We have known each other for over a decade. We meet from time to time for coffee. Whenever I arrive in the city and discover that he is there too, we also go out for dinner and a drink together (after all, two men in a foreign city are always glad of company and a conversation in their mother tongue). In recent years he has focused on the hospitality field, so when the opportunity of a hotel offered for sale in the city where he operates came my way, I immediately approached him with the initial data. It took him less than 24 hours to get back to me and ask me to buy a flight ticket and arrange a meeting with the seller.
The seller, an elderly man in his 80s, is not a hotelier. A few years ago he bought the building and decided to convert it into a hotel. The works stopped, and the place was neglected. After a tour of the building we came to the meeting with the seller. Lunch at a local restaurant chosen by the seller. Between the starter and the main course, and after a few small glasses of the local drink, we began asking questions.
“Are there work logs where we can see exactly what was done and when?” I asked.
“I don't know. It doesn't matter,” he replied.
“What do you mean?” the buyer asked.
“I'm selling it as is,” he replied. “It doesn't matter what was done, when and how … It's of no interest. Not relevant. That's the building. That's the price.”
“The price you are asking is an expensive price. It is a price we are used to paying for a hotel room rated at least 4 stars, furnished and operating, where I can also know what its revenues are and what the return will be. You are offering me an unfinished building. I don't know whether what has been built is at the level of 50%, 60% or 40%. From what I saw there is still a large investment needed here,” I tried to explain.
The buyer agreed with me and tried to explain to the seller that there is a set of risks here that the buyer must weigh, but that the price is expensive.
The man stood his ground, insisting on not negotiating over the price.
The buyer even offered to pay the full price, on condition that the seller completes the construction of the hotel.
“I am an old man. I have no interest anymore in dealing with this,” the seller replied.
At this point I asked the seller for permission to meet the professional team members who had accompanied him during construction, the supervising architect. At first he refused, and after I explained that we wanted to understand the condition of the building and what else was required to complete construction, he relented and we scheduled another meeting later in the week after we met with members of his team.
The building was not purchased in the end, because after the conversation with the team we carried out a risk assessment and the buyer concluded that the investment did not suit him.
Identifying risks and carrying out a risk assessment should be an integral part of any decision-making process, all the more so a process of investing in real estate overseas. The first step is to identify and understand the various types of risk associated with real estate investments, including market risk, credit risk, liquidity risk, operational, political and regulatory risk. Then an assessment should be made of the risks, how they would affect the investment and the likelihood of their occurrence.
Here are a few tips for risk management when buying an investment property:
1. Focus. Buying a residential apartment is not the same as buying a plot for construction. Buying or building a shopping center is not the same as building a logistics center or an industrial building. Experience in and familiarity with the real estate field in which you operate will reduce the risk of mistakes and the investment risk.
2. Identify and examine the risks in the investment. The real estate market is subject to fluctuations, interest rates change from time to time, which can harm the business plan and your cash flow, there are countries where regulation changes as a result of political or other pressures, you may encounter problematic tenants who will not pay the rent on time or will damage the property.
“Risk is an inseparable part of life. And if you don't take risks, you're not living” - Warren Buffett
3. Build yourselves a professional hive. A professional and experienced architect and planner who can navigate you through the intricacies of local planning procedures, a CPA/tax adviser to understand the implications arising from the investment and its operation, a lawyer familiar with the real estate field (and perhaps even the specific field in which you are about to invest) who can help not only in preparing the set of legal agreements but also in understanding local regulation and protecting your interests.
Remember, a real estate investment can be like riding a roller coaster. There are moments of great excitement, and there can also be moments of fear and apprehension. But if you do your research and are prepared for every scenario, you can enjoy the ride and come out of it with a handsome profit.
How do you manage the risks in your real estate investments overseas?
Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית