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Vetting Brazil - Live and invest overseas in Brazil

BY: Cabot | Category: Travel | Post Date: 2009-09-10
 



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   Cabot
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Dear Reader,

"A pre-construction resort rental is one of the most sensible investments you could make right now," writes our man in Brazil, Anthony Archer, "and this northeast coast of Brazil is one of the most promising markets for this kind of investment vehicle."

"However, in the current climate, investors are understandably cautious. Levels of risk aversion are running high. If you're new to pre-construction investing, the Brazilian marketplace, or both, how can you satisfy yourself you're making the right buy?

"The first key to successful pre-construction investing is the purchase price. If you over-pay, you will struggle to realize a good return, even in a growth market like Brazil.

"The second key is being confident that the project will be completed. The truth is that, again, in the current climate, some pre-construction developments have been put on indefinite hold and even canceled.

"How can you protect yourself against this?
"Choose projects that are realistic in their ambitions. Straightforward, no-nonsense designs and plans are where the smart money is heading in the current times. Not only does this mean the chances of completion are better, but it also supports your exit strategy. There are more buyers for low- to middle-range real estate than super high-end, luxury projects. Low- to mid-level real estate is historically the first to be hit in a downturn, as the ultra-wealthy tend to deny depreciation, but the low-middle market is almost always the first to recover, as well.

"Choose projects with infrastructure already in place--for example, road access, amenities, water supply, and electricity. A plan for a beautiful project on an isolated island a kilometer from shore may seem appealing, and the design and drawings may be impressive, but where is the access? Where is the electricity going to come from? How is the sewage going to be managed? These aspects must not only be taken into account, but also paid for!

"How will the developer raise the money to cover these costs? If he is expecting to use revenues from sales to build the infrastructure, how many units does he need to sell to cover the infrastructure nut? Is it realistic in the current market to believe he'll be able to make those sales? Or is it more likely that this hurdle will lead to delays before construction is even commenced?

"Smaller, less ambitious, bread-and-butter developments can provide a higher degree of security and comfort in this regard.

"Choose projects where the developer is personally invested. It's not uncommon, especially in developing markets, for a developer to invest only a small percentage of the purchase price of a piece of land, to have an architect draw up plans, and then to start selling. In this way, he's using buyers' funds to not only build out the project, but also to pay the majority of the land purchase price.

"In more financially stable times, when real estate markets around the world were booming, this approach could work. However, today, this is a more risky proposition. If the developer is not able to raise enough money to pay off purchase of the land, he could lose it, meaning the project could be canceled.
"On the other hand, if you choose an off-plan project where the developer has bought the land outright and paid for it 100%, what is the worse-case scenario? That the developer is unable to raise enough money through sales to cover infrastructure and construction costs. If he owns the land, though, he could be able to use it as security to obtain financing for the infrastructure money he needs. Yes, the project could still be delayed, but it is unlikely that a developer would walk away from a project when he's already invested 100% in the land ownership.

"Choose projects with planning permissions, building licenses, and environmental permits already in place.
"Choose projects where the contractor has a track record. Most developers do not build themselves; rather, they contract with a construction company. Find out who that will be and what else that outfit has built. A solid track record for the construction company can, in fact, be more important than one for the developer.

"Choose projects where the contracts stipulate the consequences should either party fail to fulfill his obligations. Engage an independent local attorney, with experience helping foreign buyers navigate this market. A U.S. attorney is not going to understand how to interpret a Brazil real estate purchase contract (just as a Brazilian attorney is not going to understand how to interpret a U.S. real estate purchase contract...and it'd never occur to you to ask one to try). You need a Brazilian attorney you can trust to review your purchase contract and to make sure it specifies penalties for delays.

"Specifically, here in Brazil, when shopping for a pre-construction buy, you want to review (with your attorney) the matricula, which certifies that the land in question is indeed owned by the developer in question; the license from the Semace, which is the state office responsible for all environmental aspects of any development (this license is absolutely required for construction); and the alvara de construcao (construction permit), which is provided by the city hall and authorizes all construction."



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About Author / Additional Info: Kathleen Peddicord has traveled to more than 50 countries, invested in real estate in 17, established businesses in 7, and renovated properties in 6. She has written innumerable books, reports, and essays on why and how you might want to do the same...and she has appeared often at conferences and on television and radio detailing the opportunities for living, retiring, and investing around the world. Learn more about Kathleen at http://www.liveandinvestoverseas.com/theexperts.html

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