#349 – The Expat Files: Real Estate Warnings, Legal Risks, and Work Permit Challenges in Latin America

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

[00:14] Hello there all you expat wannabes, I'm Johnny Mueller and you're listening to The Expat Files, living in Latin America. The show that tells you just what it's like to live, work, play and or retire down here in Latin America. It's a mix of the good, the bad, the ugly and the great and it's all right here so let's get started. Okay now regarding everyone who's been asking me about my Expat Wisdom seminar coming up in July, you can now get the full information and details by going to expatwisdom.com and clicking on the Latin seminar link on the top of the page. Everything you need to know is right there so head on over. Again it's at expatwisdom.com and if you have any other questions about it just send me an email at theexpatfiles at gmail.com or johnny at expatwisdom.com.

[01:00] All right so let's get on with it. First off today I'd like to mention that the bubble, the real estate bubble I'm talking about is getting ready to blow. As you long time listeners already know I've been keeping a very close eye on it because when it does blow, me and a lot of my expat friends and I hope a lot of you expats and goneabies out there will be around to pick up some real gems at 25 cents on a dollar or less. And that's why I'm saying if you come down here to Latin America now and you think you've found a real estate deal or two, forget about it, don't buy in. I've got three words for you, rent, rent, rent. Otherwise you're going to just kick yourself in the ass a million times. And just lately some ominous signs have showed up signaling that we're very near the implosion

[01:45] point of the bubble. And you'd think that all of these ominous signs in general should be a warning signal to any astute smart Latins that are paying attention. They should have figured out by now that something's rotten in Denmark or Panama or Peru or whatever the case may be. But because this is a real estate bubble of the kind Latins have never seen, they don't see it as a bubble at all. They see it as first world style growth in progress. Yeah right, what they've got is a first world style bubble. Now I shouldn't really say Latins have never seen real estate bubbles before. There's always that one glaring repetitive example, Argentina. They never seem to learn and they repeat their same mistakes about every 10 years. Which means even if you do get a great real estate deal in Argentina during the bust,

[02:33] you still might regret it. And by the way if you've been checking the news you'd see that it is in a bust cycle right now. So even if you do get a great deal at 50 or 25 cents on the dollar, what good is a nice cheap piece of real estate going to do you when the rest of the economy is trashed? And for the next six months or a year when you go into stores and commercial centers there's shortages and rationing on everything. And for Argentina it's not just a real estate bubble, it's a boom and bust financial bubble that happens about every 10 years. And if you're a real adventurous risk taker you can jump on that seesaw but it's not recommended for the faint of heart. Anyway, aside from the severe problems in Argentina right now, I'd also stay away from Brazil, Venezuela and Chile. Brazil and Venezuela because their economies are falling apart and there's a lot of

[03:21] civil unrest. I'm sure you've picked up on that already, Venezuela's got terrible civil problems and Brazil, well they're having a world cup there in about two months. The cops and the military are moving into the slums to try to make the place safe for visitors, which is a battle they can never win, in fact they lost it already. Now if you've been checking the papers, once in a while you'll get a glimpse of Brazil and you'll see it's not all carnival. In fact, in the slum areas which make up more than half of Rio, it's a riot zone and people are throwing Molotov cocktails and burning things in the streets. Definitely not the place you want to buy real estate. Even if you get it at 20 cents on the dollar after the bubble blows, what's the use of having a beautiful penthouse apartment on Ipanema Beach, when

[04:08] there's a good chance you'll get mugged just walking three blocks down to a coffee shop on the street. Remember in a past show I mentioned that when I was in Rio some years ago, staying at an all-inclusive first world hotel on the beach no less. As soon as we checked in, all of us foreigners in the place were advised by the concierge not to walk alone on the beach, day or night. And at first you know I thought he was joking, but when I walked out back towards the beach there were signs up on the walls on the hotel property walkways that said, the beaches in Brazil are not private property, the beach in front of the hotel is public. Use it at your own risk and avoid bringing anything of value. And believe me some people really took that to heart. There were quite a few beach comers without swimming trunks and bikinis.

[04:57] I guess that's why a lot of first world people do spend the money to come down, but I saw it differently. How would you feel after spending all that money going to one of the most famous beaches in the world and being told not to take a walk out there? Wish someone would have told me that before I bought the ticket. So Brazil is a stick of dynamite looking for a match. Wait a minute, I take that back. The fuse has already been lit. And by now some of you are thinking, why did I mention Chile and that group of countries I wouldn't buy any real estate in? Why not? In some ways it's almost first world and when the bubble blows, there will be some tremendous buying opportunities like in all of Latin America. So, you're wondering why I'm against moving to Chile. Well, I'm not against moving there, I'm against buying real estate there.

[05:44] Like I said, rent, rent, rent. The real problem as many gringos and expats who have been there see it, is that the place has so many gigantic world class earthquakes that come frequently. In fact, Chile tops a list of countries that have had the biggest earthquakes ever recorded. They just had another 8.2, which is humongous about two weeks ago. And you can pretty much count on a 7 or an 8, which are gigantic every year or two in that country. Now, in this last 8.2, a million people were evacuated from their homes. Now, I don't care how much money you have or how big and reinforced your gringo compound is. If you're in the vicinity of a 7 or 8 pointer, you can count on the fact that all your roads are going to be torn up and your water pipes are

[06:30] going to be broken and your electric power will be out for weeks. Now, just lately I was talking to a friend of mine who was born in Chile and he's a business guy that goes back and forth from Chile to Panama a lot. And he told me that part of Chile's extremely low unemployment rate is due to those earthquakes because as soon as they have a big 7 or 8 pointer, which seem to come along yearly like clockwork, the construction sector in Chile ramps up on steroids. Actually, to be fair, we should call it the reconstruction sector. Because like my friend says, once the hundreds of construction firms big and small move into an earthquake damaged area, it often takes a year or so to put the place back in order again. Usually in time for the next big earthquake event in some other part of the country.

[07:16] Now, my friend said in the last big earthquake before the one two weeks ago, which was a 7.2. About 300 miles of roads and bridges had to be rebuilt and 150,000 houses and office buildings and commercial units had to be worked on, repaired or rebuilt too. So if you're into construction or are a specialist in some area construction, Chile just might be the perfect place for you since you'll always be employed. However, you will have to learn some Spanish. Oh, and another thing, unlike most of the rest of Latin America, it's very difficult to work off the books in Chile. I mean, getting paid in cash. If you're a foreigner, that is. Government has spent a lot of money developing a first world style tax-based system.

[08:02] So they're practically first world about collecting it and going after you too. In fact, I know of a lady who was teaching English down there as a tutor. She was doing the independent tutoring thing, kind of like I was talking about on the last show. She was getting clients and students by word of mouth, working out of her apartment and going to clients houses. She was very low key and didn't even have advertisements on bulletin boards like I mentioned in the last show too. And one day she had a visitor from the Department of Labor, a guy who wanted to see her work permit, which she never had. And since she didn't have one, they claimed she was working illegally, which technically she was. Then in order to straighten the whole thing out, she had to get a lawyer and it cost her around $2,000. And even after all that, she still could not get a legal work permit.

[08:47] Now she said she really wouldn't have had to pay $2,000, but if she wouldn't have cleared it up and paid the fines, then she'd never be able to get into the country legally again. She'd be on a blacklist at the airport and at the border crossings. And get this, you know what her lawyer told her? It was someone in her apartment building that snitched on her. Because you see in some of the more organized bureaucratic computerized countries like Chile, Costa Rica, Panama, and Argentina, there's a phone number you can call to snitch on people who you think are working illegally or who are off the books and getting paid in cash. And if you call that number and report someone, soon enough, usually within a couple of hours, a team of government employment cops will show up. You know, the usual fat lazy ass government slugs,

[09:36] but in this case, they usually have cars that work. Since in those four Latin countries I mentioned, the tax collection department's about the only thing that's fairly efficient and funded on a kind of first world level, meaning the labor department cops have cars and gas for those cars too. But like I said, thankfully it's only in those four countries. So if you are working off the books and don't have a work permit, there is a chance that you could get busted and have to pay some fines. But as most backpacker gringos know, that only happens when you're well on the gringo tourist trail, because backpackers often pick up side jobs as bartenders, etc. Always working for plain old cash. And never getting a work permit, because they're pretty difficult to get.

[10:22] Mostly because you can't just go down to the municipality and apply for one and get it that afternoon. Sometimes it takes months. And then you'll need a lawyer and a sponsor and references, and you'll have to fill out about seven or eight forms and then play the usual Latin American waiting game, which like I said, could take a month or so. And as many gringos and backpackers will tell you, anywhere along that snaky bureaucratic process, your work permit application could be rejected. I mean, let's face it. This is Latin America, land of bureaucracy on steroids. Or as expat Eddie likes to say, in Latin America you got bureaucracy on crack and law enforcement on downers. So what about work permits for gringos and expats, and working off the books? Well, if you're in a country that's not on the gringo tourist trail,

[11:12] like most of Peru or Honduras or Salvador or Guatemala or Nicaragua, for example, there really are no numbers to call where you can snitch on people that don't have so-called work permits. There are no government labor cop Nazis that are going to come down to the bar where you're working and ask you for a permit. Or if you've filed your taxes. Believe me, that's just not going to happen. Except in those countries I mentioned. And even then, in those countries, if you keep a low profile, it probably won't happen either. Though I did see exactly how that works in Costa Rica. I'm talking about the employee snitch hotline and what happens when some pissed off local employee fingers a foreigner. At that time, about five or six years ago, I was checking into a hotel near Manuel Antonio.

[11:59] And while I was up at the front desk, the employment cops walked in and asked to see the work permit of the girl that was working behind the counter. Now, she was Canadian and she did not have a work permit, which means she gets fined and the owner of the place gets a big fine. And if she doesn't pay up, she gets booted out of the country and can't come back in. And that's why almost all foreigners in that spot pay up. Now, there is one way to get around that. You could tell the employment cops that you're not getting a salary. You're volunteering. You're just hanging out at the front desk. If it's a hotel, let's say, you're just helping out and getting free room and board or reduced room and board in the process. In other words, you're telling them, whether it's true or not, that there's no money changing hands. And therefore, you're not stealing a job opportunity

[12:46] from a local Costa Rican who could possibly fill it. Which is the reason why they say the law exists in the first place. But I'm here to tell you that the real reason that law exists is because some years ago, a scumbag presidential politician promised that and got elected on that platform. So anyway, you can claim that you're not getting paid. You're only doing it for room and board. Or because you've got nothing else to do and you like hanging around the desk at the hotel and keeping busy. Or if it's a bar, free drinks, or whatever. But you see, in cases like that, it's usually some disgruntled employee that works alongside of you or close by that snitched. So you can't get away with a story like that. If there's a pissed off employee there who's willing to go down to the employment bureau

[13:32] and sign a statement saying that you do get paid. And you know what? I've seen that happen in Costa Rica because the natives are jaded there. And who jaded them? Too many gringos with a lot more money than they have poking around in every little corner of the countryside. Now, like I said, that kind of thing is not going to happen to you when you're off the tourist trail, even if you're a real jerk and you deserve it. Still, the locals will love you and try to be your friend, even if you're an ass. And how do I know that? Well, of course, I've met more than a few. Anyway, as you might have guessed, off the tourist trail, you've got that gringo advantage working for you and Latins want to be your friend, not your enemy. But on that gringo tourist trail, it's a completely different thing. There are just so many gringos around

[14:19] that throw around so much more money than a Latin could ever afford that not only are you not special anymore, but many Latins in those countries will tell you, it was nice and good for the country a long time ago when the gringos first trickled in, but now, they more and more resent the fact that everywhere they turn, there's gringos. Of course, they didn't say that early on when all that money and gringo know-how developments and projects came in along with the jobs back when the three biggest industries were bananas, pineapples, and coconuts. But you can see their point. Try to look at it from their point of view. For example, if the Chinese came in and bought up most of Cleveland. Wait a minute. Now, there's an idea, huh? While we're at it, we can throw in a teaser. Detroit or Chicago, maybe.

[15:06] Anyway, when I started out this broadcast today, I was talking about the latest and greatest signs that the real estate bubble in Latin America is about to burst. First of all, just lately, there's been a huge shift in the way normally conservative Latin banks are handling home mortgage applications. And that itself should be a warning signal to everyone who's dabbling in the real estate market. But there just aren't any Latin folks who are picking up on this. That's what happens in bubbles, right? Talk about the madness of crowds, you know? It's the same thing that happens at the occasional soccer match or hoo concert. You know, a nice orderly bunch of people walk into the stadium and a couple hours later, six people are dead. And on Monday morning, everyone just goes back to work at Walmart or McDonald's or Sears or Thompson McKenna.

[15:54] How'd that happen? Fact is, when people get excited and focused on one thing, everyone seems to want in on the action and a certain fever takes over. And that's just what they've got down here in most of Latin America. Real estate fever. In fact, the only part of the bubble that doesn't mirror what happened up in the first world in 2007 and 2008 is the property flipping. You don't see a lot of that down here because it's all about new construction, not about flipping older properties. And that's because banks down here rarely give second and third mortgages. In fact, most Latins don't even know what a second mortgage is. Even Latins who own their homes outright and have no mortgage at all never get approached by banks with flyers or salesmen to try to get them into a second mortgage

[16:39] or a home improvement loan or whatever. In fact, the refinancing of an existing mortgage is practically unknown in the homeowners segment too. That market just does not exist down here yet. Now, that said, here's what's happened recently. I ran into a Latin friend of mine who lives in an upper middle-class neighborhood. He mentioned that just over the last couple of weeks that he's been getting letters and emails from three different banks, one of them Citibank, promoting that they were now offering mortgages with only 5% and 10% down. So, big deal you say, 5% and 10% down, that's been going on in the states for a long time and right before the bubble burst in 2007 and 2008, the banks there were actually offering no money down mortgages. Remember that? But here's the thing,

[17:26] down here in Latin America, banks never offered 5% and 10% down. Never. This is a totally new thing. The fact is, everybody I've ever spoken to had to put at least 30% down. Some of them, 50. And that's why until very recently, so few homeowners defaulted. They just had too much of their own cash into the venture and the banks knew it. When you put 30% or 50% down, you're a hell of a good risk. And that's why intelligent Latins that I speak to and have conversations with at parties and stuff, just don't follow the bubble argument that's so obvious to us gringos looking at it up front and right in our faces every day down here. In fact, the few Latins that actually knew there was a bubble up in the states, they'll say,

[18:11] it just can't happen here. Conditions are different. They say, how can it implode when the banking system down here is not highly leveraged? Well, that's a half truth regarding the banking side of the equation, but bank money is not what's really been driving this bubble. Though banks are diving in headfirst now, which I'll explain shortly. Anyway, historically, it really has been quite difficult for the average Latin to get a standard mortgage from a bank. And that's why as you drive through Latin America, especially in the middle and lower middle class neighborhoods, you'll see so many half built, yet occupied houses. People couldn't get financing, so they'd have to pay with cash. And so their houses would get built

[18:57] in fits and starts, sometimes taking five or even 10 years to complete and sometimes never. So as soon as the thing was somewhat watertight, they'd move in. But now suddenly, banks have opened their floodgates and they're offering five and 10% down mortgages, which really is a brand new earth shattering event down here in Latin America. Meaning, banks are hoping to scoop up new customers that could never have qualified even six months ago. Yep, the banks down here have learned well from the US banks. And why wouldn't they? They've got hundreds of too big to fail Citibank branches down here, leading the charge. Now, if you remember in a past show, I mentioned that there are virtually thousands of subdivisions and developers

[19:42] that have been offering 0% down or 500 or 1000 bucks down to gift you into one of their houses. But note that these aren't bank deals. In cases like that, it's the developer that's self financing. In fact, I'd be willing to bet that 50 to 75% of all the single family housing developments down here are financed by the developer and not a bank. And so now, as the bubble grows larger than Oprah, Latin banks, who were pretty much sitting on the sidelines in the single family development sector, since most Latins could never scrape up 30% down. Now, these banks are changing their long-standing rules to get in on the action too. So, there goes that argument about Latin banks not being so heavily leveraged.

[20:29] If they aren't now, they sure will be in the next six months to a year when people start taking advantage of that. So that's some big news that's adding fuel to the bubble. But listen to this. A friend of mine, who's a gringo, who's a freelance international journalist. A guy who makes a living writing mostly scientific and business articles. I hadn't seen or heard from him in maybe a year, year and a half. Well, we ran into each other again and got to talking about things. World events and such and what's happening down here in Latin America. And we did get to talking about all the construction that's going on all over the place. He just got back from Panama, Colombia, Peru and Brazil himself. And he, like me, just couldn't believe how many new projects are going up. And all the new projects on the drawing board

[21:14] that are supposed to go up within the next year. It's just so obvious to him too that it's a huge real estate bubble. And since he spent the last half year in Mexico City, I asked him if any of the people up there with half a brain have figured it out yet that they're in a huge bubble. He's told me that he's run into a few intellectual heavyweights here and there. People that know about the economy. They have a feeling that there is something very scary about the building boom going on. Though most of them are invested in it themselves. But he said, in the newspapers and the magazines and the big Mexican media, you can't write about it. They just won't print it. And no one will discuss it in the television news either. Not on panel shows. Not in discussion forums. Not anywhere. Seems like there's

[22:01] some censorship going on. And it's not the kind of censorship that you think. It's more like cronyism. He said, if you did a well-researched article about how the bubble is here and all the signs and symptoms, it'll never make the magazines or the papers. At least not now. Why? Well, that's because the booming real estate sector provides a huge chunk of money for all the media in Mexico. For example, any night you can turn on Mexican TV and see real estate shows where they have architects and builders taking you through homes and showing you the fixtures and the lots. Walking you through developments and projects. And unbeknownst to the viewers, these are basically one hour and a half hour. Infomercials. Pitching no money or low money down deals to anyone who can qualify.

[22:48] That, he says, is happening in every major Latin American city, including all the big cities in Mexico too. In fact, he says, in all the big newspapers in Mexico, at least twice a week, there will be a full color real estate insert section showing dozens and dozens of brand new single family developments. And those weekly inserts can be up to 20 pages of gloss. Not to mention, there are at least a dozen monthly real estate magazines that are free at newsstands and coffee shops and hardware stores and Costco's and Walmart's. Now, my friend, the journalist says, five years ago, none of that existed. There were no glossy magazines, no real estate infomercials every night, or real estate shows, and no 2010

[23:34] or even five page weekly inserts. And like he says, because of all that, he just cannot plant an article in any media source talking about things like real estate bubbles that run completely contrary to what advertisers are trying to sell. It's the same reason that newspapers in Central America will not run articles saying that sugar is bad for you or has any negative effects on the human body at all. Why? Because sugarcane is one of the top five exports of Central America. In fact, over the years, I've even snipped out a few newspaper articles that claim that sugar is good for you. Yep, down here, they have something like the Latin American Sugar Producers Council pumping out propaganda like that and people buy it because the population

[24:20] is unsophisticated and believe everything they see in the media. Sound familiar? Kind of like the American Dairy Association and the Got Milk thing, you know? So anyway, even Latin journalists who have a reason to believe that there's a big bubble brewing have to keep their mouths shut because as soon as you write an article like that, you make enemies of the advertisers. So after my journalist friend mentioned all that, he just confirmed everything us expats down here have been talking about for years. It's sad but true. Nobody at all is writing about the bubble. You never read about it in the paper. It's always positive, promotional spin for development and progress. And all those malls and subdivisions and residential towers, they are, according to the popular press,

[25:06] exactly what the doctor ordered. How else does a developing country become first world? Build the houses and the Walmarts and the strip malls and the people will come. Which is yet another symptom of the real estate bubble. Strip malls with so few clients that you could fire a shotgun down the main drag on a Friday or Saturday and not hit a soul. Not even close. Now the other day I was talking to a well-respected medical doctor down here in Central America and he tells me that a young fresh doctor getting out of school makes about $500 or $600 a month. A month. And since for a new guy it costs a lot of money to set up a practice and hang out your shingle. Not to mention a new guy has no clients yet because he's in unknown quantity.

[25:52] That's why the vast majority of young doctors either associate with an older guy as a hired hand in an established practice. Or they go to work for their government's crappy, totally dysfunctional national health system. Or at a broken down public government satellite clinic. And then after some years most of them end up in private practice. Now this in the know doctor friend of mine told me that once a doctor's been out in the field about 10 or 15 years the average MD earns about $1,500 a month. Which works out to about $16,000 to $18,000 a year. Considering all the time they take off for Christmas and Easter birthdays and government holidays etc. He in fact is one of the few

[26:39] Latin people I've ever met that is well aware of the bubble. Strangely enough I didn't have to explain it to him. He started talking about it to me. He said he knew there was something wrong with the real estate situation when the commercial developer for the office towers going up directly across the street from his office offer cheaper rents than the contract he and the other tenants in his building signed a few years back. And the new office tower he's talking about is virtually identical to the one he's in. In fact it's the same developer. So when he and the other tenants in his building started squawking about that the developer owners quickly agreed to renegotiate their rents. think about that for a second. You know in a bubble prices always get higher and higher.

[27:26] Oops I'm at the end again have to finish that bit next time so do stay tuned. You've been listening to The Expat Files living in Latin America coming to you twice a week from somewhere south of the border. Email me theexpatfiles at gmail.com and don't forget to check out expatwisdom.com to sign up for your free reports on Latin America. See you next time. Nos vemos.