#23 – Building a House in Latin America: Permits, Bribes, and Tax Evasion

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

[00:06] 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. I have to point out now that we've been having a lot of trouble with our email system. A lot of your emails have not been getting through to me. So here's my new email, and it's guaranteed to work. The Expat Files at gmail.com. Once more, The Expat Files at gmail.com. Okay, back by popular demand. On this show we'll have part three of buying land, buying an existing home or apartment, or building your own home sweet home down in Latin America. Alright, so you've got that beautiful piece of land, with the view you've always wanted,

[00:53] and you've even paid 15 bucks on the Better Homes and Gardens website. That is, in order to get the full set of plans and blueprints of the house of your dreams, that you plan to build on that perfect piece of land. Okay, so far so good, but now what? Well, just like in the first world, you'll have to drop off a set of those plans down at the local municipality, pay a ridiculous building permit fee, for which you get absolutely nothing in return, and by that I mean, although there is an inspection department in every municipality, and that building permit that you bought, that costs from 500 to 3000 dollars, well that's supposed to pay for qualified building professionals to come out and inspect your house, to make sure it adheres to the building codes and plans, among other things.

[01:40] But as I'll explain, the idea is great, and it's first world, but in practice it's just a big joke. Well the fact is, I've talked to dozens of expats who've built houses and they all say the same thing, that you're not likely to get a single visit from anyone, from the municipality or the inspection department, the entire time you build your project. Although once in a while, a government vehicle will drive by and the guy will wave at you, but that'll be about the extent of your interaction with the inspection department. And that's a big contrast, compared to the way the inspection process goes down in the first world, where every phase of the construction gets inspected step by step along the way. And if a local building inspector doesn't sign off on a certain part of your project, you just can't move on to the next step, without his signature and seal of approval.

[02:29] And for any of you people out there who've built a house in the first world, you know that there's a rough inspection, which comes first. And that happens right after you dig your foundation and get your house framed in. And that's when the inspector checks the basic plumbing and electrical installation. And then of course, some months later, there's a finished inspection, which the municipality signs off on, before you can move in. Now in Latin America, most of that stuff never happens. Because down there, once you get your permit to start building, well you're on your own. In other words, you and your contractor are pretty much on the honor system, as to actually following the letter of the blueprints that you handed in. And that means, as far as the local building codes are concerned, you're on the honor system too. And what does a building permit actually cost down in Latin America?

[03:17] Well that of course depends on what country and what municipality you're in. But normally, for a two or three thousand square foot house, you might pay anywhere from five hundred to three thousand dollars. Actually it's pretty arbitrary, and subject to what they call gringo prices. What I mean by that is, if you as an expat, waltz right into your local municipality office, lily white expat that you are, you just might be assessed double of what it might have cost if you would have sent your local Latin architect or building contractor down to get the very same permit. And it's always better to send your architect down anyway, when it involves any kind of paperwork with the local municipality, or government offices in general, because he knows the system much better than you'll ever know it,

[04:03] even if your Spanish is perfect. And that means he knows who to bribe when it's necessary to bribe, and he knows what the standard bribes are going for and what he can get away with. Now don't think I'm advocating paying bribes here, but it's a way of life in Latin America and you have to get used to it. And if you're one of those staunch, unbendable first world conservative types, and you insist on doing everything on the up and up and refuse to pay any bribes, which by the way are called mordidas, which translates to bite in English, anyway, if you don't like to pay bribes, and who really does, you'll end up standing in a lot of lines for a lot of hours, and you'll find yourself waiting a long, long time if you want any kind of paperwork processed. And especially when it comes to building a house,

[04:50] things have to run on a schedule. And if someone in some government department wants to delay your paperwork for a month or two, because you refuse to pay a measly $25 under the table gift, yeah, I said gift. I'll be nice here and call it a gift, okay? Instead of what it really is. Well, anybody who's ever built a house knows a one or two month delay can screw up everything. Especially in Latin America, where you're always running up against the rainy season, and that's a full half year stretch of intensive torrents. I'm talking about four to six hour downpours that happen almost every day, that kind of downpours you've never really seen in the first world. And during the rainy season, every contractor tries to plan so that he and his workers can be inside doing the detail work,

[05:36] because you're fighting a real uphill battle if you try to get any substantial work done outside. But I was talking about bribes, wasn't I? So all I can say when it comes to bribes is that if you don't like to pay them, don't, but at least give your lawyer, architect, or general foreman the authorization to pay the odd bribe when it's necessary. Or else, building a house in Latin America will be twice the stress that it normally is. And one last thing about bribes. Bribes down here will hurt your pride much more than they'll hurt your pocketbook. I mean a bribe down here of $20 goes a long, long way. And that's why it's easier to pay it than to fight it. Say for example, you got a hundred bags of concrete coming, and you get a phone call from the truck driver,

[06:21] who says you're way down the list and he can't get there for five days. You promise him $20 and he'll be there that afternoon, because $20 for him is more than a day's wages. Okay, you got the idea. Okay, when I started this conversation, I was talking about bringing your beautiful architectural blueprints that you got from Better Homes and Gardens for $15 on the internet, and you're bringing them down to the municipality to get your building permit, right? Well, here's where things get a little complicated. Even if those blueprints were drawn up, signed and sealed, by Frank Gehry or Frank Lloyd Wright himself, no municipality in any country in Latin America is going to authorize those plans to be built. Even if you're an architect yourself

[07:08] and you went to the best architectural school in the first world, Latin municipalities will only accept blueprints that are completely in Spanish and signed and sealed by a local Latin architect, a guy or gal who graduated from one of the architecture schools from within the country that you're going to build your house. In other words, the government's kind of made it a closed shop. In other words, Latin governments have kind of made a closed shop out of it. If you ask me, it's kind of a lame way to keep the locally trained architects employed. But it really hasn't seemed to work much at all, because the local architects, most of them, are unemployed. But unemployed or not, how do you go about finding one of these local architects? More to the point, how do you find a good one?

[07:54] Who can you trust? What you need is a trustworthy guy to take your plans and translate them into Spanish, or better yet, you give him a few of your own first world ideas and have him design the whole thing from scratch, which means he's got to have some good skills. And then he's got to take these Spanish plans down to the municipality and get them approved. Well, you can ask your lawyer, he always knows a few architects, or you can flip through the yellow pages or Google architects in the country you're in, and you're in business. And if all else fails, there's always the classified section in a local newspaper. But even better yet, and cheaper, is to go down to one of the local architecture schools, and believe it or not, practically every Latin American city over a half a million people

[08:39] has at least one university with an architecture school. And why I suggest that is that Latin American universities are notorious for pumping out architects in far greater numbers than the country could ever manage to absorb. And that's pretty much true of all the professions in Latin America. But that's a topic we're going to touch on in another show, so stay tuned. Anyway, because there is a big surplus of architects throughout Latin America, the fact is, most architects don't even work in their own field. They just can't earn a living designing buildings for their own population. In truth, if you go down to any one of the big building supply companies, chances are there's a few young, fully accredited architects holding down menial clerking jobs,

[09:27] selling cement, tile, and bathroom fixtures. So what I'm saying is, it's more than easy to find a bona fide, fully registered architect to translate any of the plans you might have. But what's even a better idea is to hire one of these guys to design the house you want from scratch. And it's smarter yet to put a young guy like that completely in charge of your project. I mean, let him handle the contractors, the payouts, the delivery of the materials, the ordering, the permits, the paperwork, the interfacing with the government, the hiring and the firing, all of it. And these young architects are so hungry to get into the business, to get their foot in the door, that they'll charge you only five or ten percent of the total construction costs to run the whole project as well as doing the complete house design.

[10:16] Now up in the first world, if you have an architect design a custom plan for you, you're going to pay five or ten percent of the construction costs just for him to draw the house, make the plans, and hand over the blueprints. And then you have to go hire a general contractor who's going to charge you another ten or twenty percent on top of that to run the project. So look at it this way, if the total cost of your house in Latin America is $200,000, which is an easy half a million dollar house in the first world, and if you put a young, hungry architect completely in charge, you'll be paying him between ten and twenty thousand dollars to run the whole project. And to him, that's a small fortune, because chances are, he's been working at a construction supply outfit or clerking at the Latin version of Home Depot.

[11:03] And those kind of jobs only pay four to six grand a year. So if he's making ten or twenty grand on your project, and that project lasts a full year, which is about how long it takes to build a single family home in Latin America, anyway, that young architect suddenly is the big boss of a first world style project with an owner that's got the money to complete it on time. And on top of that, he's making two, three, or even four times the money he was making at Home Depot. And just as an aside, I've been involved in a lot of construction projects in Latin America, in various countries. And the last young, hungry architect I hired, well, he'd been out of school for two years and still not working in his field. In fact, he was surviving by selling audio Bibles on CD,

[11:50] burning the CDs himself on his computer and selling them in the classifieds in the local newspapers. Now you can imagine just how happy this guy was when he actually got a real-life architectural job and working for a first world expat gringo no less. Even now, I feel a bit guilty about how little I actually paid him, but he was more than happy to take the job on. And there's one more thing I just have to point out. If you remember, in most of the past expat file shows, I talk about a thing I call the expat advantage. I've emphasized all the distinct advantages that you have. Just by virtue of being a first world person with a first world education and first world values and how all these things work in your favor once you're transplanted down to the third world

[12:37] and how Latins rightfully are not stereotype first world people with a ton of exemplary traits, whether we deserve them or not. Like for instance, in general, they think we're more efficient, more organized, more business-like, more honest and trustworthy, and they believe we have a lot more disposable income too. That is, compared to the Latin American population in general. And they believe all this stuff on the basis of what they see on television and all the products and services that come out of the first world that Latin so much desire to have. Not to mention that first world expats are responsible for the huge success of so many franchises that have recently landed down here in big numbers. Like Starbucks, Wendy's, McDonald's, Walmart. I mean, I can name a hundred others.

[13:24] You get the idea. Anyway, young, hungry architects in Latin America, so many of whom will never get a job in their own field. Well, let me tell you, you'll find these guys will salivate to hook up with a real live expat with a building project that's ready to go. And I don't have to tell you that it's a huge feather in the cap of any young architect who can claim that not only did he design a first world house, but that he was in total control of the project from start to finish. Because he knows that's one excellent way for him to get his foot in the door at one of the handful of big architectural firms that usually dominate and get the contracts for every big Latin construction project. And it's every young architect's dream to get his foot in the door

[14:11] in one of these big companies to show off his stuff and work his way up. But it almost never happens. I'm talking about a handful of firms with dozens of employees who seem to get all the big city projects, and not because they're so talented or any good, but because they've got political connections. These big architecture firms are heavy campaign contributors, and they pay big kickbacks to the right guys at the right times. And notwithstanding that, I don't really recommend expats searching out firms like that to do any of their projects, especially if you only have a small project like a house. You're much better off going for a young, hungry architect who's not trying to make a name for himself, but just trying to get a job in his field. So just remember, if you do end up going to one of the big architectural firms,

[15:00] you'll get your job done all right, but you're guaranteed to pay double. Because look at the buildings these guys occupy and the expensive cars they drive. They're putting on a show and you're going to pay for it, especially when they realize you're from the first world. But a young, hungry architect, he has no overhead, and chances are he's still living with his parents at home. And you as an expat are his ticket out of there. And another thing, he knows he's onto a good thing, and he's got to do good by you. So you shouldn't worry that this guy's going to be second rate or fall down on the job. He's got a ton of pressure on him right now to do things your way, the first world way, or at least he'll try mighty hard to satisfy you. Because you're the guy that's going to write him the letter of reference when it's all over.

[15:46] And to him, a first world reference will open a lot of doors. The fact is, your job's going to really boost his portfolio, if he even has one. But wait a minute, you say. How do I know if this guy's a klutz or not? Maybe he really is a crappy architect. And that's why he's selling bathtubs and toilets at Home Depot. Let me clear one thing up. Personally, I've been involved in at least a dozen construction projects in six different countries in Latin America. And I've been to quite a few architectural schools. And I can tell you, they are modern. The students there all have computers, and they use computer-aided design in all their projects. In fact, I recognize that some of them are artists in their own right. And they have thick portfolios of houses and office buildings that they've designed. But of course, they'll never get a chance to build.

[16:34] But what I really like about the architectural education in Latin America is the fact that nearly all architectural schools require the students in their last year to go out in the field for at least six months where they're assigned to a construction project. And many times they get placed at a building project that's being funded by a first-world organization like Habitat for Humanity or any number of Christian charities that come down and build various projects. So these young architects have a lot of hands-on experience, and they even know about first-world construction techniques. They all have a kind of internship in the field, and they can't graduate without putting in at least a half a year's physical work on a real construction site building real houses. And admittedly, these houses are not first-world style.

[17:21] They're your basic cement block housing units for the masses. But I've found that these guys are prepared for anything you can throw at them. So go down to your local architectural school, check out the bulletin board, or ask one of the department heads for a short list of a few recent graduates, check out their portfolios, and I'm sure you'll be impressed. And oh, I forgot to tell you, almost all the architects, at least the young ones, speak English. But suppose you want to buy into an existing development that has a lot of homes already built and some under construction. Well, in that case, especially in the early stages of the subdivision's development, when let's say the subdivision, well, in Latin America, they call them colonies, well, let's say it's about a quarter filled with houses

[18:07] and the other three quarters are still filled with completely undeveloped lots, or houses just starting construction. Well, the big developer of the project, who initially bought the land, put in the roads and the infrastructure, I'm talking about the same developer that's going to offer you that cheap financing on the lot that you want. If you remember, that was a theme I went into in last week's show. Anyway, nine times out of ten, that developer will offer architectural services and have a whole range of houses you can pick from that are ready to be built. Not only that, they'll have a list of general contractors that they know are trustworthy and that have done satisfactory work for them before. It's much the same as when you buy into a first world subdivision

[18:53] and all the houses kind of look the same and have the same general contractor. So that's another way to go in case you don't want to go out and hire your own architect. But again, it's going to be a little more expensive, maybe even ten or twenty percent more than hiring your own architect and handling the project like I mentioned before. Now for me, I prefer to hire my own architect because generally I don't like my house looking like everybody else's house in the colony. And that's usually what you get when you hire the same contractor that your colony's developer recommends. And I know that a lot of you first worlders up there know that's the same kind of thing that you get when you buy into a subdivision project up in the first world. All the houses kind of look the same. And as for me, well I'm not too big on that.

[19:39] So either way, when you're building a house, if you hire your own architect or you hire your colony's development firm to build your house, how do you handle the payouts? Like we've said in the expat files so many times before, there's so much dishonesty and corruption in Latin America that you have to really, really watch your money. And what I suggest is that you handle all the payouts yourself on a weekly basis with your architect or your builder. In other words, just like on any building project, you have estimates of what things are going to cost. And your architect or builder will know what the costs are going to be for the upcoming week or two. So he has to give you a list of what he's going to buy for the week. Let's say 40 bags of cement, 2 cubic yards of gravel,

[20:25] 6 cubic yards of sand, 300 pounds of rebar, 10 pounds of nails, et cetera, et cetera. And you advance him the necessary monies every week or two, depending when the bills come in. And though your architect or contractor might pay some of those bills in cash, you should give him that 1 or 2 weeks advance money by check, because in Latin America it's dangerous to walk around with that kind of cash in your wallet, especially since there's bound to be some other people in the job that know that's the day you pay your bills. So every week or two, you'll have a meeting with your contractor or architect, and he'll hand over the receipts from the bills that he's paid since your last meeting. Then you can do the accounting based on the cash that you advanced him. Now one thing I should tell you that there are a lot of places in Latin America

[21:11] that will take straight cash and give you a big discount, anywhere from 10 to maybe even 20%. Now that kind of savings can involve a chunk of money, especially when you're buying in volume for construction items on a house. Now normally when you buy in volume, you get some kind of discount, right? But I'm talking about a different kind of discount now, because you see, in many places throughout Latin America, a supplier will sell you some building materials at a great discount, but he won't give you a receipt, not an official receipt anyway. And that's part of the deal. And in Latin America, receipts are called facturas, and they're a little different from the receipts you get up in the first world. Now these facturas are numbered sequentially, and they're actually gotten from a government agency, the tax agency. So they're a big deal,

[21:58] and they're highly scrutinized by the government at tax time. In other words, one of the steps to opening a business in Latin America is going down to the tax office and getting your facturas. So if you're a hardware store and you're just opening, you'll get maybe 2,000 of these facturas, numbered of course from 1 to 2,000. And they're always in triplicate, one for the customer buying a product, one for the shop owner, and one for the tax man. And if you're in a country that makes you file your taxes quarterly on a business, you have to actually go down to the tax division with all your facturas and give the tax man his copy, and at that moment he'll add up all those facturas for the quarter and figure out your sales tax bill due to the government. And the tax man is also going to make sure that you have given him

[22:45] every sequential number on those facturas. And if just one number is missing along the line, you'll get a hefty fine. And that's how these third world countries, and a lot of countries in Europe, collect the majority of their taxes. It's called VAT, Value Added Tax in Europe, and the Latin Americans call it IVA. So let's say for example in Panama, IVA is 15%. That means the business owner has to pay 15% of the value of the sale on every factura that he brings in quarterly to the tax man. Now suppose you had a hardware store and you were selling ceramic tile for $10 a square meter. If I bought one meter for $10, you'd take that factura down to the tax man,

[23:31] and if in that country the IVA was 10%, the hardware store owner would have to pay the tax man $1 out of that $10, which is 10%. But suppose you went into that hardware store and you were looking at that ceramic tile and looking, and the owner came up to you and said, I know it's $10 a square meter, but I'll sell it to you for $9 a square meter without a factura. Now if he does that, he gets the sale and you save 10%. And he makes exactly what he would have made before if he would have charged the regular price of $10 a square meter and later down at the tax office turning that $10 factura in and paying 10% or $1 on the sale. And of course all Latin American governments are on to this gimmick.

[24:17] In fact, it's mandatory in most countries for every business to carry a little sign right over the cashier station that says, please ask for your factura. And if you don't get one, please report this infraction and they'll have a phone number listed. And that's because of course governments are hungry for money and owners know that if they don't give you a factura, for example, if they write up a sale and somehow give you a bogus receipt that looks almost like a factura but really isn't, well that's another way business owners can scam the tax man. Because if they give you a receipt that looks like a factura and really isn't, they gain 10% on the deal, depending on the EVA in that country. So you can imagine if an expat walks into a hardware store and he's not a regular customer at all,

[25:04] chances are the owner or the cashier just might try to slip you a bogus receipt or no receipt at all. And what do you care? You're not a regular customer. I mean, suppose you walk into a hardware store and buy a hammer. Do you really need a receipt for that? I doubt it. So really as far as an expat's concerned, he'll take that 10% or whatever anytime he can get it. Who needs a receipt or factura? Well businesses do. That's the thing. A business of course has a lot of expenses. So businesses collect those facturas, which are proof of their expenses, and they can write them off their taxes at the end of the year, just like they do in the first world. But a lone expat like you, who's just building a house, you'll take that 10% anytime you can get it, right? No questions asked.

[25:50] What do you care how the guy juggles his books? But beware, if there's one law that the Latins are actually dead serious about enforcing, that's the tax laws. And all throughout Latin America, they have some pretty tough tax police. I mean, if they ran any other government agencies like they run their tax division, well we wouldn't be calling it the third world anymore. I'll tell you that. So my advice, if you're buying something that needs a guarantee, like a blender or a television or a computer, take that factura, because you'll have to use that if something breaks in the future. You'll need to show that to claim your warranty. But if you're buying something like 700 bags of cement, it's not a bad idea to ask if you can pay cash and forget the factura, because if you can get

[26:35] a 10% or 20% discount on that, it's worth it. Though as more and more people get prosecuted and shut down for tax offenses, just like that fake factura thing, or not giving one out at all, well let's just say that's not going to last forever. So you might as well take advantage of it, if and when you can. So are we at the expat files advocating third world tax evasion, which is of course breaking the law? Well I'll just tell you what one expat told me. He said there's no bigger band of criminals and thieves than Latin American politicians. And since the population gets absolutely nothing for their tax dollar, how can it be a crime to steal from a thief? In fact, an enlightened person might want to call it a patriotic act of civil disobedience.

[27:22] Or not. So I'll make it clear. Here at the expat files, we don't recommend breaking the tax law. However, every expat I've ever known gets a warm feeling in his heart when he does. You've been listening to the expat files, living in Latin America. And don't forget, you can email me about any question you have about Latin America. That's theexpatfiles at gmail.com. See you next time. Nos vemos.