Panama Condos - How NOT to Buy

Introduction to Panama Condos – As a Panama Law Firm we get approached by clients constantly asking us about buying Panama Condos generally in Panama City. We have learned the market from brokers, developers, lenders and from our own experiences. As a law firm our primary concern is to keep our clients out of trouble in anything including purchasing condos. Everything here is simply our opinion only. We can not predict the future in terms of market prices and what will and what will not happen.

Buy Only Completed Panama Condos – We have seen one major 80+ story project fail (it just is never going to get built after deposits were accepted) and more failures are expected by many people knowledgeable in the industry. Does this mean failures are imminent? No but as a law firm we tend to be cautious in how we advise our clients. The principle to follow is: “What You See Is What You Get”. If you can walk into the condo, flip on the a/c and flush the toilet then it is a real project. If not well “Caveat Emptor” which means buyer beware.

Pre-Sale of Panama Condo Projects– Remember this is Panama. To pre-sell a real estate project all the developer needs to do is get an option on a piece of land. This can be done by purchase or even cheaper a deal is struck with the land owner giving him a piece of the project if the deal goes through to completion. Next you hire an architect and get some basic design sketches and simplistic floor plans made. Artist renderings of the project in all of its glory are created. A fence is put up on the property if it is vacant with a large billboard depicting the project. Now after spending a few hundred thousand dollars you are ready to pre-sell your project. If the marketing goes well you collect deposits and then have the architect begin the plans and seek to get them approved by the government. The actual approved plans may differ from the marketing information. The height of the project may change, floor plans may differ and so forth.

Pre-Construction Marketing – Generally the project is destined for the Panama market or the foreign market. For purposes of this discussion we will not focus on the Panama market very much. Those selling to the local Panamanians who intend to owner occupy the condos will require a 30% down payment when the sales contract is signed. This tends to drive away any speculators. The 70% balance is due on the completion of the project when the certificate of occupancy is issued. The projects destined for the Panama market tend to be modestly priced with many units selling for $40,000 to $80,000 and some units reaching into the $160,000 range. We are not talking about $3000 sq. meter condos. These are generally sound projects built by experienced real estate developers with a lengthy track record in Panama.

When it comes to marketing in the foreign markets the game is completely different. The condos are sold to speculators who want to flip the property before it is completed at a profit. Others wish to hold the property as a rental unit for a few years and then sell it for a gain. The theme is pretty much the same – buy the Panama condo to resell it down the road for a profit. This requires creating a buying frenzy to keep the prices spiking upwards or else there will be a shortage of buyers and the prices will recede. Some of these foreign buyers wish to live in the condos but many have no intention of ever living in Panama. The foreign buy is often asked to put up a small deposit to hold the unit for them. This is at times as low as $5000 and usually not more than $10,000. There is often a schedule requiring subsequent payments according to a time frame or at the start of construction. The 30% figure is reached at construction onset and then the 70% is due upon completion of the project when a certificate of occupancy is granted. These people do not have as serious of a financial commitment to the project as the locals who put down 30% before the construction has begun.

Pre-Sale Panama Condo Projects and Construction Financing – Now we will assume the pre-sale of the condos went well and now the developer is actually going to build the project. Let’s see how this happens. Generally in these situations the developer has collected 30% of the sale price of the units. Remember he might hold this money for a year or two before construction starts collecting interest during this period from the bank where the money is held. Usually the developer will want at least 70% of the units sold; most will wait until almost all of the condos are sold if not all. Now the developer has about 30% of the retail value of the property cash in hand, a little more when you consider the interest collected for one or two years compounded. If the developer did not have to buy the land (think the owner of the land gets a piece of the project in return for contributing the land) he can just about built the project from the 30% without having to go to the bank for any interim or construction financing. Often it is the banks that impute a sense of conservative reality to condo projects and now that ingredient is missing. Also bear in mind that when the banks do the construction financing they require what is called a take out commitment. A take out commitment means the developer secured for a price a block of money that a lender will loan out on the finished units to actual buyers usually owner occupied but not always. Banks will generally not make a construction loan without a take out commitment in place. Banks do not like to be owners of unsold condo projects in Panama or anywhere else. Take out commitment financing generally has a pre-sell requirement of its own, usually between 50% and 70% of the condos must be signed sealed and delivered before any individual condo escrows will fund. Take out commitments can cost 1.5% or 2% for something decent with good rates and terms for the buyers. If you have a 60 story project selling at $1800 a sq. meter this can cost the developer a million dollars or more for the take out commitment. Not only is the take out commitment expensive but the bank may not let the developer pay for it from the construction loan proceeds so this is out of pocket cash. Ouch. The take out commitment pre- sell requirement can delay the actual funding of the individual condos causing cash flow problems. The developer really comes out ahead if he can build with the 30% down payment. If the developer needs to go to the bank for some money it is probably not going to be that much and the collateral from the land may cover the loan or he may need to post other real estate as collateral which he generally will have.

Panama Condos and Panama Banks – The banks in Panama are far from aggressive when it comes to making construction loans and they overall tend to avoid making them. If the real estate developer has a serious track record they may make a construction loan but then they have a habit of making sure the condos are sold to locals who intend to owner occupy and insist on the 30% down payment at signing to weed out the speculators. Currently there are over 100 condo projects underway in Panama City. What will the market be like when these condos are completed in a year or two? Will the foreign investor/speculators really complete the sale and fund them? Will they walk away? Will there be enough end user buyers to keep the demand up? No one really sees the future; one can only make an educated guess. The banks do believe in making mortgage loans on these properties to foreigners. They generally require a 30% down payment. We have heard of 20% down payment mortgages and some requiring 40% for people from countries where they could not produce a credit report or tax return. This much of a down payment keeps the bank protected in anything but a massive drop in the market. Panama banks also calculate Condo mortgages their own way. They take the number 75 and deduct the person’s age and what is left is the amount of years they will loan on a fully amortized mortgage. So the retirees are generally getting 10 to 15 year fully amortized mortgages. This is again beneficial for the bank since the borrowers equity goes up fast which encourages the borrower to hang in there if there is a drop in the market. The banks in Panama often require a life insurance policy be taken out in favor of the bank for the amount of the mortgage and this can increase the cost of the financing.

Panama Condos Warning Signs – If you see a project offering a small down payment to secure the rights to a unit and then a dragged out schedule of down payments be very careful. If you see the developer insisting on a full 30% down payment to secure a condo this is a good sign. This is the type of developer that is serious and the project should go successfully. If you see the project is on a piece of land with an existing structure still on it be careful. This might mean the developer has not really committed to the project yet and wants to see how things go with the sales before he gets serious.

Panama Condo Site Inspection – Do by all means visit the site of the project physically before you buy anything. Look around to see what other projects are going to go up that may impair the view and ruin the privacy of the units. Another condo 60 feet away is going to mean people from several floors higher than you can look into your condo from the other building. A condo going up nearby that will obstruct your view will decrease the value of the condo. I have been in Punta Patilla condos that several years ago were the grandest condos in the town but today have obstructed views from numerous surrounding condos that also look into your windows destroying your privacy. Imagine occupying the unit to learn that two other condos located on the same block or across the street are going to be in construction for the next two years and you get to hear the noise (building is only allowed from 7AM to 3PM), the dust and dirt comes into your windows and lands on your nice marble floors and the street is all full of mud and dirt from the construction, and your immediate neighborhood will be full of construction workmen and delivery people constantly. If you see a vacant building or a vacant lot assume a condo is going to be built there someday. If there is a lot of construction in the area the phones and the internet will be getting worked on a lot and outages should be expected. More condos mean more traffic and more traffic means more traffic noises. Remember visit the project and walk around to see what is going on, these are condos not the forex you do not buy online.

Panama Real Estate Shows – Run the other way. These are generally designed to sell projects in pre-development to speculators and flippers. Other seem to specialize in retirees. As an opinion you will probably never get a good deal at a show. Putting on a show costs a lot of money. Brokers don’t go to these shows to make sales that are really good for the buyer and not the broker. You do have a conflict of interest with the selling broker, think about it for a minute. The higher they sell the condo for the more they make. The higher their commission the more you pay for the unit. Now consider the extra expense of the show they are attending. You want a good deal come to Panama and walk around in the neighborhoods you wish to buy in. Hand pick your housing. Already built condos are going to be cheaper, they are ready to move into and the older units are considered by many to be better built. That is how to do it, simple. Want to know what a condo is worth; look at fifty condos for sale. Simple but it will take some time.

Panama Real Estate Brokers – The broker specializing in the pre-construction projects makes their money by selling condo projects at high prices and seeing that the prices get driven up constantly. If the prices stop rising their sales stop. They are selling to speculators wishing to resell for a gain. They do not cater to end users. They generally get a small commission when the buyer puts down the 10% and another small commission from each down payment. If the buyer never completes the sale they don’t care, they earned some good money and then they get to resell the unit again maybe at a higher price. These brokers often attend real estate shows and fairs in foreign countries sometimes maintaining sales offices there. They are looking for the speculator who wants to flip a property and cater to their greed. Their sales pitch is basically always full of buy now and it will be worth more later. If their products were such good deals why do they need such sophisticated marketing often encompassing television, radio, trade shows, internet, newspaper advertising and more. Good question isn’t it. In Panama there is no Multiple Listing Service, none, does not exist. The sellers do not like to give exclusive listings to brokers either. It is a jungle for the broker with precious little to prevent a buyer and seller from completing a deal without the broker, or the buyer going to another broker for the same property at a lower price. The larger brokerage firms that specialize in pre-construction condos have found a secure niche. They get the developer to give them an exclusive on the condo projects being sold to the foreigners and this allows them to get out of the jungle that the other brokers must live in. How do they get these exclusives? They maintain sophisticated marketing efforts in several foreign markets.

Panama Broker Owned Condo Projects – This is a newer phenomenon in Panama but not exclusive to Panama either. The Panama real estate Brokers specializing in the pre-construction condo projects have taken to doing their own projects. They hook up with a developer and run the sales only now earning a lot more than just a commission which is 5% in Panama. If the underlying developer has a good track record this should not matter too much. Unfortunately many of these brokers who now own the project will be promoting projects destined to the foreign speculator and flipper.