#22 – The Expat Files: Real Estate, Legal Challenges, and Insurance in Latin America

Automatically transcribed from the original recording; names and wording may contain errors.

[00:07] Hi everybody, I'm Johnny Mueller, and you're listening to The Expat Files, living in Latin America, the one-of-a-kind show that tells you what it's like to live, work, play, and or retire in Latin America, so let's get started. In the last Expat show, we started our discussion about how to buy land and build a house, and we talked a little bit about buying into a finished housing project, and buying into a housing project that's still under construction. We talked about the usual stuff, location, location, location, and the second most important thing when looking for a place to buy, and I'm talking about water, water, and more water. So let's get into part two of buying land and building in Latin America. So first I think we should talk about financing, or getting a mortgage in Latin America.

[00:54] Is that even possible for an Expat? Well, I can tell you right now it's not like in the first world, and there are not a lot of options for Expats or the locals. Just like in the first world, banks do have their mortgage departments, but whether you're an Expat or a local, you'll have to put down a hefty down payment, from maybe 20% to 30%. And then of course you'll have to prove that you've got good credit, great references, and that you've been at a stable job for some years, which right there pretty much rules out any Expats I know. Because unlike locals, most Expats don't work a steady job. In fact, the vast majority of Expats come down to Latin America without any job prospect at all. They come down with first world know-how, some good ideas, and maybe some cash, or maybe

[01:41] not. But just because an Expat can't get bank financing, that doesn't mean there's no financing options out there. Because lately, throughout Latin America, almost all new housing from the middle class on up has been in subdivisions or colonies. And most of them are guarded and gated. And these gated colonies just don't pop up on their own. There are hundreds of well-planned, first world-style subdivisions going up everywhere throughout Latin America. And most of these are constructed by big-time developers. And in the majority of cases, these developers will offer the financing themselves. And believe it or not, sometimes Expats get preferential treatment. So, even if you're an Expat, and you don't have a real job, and you haven't been in the country a long time, that really doesn't matter.

[02:28] Because if you can fork out a big down payment, like let's say 20 or 30% on a $100,000 or $200,000 house, they'll be glad to take your money and sign you right up. And that's because once again, Expats, and I'm talking about mostly Gringos and Europeans here, they have a huge advantage right off the bat. And I know this is going to sound a bit strange. First of all, developers love to have a first world person living in their colony. It adds class and cachet to their project, especially when a project's just getting started and you're one of the first ones in. And in fact, if you buy into one of these projects, they'll more than likely use you in their promotion propaganda, whether you know it or not. Because if some new housing project is good enough for a first world buyer, well you get

[03:13] the idea, and word travels fast. So what I'm saying is the developer will have its own marketing, sales, and legal department, and they'll set up that loan for you. Without too many questions asked, as long as you put down a decent down payment. And they know historically, first worlders rarely default on their mortgages or even get behind in their payments. So for them, it's a great deal, especially knowing the extraordinarily high default rate with their own citizens. And even now, with the worldwide mortgage and financial crisis hanging over everyone's head, it doesn't even matter that the whole real estate bubble and the giant financial fiasco we're in right now was caused basically by gringos, which technically makes gringos

[03:59] and expats by inference somehow responsible for the whole mess. And it's just dumb luck for us expats that no one in the third world has really put that piece of the puzzle together yet. Or they'd never trust us expats on anything that has anything to do with finances again. The fact is, the crunch is here. Third world developers have overbuilt and overextended themselves quite a bit, just like developers in the first world. They're starting to feel the pain, with a lot of empty lots and vacant houses to sell. And because of that, they'll still cut any first world or a break if he wants to buy in. In fact, they've been known to bend over backwards to get a first world client to buy in because they know they can squeeze a bigger down payment out of him.

[04:45] And at the same time, for a local guy to qualify, he can get away with a tiny down payment, but they'll make him jump through hoops on the other stuff, like credit history and job status. But developers are famous for waiving that for expats. Sometimes a big down payment and a letter of reference from your local lawyer is all you'll really need. So what I'm saying is that as long as you're an expat, you've got that unfair first world advantage working for you again, whether you deserve it or not. But for expats to get financing from the developer like that, you only seem to get a free pass if you select a colony that's under construction or one that's so new that it's got a lot of empty housing units available. And don't forget, in Latin America, they call subdivisions colonies. I mean, if you select an old established colony, one that's been around 10 or 20 years, you

[05:35] probably won't find any financing there. And usually even these older developments have at least a few lots available, though you won't get too far without cash on the barrel head there. Usually the developer's already out of the picture, and there's no one there to give you financing. And that smattering of empty lots that are available in some of these nice old colonies. Well they were lots that were bought on spec a long time ago. And their owners are sitting on them, just waiting for a guy like you to come along. And in nice colonies, these owners who've been patiently sitting on these lots year after year, they're not going to let them go cheap. And right now I should explain something else about buying into a new subdivision or colony. Often you'll be driving around a few kilometers outside a big city in Latin America, and you'll

[06:22] see signs all over the place advertising lots for sale in a brand new colony that's being developed. Now it seems to be a common pattern down here in Latin America for the developer to offer new lots in a new colony on a very easy installment plan. In other words, let's say a half acre lot costs $20,000 US. Now if you walk into a developer's office and plunk down $1,000, he'll set you up with a 10 or 15 year mortgage on that piece of land, without any letters of reference, background checks or even credit checks. In some ways you can't believe how really easy it is. And by the way, credit checks are a brand new thing in Latin America. Credit bureaus and credit checking agencies are just starting to pop up, and you could say they're about at this stage that they were in the United States back in the 1960s.

[07:12] In other words, even if you're a bad credit risk, and you've gotten behind on your payments at let's say Sears or Price Mart, and yes, like I said in a previous show, they do have Sears down here, and Walmart, and Office Depot, and Radio Shack, etc. Or let's say your credit's really shot, like you got your car or your refrigerator repossessed. Some of that stuff's not likely to show up on your credit report, and if you're lucky, maybe none of it will. Just because, in Latin America, they don't seem to have their act together enough to have a central collection point or database for that kind of information. But give them a few more years, and they will. So back to picking up one of those fresh new lots on the payment plan. So figure it out. You put $1,000 down, and you get a 15-year note on a $20,000 piece of property.

[07:59] Now that's going to set you back all of $150 a month. And for a Latin American guy who sits squarely in the middle class, making maybe $1,000 or $1,500 a month, for him, $150 a month is pretty affordable. At least, he thinks it is. And in his mind, there's always that optimism that his salary is going to go up over the years. And why not? That's how everybody in the first world thinks, too. Well, at least till recently. And that's the way the middle and upper middle classes in Latin America do it. They pay for five, ten, fifteen years on a piece of land, and since you can't start building until the land's paid off, sometimes the land sits for years and years, with absolutely no development on it whatsoever. And sometimes that's true for whole subdivisions.

[08:45] Then suddenly one year, a lone house will pop up. And then a few more. A handful here and a handful there, just like mushrooms. And what happens if you're upper middle class, or even wealthy, Latin American style, that is? I mean, if you're making $2,000, $3,000, or $4,000 a month, it's more than likely you still won't buy a Latin bill right away, because the wealthier folks have a different strategy. What usually happens in that case is that wealthier Latins will buy multiple lots in the subdivision, and one of these guys might buy five, ten, or fifteen lots. He'll wait some years until the others start building, and then maybe build a house for himself or his kids, then put the other lots up for sale. But only a few years later, after the housing project is well underway and some houses have

[09:31] gone up. Because by then the colony's maturing and it's looking pretty good, and he knows his lots are worth a lot more than he first paid for them. That is because he bought in when things were cheap in the initial stages of the project, when developers offered deep discounts just to get the ball rolling. And buying land and sitting on it seems to be a favorite investment tactic for the upper middle classes in Latin America. Most of them, especially the old timers, don't like to put a lot of money in the bank and let it sit there, because in their time, nearly all of them have witnessed some kind of hyperinflation or a big time bank crisis, and for them, real estate is one of the only options to preserve their capital. Okay, enough said about that. Now I think it's a good time to talk about title insurance.

[10:17] You all know what that is. Whenever you close on a property, you always end up paying a few hundred bucks or more to the title insurance company to make sure your property's registered correctly and it's free and clear. Well down in Latin America, title insurance, forget about it, what you have to do in every case when you buy a property is hire a lawyer to go down to the municipal property registry and make sure everything is in order. And that's something an expat could never do himself, no matter how many years he's lived down here or how good his Spanish is. Because to really check a property out, it could take four or five visits to three or four different government buildings, and each time you'll have to get a volley of signatures and stamps and papers, not to mention standing in long, sweaty lines for hours and hours. And of course, your lawyer will never do that himself.

[11:05] He'll have a guy or two on his staff with suit belching motorcycles, and these guys called trametadores will buzz through traffic like madmen to hit all those government buildings. And they're the ones who will stand in all the sweaty lines, get all the paperwork done, and get all the necessary stamps and signatures. And in all that chaos, some unnecessary signatures too. Because you see, in Latin America, governments are only partially computerized. Nobody's really got the rack completely together, and there's really no central database, though I suppose someday, even they'll get it right. If you can imagine this, there are still places in the world, like Latin America, where they still use manual typewriters, carbon paper, and whiteout. So much for progressive government. And since most of Latin America is tropical or subtropical, every government down here

[11:56] has bunkers full of rotting, molding, and insect-infested paperwork. And even if they could scan it all into computers, which in the last few years they've been trying to do, it's been estimated by some that 30% of the documentation in the government files is either totally decomposed or illegible, which is a pretty scary thought, especially when you're digging around in the property records. But you can avoid all those problems by buying into a subdivision or colony that's already been developed or is under development now. Because in that case, the developer has done all the legwork and has on hand all the right paperwork proving that everything's on the up and up. And believe me, that's a big advantage. Because if you pick up the newspaper in any town in Latin America, one of the stories

[12:44] you'll often see repeated is how somebody's been screwed out of their land title. And that happens in the big and the small towns alike, but mostly with farms and large undeveloped pieces of land. And that's because a lot of these big farms, especially the ones out in the boonies, well, just like in the first world, the cities are encroaching, which makes that farmland more valuable for development year after year. And a lot of that farmland in the boonies has been handed down generation after generation and sliced up over and over into family plots. And all those changes have to be recorded in a local property registry. And like I said, those local property registries and the ones in the big cities are pretty much a holy mess. And that's an understatement. And adding to the problem is that a lot of the people that own this land, the ones that

[13:32] are getting ripped off, in most cases, they're indigenous people who are illiterate or very poorly educated. And powerless people like that, they're easy marks. So it doesn't take an Einstein to figure out that someone on the inside, someone tied in with the property registry, well, a guy like that's got the power to change a few signatures and stamps or even create new paperwork, which in the end, screws a lot of poor people out of their inheritance. And this is such a common crime that you read about it all the time in every newspaper. And to me, and a lot of other expats, it boils down to the fact that Latin American countries don't have a system of title insurance in place. And even if they did, uneducated people with plots of land are a long way from buying into a system like that.

[14:19] And while we're talking about title insurance, why not talk about insurance in general in Latin America? Oh, insurance companies exist all right. And just like in the first world, they have the biggest, brightest, newest, most sparkling buildings you can imagine. And believe it or not, throughout Latin America, most countries have mandatory car insurance laws, just like up in the first world. At least that's what they were intended to be like. But this is how it really goes. If anyone has a car that's five years old or newer, they definitely have car insurance. Most of all, because like in the first world, 95% of all the cars that are bought are bought on the payment plan. And when you buy a car on the payment plan, the finance company or bank requires that you carry car insurance. So part of your monthly payment pays for the car insurance.

[15:06] And of course, you're paying for full coverage on that car because the dealer doesn't want to see it get wrecked and not fixed, just in case he has to repossess it someday. But after a few years go by and that car is finally paid off, the vast majority of car owners were switched to basic liability insurance, which covers medical costs and the damage to the other guy's car, but not collision on your own car. And that liability coverage might only set you back $100 to $150 a year, which is really dirt cheap. And it's a general consensus done in Latin America that most people who've got paid off cars probably wouldn't even carry basic liability if it wasn't for the fact that if you do get in an accident and can't produce the insurance paperwork that shows that at least you have the minimum coverage, the police will take your car on the spot, put it in a municipal

[15:54] garage lockup, and by the time you get it back, which could be up to a month later, chances are your battery, your radio, and your tires will have been stripped off of it already. And that's in a police supervised lot. And as for the rest of the cars on the road, well pretty much anything that's 10 years old or older are definite road hasters or outright death traps. And it's more than a good bet that any car older than 10 years old in Latin America, well let's just say they're overdue for the junk heap and that's being kind. And how they keep running, pasted together with duct tape, chicken wire, and super glue, well I'll never know. All I've got to say is, three cheers for the world's car makers. Because if a car can last 10 years in Latin America, it can last 50 anywhere else.

[16:44] So it may be 70% of the cars on the road in Latin America over 10 years old. You can bet your bottom dollar that 70% well they're not carrying any kind of insurance at all, even though it's the law. And like I said before, the law? Well it's only good when they feel like enforcing it, which isn't too often. So you of course, as an upstanding expat, with a history of first world values and expectations, and since you come from a diet in the wool insurance culture, you'll almost always carry insurance on your car, no matter how old it is. Because you'd feel like a dope if you didn't, even if it's an old junker. And we highly recommend that you do carry it. Alright, I know I got a little bit off track there with the insurance thing. So let's get back to insurance when it comes to building and owning a house.

[17:33] Now if you've ever built a house in the first world, you know that the workers who work on your house, who construct it, well they're always bonded. And they carry some kind of liability or workers compensation insurance in case they get injured on the job. Well in Latin America, you can forget all about that kind of stuff. Not that it shouldn't be on your mind, I mean what if a guy gets hurt on your job? Or killed? But the fact is, throughout Latin America, workers indemnity, or any kind of umbrella workers liability insurance, just isn't available. Though it might exist on some of the larger jobs that are contracted out to giant first world construction companies. You know, the ones that build bridges and dams and power plants? Now these companies have their own internal rules, and they may require some liability

[18:19] insurance coverage. But I'm telling you, I've only heard about it. I've never seen it in action. But I've also heard that that kind of coverage only applies to the first world workers that are brought in, not the local people who do all the grunt work. So in effect, if a worker falls down and breaks his arm, he's off to the hospital and a new guy comes in the next day. End of story? End of his connection with your construction job. Okay but what about the other kind of insurance when you're building a house? The thing called a performance bond. Which if you have one, is supposed to ensure that the job gets done by a certain date and in good order. Well you can forget about that too. I've been in Latin America a long time and I've never heard of one. Not anything formal anyway. I mean not anything actually issued by an insurance company.

[19:07] But I do know some cases where owners have made a side deal with the contractor, saying that if you finish by a certain date and in good order, you'll get a bonus. But I also know that in every case that I know of, the contractors are quick to promise a thing like that. But they almost never end up getting a bonus, because the majority of them just can't seem to hold to a good tight schedule. And because most of Latin America has just two seasons, the rainy season and the dry season, each season about six months long, contractors know they need to start their job at the very beginning of the dry season. And that is to do the excavation work without getting swamped by the torrents of the rainy season. And they make a lot of promises that they will. Because if you really do start the project at the beginning of the dry season, you have

[19:52] a really good chance of building a 2, 3, or even 4,000 square foot house in what usually turns out to be a year from start to finish more or less. And don't ask me why nearly every house construction project seems to take about a year, but that's only if you pay your men on time and keep the full crew working the whole year round. If you start the job right at the beginning of the dry season, you can get the lot excavated, the basic house built and boxed in, and by the start of the rainy season, you're inside doing the finish and detail work. At least that's the general plan, and what every contractor strives for. Though I've seen a lot of houses, even small ones, turn into two, three, and even four year projects. And I know you're thinking, yikes, two, three, four years waiting for your house to get built,

[20:40] how could that be? Well I guarantee you, you can get a house built in a year, or even a little less, if you have the money. Because those projects that stretch out, two, three, and even four years, it's all about the fact that the owner came up short and he had to send his workers home when he ran out of cash. And you can always tell when that's about to happen. All of a sudden, at a particular job site, you'll notice that the dozen workers that used to be there, for weeks at a time beforehand, all of a sudden, there'll be only two, three, or maybe four workers piddling away at the job. Now that's a bad sign, and a sure bet, that the owner's running out of money. Now one architect from Honduras told me, that kind of thing has happened with at least half of the jobs he's been on. And he says it's because it's so hard to get bank financing that people pay as they

[21:28] go. And on top of that, most often, owners simply underestimate the cost of the project. And when the architect advises that most projects run about 20% over budget, the average guy who's never built a house before just doesn't listen. And since we're still talking about insurance, at least I think we are, what happens when the house is finally built? Do you call up the local insurance man and get umbrella coverage? Not likely. In fact, while nearly 100% of the homes in the first world are covered by some kind of insurance, like fire theft and water damage, almost no one in Latin America who owns a home has that kind of coverage. First of all, there's so much theft in Latin America that insurance companies have set

[22:16] such high deductibles and wangled in so many loopholes that almost nobody ever collects. And therefore, few people even bother to buy the product, that is, when it's even available. And as for fire insurance, well these days, almost no one in Latin America bills with much wood. In the middle and upper classes, it's almost never used in frame construction. It's only really used for doors, accents, and trim. That's so different from up in the first world, where structural pine is used to frame almost every house. Well, down here, it only figures what with the climate, the mold, and the insects, pine 2x4 construction is a really bad choice, and it's almost never used except by the poor and the very low classes. And that's why when there's a fire, it almost always ends up wiping out a really impoverished

[23:04] section of town. And though pine is cheap and it grows like a weed down here, it's a bad choice all around. And everybody down here knows that if it's near moisture or even close to the ground, you're lucky if it lasts 5 years before the dry rot sets in. And that's why 90% of all new construction is concrete block and cement. So you really don't need fire insurance. What for? And though everybody could use flood insurance, what with all the hurricanes, flash floods, and unpredictable rivers, nobody much buys insurance for it. And though I know it's available, I don't know anybody who's ever bought it. And as for earthquakes, well they're a real risk and I've been in a few myself, but I actually don't know anyone who's got insurance coverage for it.

[23:50] So if I was to make a guess, I'd have to say that 90 to 95% of all the homeowners in Latin America, from the poorest to the richest, they just don't buy insurance coverage. At least as far as umbrella coverage for your home, it's just not on the radar. And unlike the lawsuit crazy first world who have a culture saturated with insurance coverage, the Latins haven't boarded that train yet and I don't think they ever will. Anyway, think about it. When a big earthquake rolls in, like it did last year in Chile and in Haiti, when whole cities get wiped out, does anybody have any real hope that insurance is going to pay out on a huge disaster like that? Why just the Chilean earthquake alone could easily bankrupt a string of insurance companies.

[24:35] So what I'm saying is that all throughout Latin America, with the poor and even with the rich, at least for now, everybody seems to be going naked when it comes to insurance. And there's only two or three areas where Latin Americans are willing to pay out. And that's basic car insurance liability, and they only buy that because they don't want their car towed to a police lot, only to get stripped out later. Another kind of insurance Latin seem to be willing to pay for is credit card insurance. And there's a solid reason for that too. And regarding credit cards, most Latins who have them are willing to voluntarily pay the extra two or three dollars a month for insurance the credit card companies offer in case you get your card stolen or misused. And Latins only reluctantly pay for that kind of insurance because there's so much credit

[25:25] card theft and fraud going down. And there is one last area where Latins are beginning to jump on the insurance bandwagon. And that's with private health insurance. And that's because the public hospital systems are so decrepit and miserable that middle, upper middle, and high class Latins try to make it a priority to buy some kind of private health care insurance so they can go to the private hospitals, which are infinitely better than the public ones. So Latin America is one place, HMO style insurance plans are a growth industry. But that said, it's a bit deceiving to know that only about 10% of the people in Latin America have any kind of private health care coverage at all. But it's something that's on everybody's mind, and it's definitely on the upswing.

[26:11] And on another program, I'll go into much more detail on health care insurance and why it's such a terrific deal and at a price you can't believe. So stay tuned for that. And now that I've explained how almost no one, rich or poor, carries household umbrella liability coverage, I'm sure some of you out there must be wondering, what happens if somebody trips and falls on your doorstep and lands on his face and goes to the hospital, or worse? Well I can assure you, that happens all the time because throughout Latin America, most of the ramps, sidewalks and pathways, either public or private, well so many of them are so busted up, broken, full of divots and potholes, that you pretty much have to put the blame and the neglect on everybody. The fact is, it could be dangerous just walking down a sidewalk, because the next step that

[26:58] you take could be into a twisted, grating or open hole. But the surprising thing is, even though walking down a sidewalk in Latin America is a veritable obstacle course, practically no one ever gets sued, and it's not that the culture hasn't yet caught on to the lucrative business of suing, I mean the way we perfected it in the first world. The fact is, since practically no one has liability coverage or umbrella policies on their home, there are really no deep pockets to sue, at least not yet. And Ambulance Chasers, well that hasn't caught on yet either, in fact there's no Spanish word for Ambulance Chaser yet. Not yet. You've been listening to The Expat Files, living in Latin America, and of course you

[27:49] can always email me, expatfiles, at progressiveradionetwork.com. See you next time, nos vemos!