrong answers, but we’ve found that the things people take for granted or assume are standards in North America, may not be in Latin America. Be sure you know the answers to the following questions and make conscious decisions about what levels of creature comforts are mandatory and which may be optional.

The 15 Critical “Must Ask” Questions when Buying Real Estate Overseas needed for excellent and comprehensive due diligence are broken into three main areas:

1. Buy what you see
2. Own community
3. Know the developer.

The first set below deal with “Buy what you see.” The president of ECI Development has a saying, “You get what you inspect, not what you expect.” Promises are easy to make and difficult to deliver. Be sure you are dealing with existing reality. These first critical due diligence questions are below.

The other two areas, “Own Community, and “Know the Developer” will be presented in subsequent posts.

Buy what you see

Is there year around access to the property? What is the drive time from shopping, dining, and the airport? Not all roads are accessible year around in the region. Steams that barely flow or don’t at all, can be raging torrents half the year. Know the road condition in rainy season. Proximity to services is very important. The key factor is the time to reach the destination not the miles. 10 miles on a rough dirt road in rainy season can easily take an hour or more.

What road and public infrastructure exists? Does the current infrastructure include underground utilities, paved streets and sidewalks? Do not take for granted paved roads, street lights or state of the art telecommunications. If these are not in place when you buy your property, they might never be. Rarely, if ever does, the government or utility company provides these services to a developer. If the sales agent says, “it’s coming,” verify y that the developer has the funds to meet his promises. Ask to see a copy of his most recent bank statement showing the millions of dollars it will take to build the infrastructure. Bottom line: Buy what you see! Be sure that the price you pay is indicative of existing reality.

Is there enough fresh water and water pressure? Sometimes it’s the smallest of things that adds greatly to the quality of life. Water pressure is one of them and it must be planned for and paid for. Either the developer has planned and paid for this part of the infrastructure or the lot owner will bear this cost with the addition of storage tanks and pressurizing systems. If you are considering an existing home or condominium, turn on all the faucets, inside and out, the showers, and then flush the toilets. Is there sufficient pressure?

Is the house or condominium plumbed with hot water? Not a silly question. Look under the sinks to see if there is hot and cold service. In many cases, a splitter is used from the cold service to provide water to both faucets. The cost to retrofit a concrete home for hot water to the bathrooms can be high. If you are having a home built, be sure to triple check the plans for a hot and cold service to all bathrooms and fixtures. Architects and builders may design “local” and unless you catch this upfront, change orders become prohibitively expensive.

How far is it to major medical care? How long in dry season, how long in rainy season? Major medical care is critical. Most major Latin American cities have state-of-the-art hospitals. In fact, in many cases these facilities can eclipse regional US hospitals with newer more modern equipment approved for use by the Europeans but not yet passed by the FDA. Be sure to visit the medical facilities as part of your due diligence process. Remember too, it is not how many miles to a major medical facility, but how many minutes by car in both the wet and dry seasons that really counts.

About Michael Cobb

At the height of a successful career in the computer industry, Michael Cobb left to pursue pioneering opportunities in the emerging markets of Central America. He formed ECI Development, a multi-country developer with projects in 5 countries: Belize, Nicaragua, Costa Rica, Panama, and Ecuador. The model is based on the Del Webb Sun City active senior communities in the U.S., and it serves North American consumers with familiar product in multiple geographies.