#350 – The Expat Files: Real Estate Market 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. Once again I'll take a few seconds to mention my upcoming July 2014 Expat Wisdom Seminar in Central America. Time to get your ducks all lined up because remember I'm only inviting 25 people along. Just go to expatwisdom.com and click on the latin seminar link for full details. And if you have questions just send me an email at expatfiles at gmail.com or johnny at expatwisdom.com.

[00:59] Time's a waste and so you better get on it. Okay now continuing on with last show's topic, the big real estate bubble that's going on down here in Latin America. Right before the show ended last time I mentioned that a young doctor friend of mine who'd signed a long term rent contract about 2 or 3 years ago in a brand new office tower complex. He said that when he and his fellow renters found out that the office building going up across the street being built by the same developer and a virtually identical building too. Anyway the developer was offering new renters identical office space at a lower price than he'd signed on for a year or two before. Then he and a few of his fellow renters decided to confront the developer. Why should they be paying more in an identical space in an older building whereas new and

[01:47] prospective renters in a building that wasn't even finished yet would be paying lower rates. They knew something was definitely wrong with that situation. And the developer well he quickly caved and lowered their rents without much of a squabble at all even though they had a contract. So why is it that all of a sudden you can if you're smart negotiate your rent downward. Well that's because there's a huge glut of empty office space and hundreds if not thousands of new units coming online every month. And that's happening in every medium and large city in Latin America. Now of course the example I gave was with commercial space and of course it's also happening in the housing sector too so if you're a renter you really do have your landlord by the so-called cajones. Meaning when your annual or six month rental contract comes up for renewal and that goes

[02:35] for even if you signed a long term contract with options. If you don't ask for a break a lower rate anywhere from 5 to 25 percent or ask for something else like a free month or maintenance thrown in some sweetener to the deal anyway then you're just being foolish and not taking advantage of what that bubble is doing down here. In the first place if you don't ask you'll never know and the second place landlords down here are in a pinch and they well know that if you move out there's a chance they might not rent the place for months and they'll lose all that money and they know they got you a gringo a bird in the hand who pays regularly the checks don't bounce and gringos pay on time at least I think most of us do so anyway don't be afraid to play that real estate bubble card in

[03:21] your favor you're crazy if you don't every landlord I know is facing his own brand of occupancy problems and the fact is the ones that were hard-nosed jerks that never suffered before because they thought real estate always goes up up up and never down they're starting to feel it now and the pain is just beginning but the pain is on them not us if you're a renter right now you're the one who's gonna be in the driver's seat and soon buyers with cash will really clean up and don't worry I've got my finger right on the pulse of this market and I'll let you know just when and where to jump in and where not to because soon there will be so many deals out there you'll have your pick of the litter however it's not as easy as you think for example you might find a steel on a beachfront penthouse apartment at 20 cents on the dollar but

[04:10] you don't want to be the only one in the complex you know what I mean you have to have a decent occupancy rate so that the maintenance money is coming in to maintain the whole thing you know keep up the standards of the neighborhood you don't want to be the only person in a beautiful penthouse apartment when the building or the complex is only 30% occupied you know what I mean and like I may have said before just a few months ago I was looking around at apartments to gauge the market in Salvador Guatemala Nicaragua and Honduras just checking out the rentals and the local classifieds and on the bulletin boards in those big grocery stores that's the best way to do it remember anyway I made the rounds in a smattering of medium and large-sized cities off the gringo tourist trail and I visited some very beautiful apartment complexes and housing developments most of them brand new with

[04:59] prices ranging from $250 a month to about $700 a month and the young Latin guy showing me around a freelance real estate guy working on commission and by the way I got his name from a listing on one of those supermarket bulletin boards I would never use a big real estate agency like CityMax or Century 21 unless I just landed in a town and wanted to get a free tour then I would gladly call them up and have one of their agents give me a free tour through the city though he won't know it's a tour I say usually it's worth it to spend a day or two with those guys make them use their car in their gas but don't believe anything they say about the real estate market because they have no idea what a bubble is either even though they're right in the middle of it and believe me these CityMax, ReMax and Century 21 guys they will jump at the

[05:45] chance to take a gringo around since off the tourist trail you might be the first one they ever had in a car the fact is a hot gringo on the line like you will be the big talk around the ReMax office for a couple of days believe me all the other agents in the office will be a bit jealous they didn't snag a prize like you even though you're just using them and by all means use them and get them to buy you milk and cookies too only you should never buy anything from them never anyway after my new friend the freelance real estate agent that I got off the bulletin board after we got to talking a bit for a while and bonding he told me that most of the nine or ten brand new units that we looked at that day in various upper-middle-class developments most of them had been on the rental market for at least six months and some of them did

[06:32] not have a single walkthrough a single looker in all that time so it did take him a while to admit that the market was extremely soft and unusual now if that doesn't scream real estate bubble I don't know what does but when I mentioned the idea of the bubble to that young real estate guy he still didn't get it ever the optimist like everyone in the bubble always is he said after the rainy season the market should come roaring back and I asked him why he felt that was so and he said well that's what all the other guys are saying hmm need I say more here he is showing me rental units that haven't been walked into in six months and I have to explain to him what a real estate bubble is and when I asked him if he was worried about it or worried

[07:20] about his future as a real estate broker he told me he was trained and has a degree in architecture then when I asked him why he wasn't in the field why wasn't he an architect in this huge building boom he said unfortunately and in Spanish it's unfortu netamente unfortu netamente now you have to be down here quite a while to get that tongue twister anyway he lamented the fact that almost all the housing developments and in commercial properties are being done by huge developers and they have their own architects and construction firms and he also said even if you're an architect or a civil engineer unless you've got contacts or connections and they call that quayo down here see you e l l o quayo that means inside connections anyway

[08:08] you end up working at Office Depot selling real estate or working at a hardware store oh and just one more thing this guy did speak some English on a one to ten maybe a six and a half pretty good anyone could basically understand him here's another good fact I got out of them he said that if you go to an architecture school that's private you always learn pretty good English and that's what he did he said they even had some gringos teach in English at his school but if you go to a public one one that's a state school you know one of those national schools I always talk about that have busted windows and bathrooms that don't have plumbing that works and walkways and halls that stink like urine etc because that's actually a place where a lot of people will relieve themselves but you know they're basically free and you get what you pay for right and people who don't have money generally come from

[08:56] the lower classes and the lower classes have lower cultural values and they're the guys that whip it out on the street so why wouldn't they have the same habits in the halls and walkways of their schools too but that's another story and I talked about that in a past show anyway suffice it to say that down here it's a huge renters market now that's not to say there aren't some real estate hot spots in and off the gringo tourist trail where vacancies are very low and rents are high and that would be in the business and banking area of any medium and large city almost always where the first world franchise hotels are like the princes in the Hyatt and the Hilton and the Radisson and the Continental etc it's the same thing you see with business districts in cities in the states there are always going to be certain islands of

[09:41] prosperity and high rents no matter how the economy is doing in the rest of the country if you're in one of the high-end business districts in Boston New York or Cleveland where all the big banks and hotels are as well as convention centers and high-end shopping malls etc rents are artificially high compared to places outside that zone and vacancy rates quite low but generally as soon as you get about a mile or two outside that commercial area in whatever Latin city you might be talking about whether it's on or off the tourist trail rents start dropping like a rock now because Latin cities are so heavily built up and densely populated in the center the massive new subdivisions and housing projects are always at least five miles away from the center city in

[10:28] fact with larger cities of 500,000 or so some of the big new housing commercial and development projects are actually what we might call bedroom communities and can be up to 20 or even 25 miles away from the center city although that term bedroom community is not on the radar down here yet so if you mention it or try to translate it into Spanish they won't know what you're talking about yep it's that lag time effect again remember it's like that word walk-in closet which Latins still can't get straight down here off the tourist trail when they use it they spell it walking w-a-l-k-i-n-g like the closet's gonna get up and walk away walking closet now you won't see that much on the gringo tourist trail anymore but you're used to and that's

[11:15] what happens when Latins try to show off their first world gringoisms and aren't proficient enough with the language to know that they've screwed it up but when you're on the gringo tourist trail Latins eventually pick up on the fact that they've screwed up the language and correct it that's why you see most of the twisted English language screw-ups off the gringo tourist trail because we're not around to laugh and correct them anyway nearly all the big housing developments are out in the burbs that's where the biggest part of the housing bubble is while the commercial real estate bubble is in both places within the cities and out in the burbs now about that bubble in the burbs if you rent or buy out there you're probably gonna need a decent car because things are pretty spread out and by the way like in the states most people in the burbs commute in and out of the big city for their day jobs so

[12:03] the bottom line is there is a real estate bubble everywhere but when you get five or six or ten miles out of the city that's where the bubble is really exploding there it's becoming a renters paradise and that includes spaces in commercial malls and shopping centers too just a little ways out from practically every Latin city that's where everything's overbuilt and that's where all those vacancies are so if you plan on renting make them a low-ball offer and don't budge and while you're at it put in some low-ball offers on some of the other vacant spaces in the area there'll be plenty to choose from believe me so that's what I suggest for gringos and expats who first come down have a look through some of these projects that are sometimes totally vacant and get

[12:48] yourself a great deal on a rental in a brand new apartment because you know there's nothing like being the first one into an apartment complex or a house right everything's brand new the walls are perfect the plumbing great the sinks and fixtures sparkling new and believe it or not if you're off the gringo tourist trail you could get something like that easily first-world style three-bedroom house or apartment for around 300 to 400 a month and sometimes it'll include cable water and they'll throw in maintenance to believe me landlords are desperate for qualified renters and buyers and on top of that you've got that gringo advantage going for you too and that puts you on top of the list of preferred clients but what about the locals how are they handling and

[13:35] reacting to the big bubble let's face it off the gringo tourist trail they are the potential clients for that rental market not gringos there's just way too few of us to matter well let me illustrate that with a little story now if you remember in the last show I mentioned that a well-established doctor down here makes about 16 to 18 thousand bucks a year and I'm talking about a big city doctor off the gringo tourist trail at least I think I mentioned that on the last show but if I didn't I did now okay now follow me on this one according to banking standards and practices down here the average Latin American adult can take out a mortgage that's no more than six times his yearly salary provided of course he qualifies and has good credit and all

[14:22] that also provided he could scrape up the cash down payment which like I said before it used to be 30% but now is five or ten and as for the other case when you're not dealing with a bank when you're buying into a project and the developer is self-financing then you might not even need a down payment we'll talk about that case in a little while but for now let's stick with bank financing for a minute in any event let's go through some simple numbers here if the average well-established doctor makes let's say seventeen thousand a year which by the way is about four to five times the average salary down here in Latin America and as you well know that would be poverty row up in Cleveland a guy making that in the States would definitely be on food stamps housing assistance and a dozen odd other

[15:09] government programs no wonder Latin still call it the American dream don't think that every Latin that slips into the US illegally doesn't know those programs exist they do why because they've all got friends and relatives up in the States who told them all about it it's not like the US welfare system and safety net is an unknown commodity down here in Latin America in fact every Latin I've ever talked to down here no matter what economic status he's in is well aware that Americans get free money if they don't work not to mention a good majority of the lands down here also know that up in the States a person that doesn't work gets free food and free medical and a free housing allowance free water free electric and utilities and that people who don't work have all

[15:55] the cable channels flat-screen TVs cell phones the works some of which the average Latin American working person can't afford and the topper is and I've talked to many lands about this they also know that the average person in the States that doesn't work and maybe never worked in their whole lives still have and drive cars their own cars now remember 90% of the Latin population cannot afford a car not even a rust bucket piece of junk so it's simply amazing when they hear that people in the States who sometimes never work the day of their life not only drive but often own their own cars it might sound like I'm oversimplifying that but I invite you when you come on down to speak to the average Latin guy at a party or wherever and ask him or

[16:42] her if they've heard about such a thing and you'd be surprised how much they know about our welfare and safety net system it's what expat Eddie calls rocket fuel for the American dream and I want you to notice one thing when you ask a Latin down here about that notice how animated they suddenly get when they talk about it because it really does blow their minds but I digress and let's get back to our doctor friend anyway our doctor friend making 17,000 a year should be able to afford a mortgage worth six times that or almost exactly a hundred grand now here's where the numbers don't quite work out according to statistics down here in Central America and in Mexico the average price of a brand new house in a housing development coming online right now is

[17:30] about $98,000 you know what that means all these thousands and thousands of brand-new average houses coming online worth about a hundred grand each can only be picked up by professional people and businessmen like your average doctor who down here would be in the upper middle class that's the upper four of five percentile of society meaning the rest of the 95 or 96 percent of the population that make under 17,000 bucks a year they're SOL they can't afford nor can they qualify for a mortgage on one of these average new houses that make up most of this huge building bubble and as you might have noticed the average doctor can just barely qualify for a mortgage like that too which should

[18:20] tell you exactly what's wrong with the real estate market here so why haven't developers here figure that out already go figure it really is a bubble mentality too the fact is it's a terrific renters market but it's obvious buying a house or an office and taking on a mortgage would be one of the stupidest things you could ever do even if it's a no money down developer finance situation think for a second about who your next-door neighbors and arrested the folks in your subdivision are going to be people that also put almost no money down most of them absolutely stretched to or beyond their credit limit why do you think they chose that subdivision for the low money or no money down option think of it if developers are building these cracker box $100,000 houses like crazy and yes unfortunately they are building row

[19:11] after row after stinking row of cookie-cutter cracker box houses just carbon copies of cheap ugly u.s. subdivisions that's all they are without an ounce of creativity really but to your average latin guy making 300 or 400 bucks a month he thinks they're just great now from the developers point of view who are his perspective clients the average latin the guy making three or four hundred bucks a month that's you know 70 or 80 percent of the population can't you see there's a total disconnect from reality here because you see based on that six times your yearly salary number the average guy making 300 bucks a month could just barely afford a mortgage on a house that was worth $24,000 and I'll tell you right now no one's building houses down here

[19:59] for 24,000 none of the private developers or private contractors anyway so even if you consider that a very high percentage of families here pool their resources the husband and wife work and the kids chip in to even so let's say they brought him twice the average salary $600 a month then they could actually afford to get a house that's worth about 43,000 bucks based on that bank loan standard of six times your income level and I'll tell you there are no developers down here that I know of that are building houses for 40 or 50,000 bucks seems like the very lowest of low-end houses you can buy run around 60,000 or so nothing really more than glorified garages in our eyes and even if houses like that were easily available to the average person down here

[20:47] almost none of those families could actually qualify because they need the proof in the paperwork that they're actually working and bringing home a salary they'd have to prove to the bank that they actually were making 600 a month although there might be one person in the family who's working on the books making the average three or 350 a month and can prove it with check stubs the rest of the money coming into the household is usually off the books like for example the mother is a maid or a cleaning lady or selling Amway or Tupperware or maybe she has a kiosk in front of the house all for cash and off the books of course and the kids they're off the books too they've been known to sell all kinds of stuff fruit candy roses newspapers smoothies you name it and in order to qualify for a bank loan even if you're making 600 a month

[21:35] you have to prove somehow with paperwork that it's actually coming in and if you're taking cash off the books it don't count and cash off the books is pretty much the backbone of the economy down here I'd say it's at least a 50% cash society gotta love it huh so the bottom line is this building boom is composed of tens of thousands of cookie cutter matchbox houses average value about a hundred grand each and to qualify you got to make a minimum of about fifteen hundred a month which is four or five times what the average Latin brings home in fact the mortgages on those so-called average houses are only doable for the upper five percent of the Latin population so I hope now you can see

[22:21] that the whole real estate thing is terribly lopsided here and do remember I'm just talking about the average house in one of these new developments in subdivisions there are also a ton of what we'd call upper middle-class or higher-end subdivisions to where the houses start at around a hundred fifty thousand on up to four hundred thousand and in that case the potential buyers are really narrowed down to one or two percent of the Latin population and as far as that goes I just don't get it I look in the Sunday newspaper and see the real estate supplements and the glossy magazines there are dozens and dozens of those so-called upscale subdivisions too and I can tell you this all you have to do is drive by one of those completed subdivisions at night and you can see

[23:06] there are very very few lights on in the place except for the street lights of course meaning most of those things are just big white elephants that no one's ever gonna live in now earlier when I mentioned that the average Latin family could probably get a mortgage on a twenty five thousand dollar house if they could scrape up the down payment which is highly unlikely the other problem being there are no decent houses for 25k not even down here now I'm not saying there aren't twenty five thousand dollar houses in bad sections of town there are even ten and fifteen thousand dollar houses in really crapola areas so obviously that's where the poor folks live not us when I mentioned there are no new housing projects that sell houses for twenty five thousand bucks I was

[23:52] talking about regular normal housing built by a developer not subsidized housing because yes there are subsidized housing projects here and brand new housing that goes for as little as get this five thousand bucks of course houses like that are nothing more than plain old block cubes with a laminate steel roof on them but it's a hundred times better than living in a dirt floor shack and who is subsidizing well almost always some do-gooder group from the states or the World Bank or the IMF and Habitat for Humanity of course and a hundred other charities that come down and build houses now you have to remember the houses these folks build are not anything you or I would ever care to live in they're just glorified concrete block garages but it does

[24:39] allow some very lucky poor people who live in tin shacks and dirt floors out the boonies usually to have for once in their life infinitely better shelter now it used to be they used to give these houses away for free but they found out in quick order when people get free stuff they don't care for it or appreciate it as much so now at least these do-gooder charities are charging a fee basically a very very low monthly payment mortgage which in theory should instill some pride in ownership but most of the time that's just a pipe dream because when you go back to these housing developments five or ten years later well believe me most of the time you don't want to visit it's just too sad but you know you have to start somewhere and it's that first world do-gooder

[25:25] mentality that gets it off the ground but unfortunately in the long run it always makes the giver the do-gooder feel better than the receiver and I could prove my point by bringing up about 10 or 20 or 50 examples but you get the idea now I've seen a lot of do-gooder house building projects down here that charge the homeowner a thousand five thousand or ten thousand bucks on a mortgage basis and it's the charities that work out these deals for repayment and even so many times these families just can't pay but you know in this case we're talking about the very poor we're not talking about middle class people here groups like Habitat for Humanity are not building houses for people who make 300 to 600 bucks a month they go deep in the boonies to areas

[26:10] where people don't have electricity or running water and you do have to give them some credit for that because it takes a certain kind of person sometimes I wish I was that selfless but I'm not and besides that I just can't wear a t-shirt with a smiley face on it or anything that looks like somebody's idea of Jesus oh and speaking of t-shirts you know when I first started this show the expat files living in Latin America more than three and a half years ago I mentioned in one of the very early shows that if you really want to treat some of the local Latin people to a gift a meaningful but inexpensive gift I said just bring them down a t-shirt with any kind of English language lettering on it any kind of logo would do a bar a pool hall a rock and roll t-shirt a sports

[26:57] t-shirt Mickey's malt liquor Hooters Harley whatever even one with a stupid gringo cliche on it like have you hugged your psychiatrist lately or the mind numbing have a nice day you know up to recently those were really great cheap gifts and the kids in the neighborhood you're cleaning lady the maintenance guy they all would just go nuts for that stuff but if you've been down here in the last year or so you'll have noticed every young Latin rich or poor has a collection of English language t-shirts they wear all the time but don't understand more on that next time so 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 the expat files at gmail.com and don't

[27:47] forget to check out expatwisdom.com to sign up for your free reports on Latin America see you next time nos vemos