Panama Real Estate Flipping

Definition of Panama real estate flipping– Panama real estate flipping is a term applied to a situation where a speculator buys a condo in pre-construction mode. The buyer never has any intention of living in the condo whatsoever. The buyer never has any intention of ever actually fully paying for or financing this Panama condo. The hope of the buyer is that the Panama condo will go up in value as the project approaches construction and during construction, then the buyer sells the condo at a gain.

Return on Investment – The ROI on these Panama real estate flip deals is intoxicating, even surpassing the return on forex trades which are highly leveraged. The buyer tries to get away with putting as little as 3% down to secure a sale contract on the condo unit. The developer often requires 10% but with a little wheeling and dealing, perhaps buying more than one unit the down payment can generally be reduced to 5% and sometimes as low as 3%. Let us say the buyer gets a unit for $200,000, with $10,000 down (5%). The hope is the unit will go up to say $250,000 when he flips it and the original buyer realizes a gain of $50,000 on an investment of $10,000 which is a 500% return on investment (ROI).

Musical Chairs Syndrome – The original buyer (the Panama real estate flipper) must sell the condo before more payments are due so as to maximize his ROI. These Panama condo projects typically require payments of 10% every few months and these payments accelerate when the construction begins and when there is a certificate of occupancy the final balance is due and payable. If the buyer does not make the subsequent payments the developer can push them off the sale and keep the deposit money – all without a court date. So the original buyer wants to sell quickly and take a nice profit before putting any more money down on the condo. The problem is the buyer he in turn finds also wants to flip and then he finds another buyer who also wants to flip and these condos wind up changing hands several times to flippers never ever being sold to anyone who really wishes to live in the unit after it is built, if it ever gets built in the first place. The musical chairs syndrome sets in when the price has been driven up so high the last would be flipper buys the property and can not sell it since the cost is over inflated and this is the shortage of chairs (buyers). Now he or she has a unit they have put money down on and they can not sell it at a gain or even break even and they have no intention of ever living in the unit. The project hasn’t started yet and soon more payments are going to come due. They do not even know if the project will ever break ground and/or complete and are faced with coming up with more money. This is where things are at now (March 2007).

Can Anyone Really Make Money Flipping Panama Real Estate - When you sell someone your position in the condo you give them the rights to own the unit you had but they are paying a higher price. When the unit is completed theoretically the second buyer would close an escrow with you and you would be simultaneously closing an escrow with the developer so when the smoke cleared if you paid $200,000 and sold for $250,000 you would be sitting on a $50,000 profit. The second buyer would pay the first buyer a down payment equal to the first buyer’s down payment, maybe even greater of they could get it. No one is going to get paid until the unit is built and ultimately the sale is funded. If the project never completes or no one ever funds the actual full sale all that happens is there is a loss of down payments and never a profit of any sort. The brokers generally never get paid until the final sale funds at completion of the project. Wait it gets better.

Panama Real Estate Project Failures – Have any of these new projects ever failed yet? One big 80 story one failed, got reinstated, and went back and forth and we do not really know if it is a go or not. These things can be confusing. There are like 250 high rise residential projects ready to go with some already in progress and some completed and occupied. Let us look at the numbers. Some of these projects are 10 stores and some are 80 and higher. Many are 40+ stories high. Let us conservatively say these projects average 35 stories with 4 units per floor, which gives us 35,000 units. Now let’s say I over estimated and there will be some projects never moving forward etc. so we’ll make it 25,000 units. This means that Panama needs 25,000 families to move here and belly up to the bar and drop say an average of $1600 a square meter on housing. Remember for every 40 or so residential buildings there is one new office building going up, so forget about an expanding job market. These buyers need to be retired or have their own source of income. Now add into the equation a declining real estate market in Canada and the USA, sharply declining in the USA. Americans can not sell their home, take profits and cash out a home in Panama to retire in. Those days are behind us now and it looks look a turn around will come some years down the road maybe, but before we get to a turnaround the market has to hit bottom and the USA market is still dropping very nicely. Is something wrong with this picture? Where are all these buyers going to come from?

The Panama Banks Perspective – The way a condo project is structured in a nutshell is as follows: The developer gets a nice piece of land to build on. He generally needs to show the bank he has the land free and clear so he buys it outright or negotiates a partnership with the existing owner in return for their contribution of the land. Now the developer gets what is called interim financing or a construction loan to build the project and cover the marketing expenses of selling the units. The construction lender may require the builder to get a take out commitment which means he lines up mortgage financing for the units. In this Panama market this is often not the case since a lot of real estate is sold for cash. If it is the case the take out commitment will require that 50% or so of the units be sitting in escrow ready to close before they will fund a single one of them. This is the pre-sell requirement. Okay, so there may not be mortgage financing in place so the construction lender needs protection so he puts in his own pre-sell requirement. This means a certain percentage of the units must be sold before construction can start and/or progress significantly. The problem is knowing what is a real sale and what is a flipper? The construction lender is nervous as to whether or not these sales are real sales or just a bunch of speculators trying to spin a quick buck. So what do they do? Well they drag things out. Banks like to drag things out it seems. Banks are cautious that is why they get entrusted with money. The construction loan is usually paid out in phases. For instance when the foundation is laid then money for the building starts to become available, they finish five floors then more money is available for the next five floors (oversimplified of course). They do not give the developer $200,000,000 and tell him to call them when it is finished. So if the construction lender is nervous they delay the funding and wait. What are they waiting for? They are waiting for the buyer/flippers to stop making payments and go into default or continue making payments which means there is more cash in the deal to give them greater security. If the subsequent payments do not get made this means the units they thought were sold are not really sold. Before the bank gives the developer a single dollar they are going to have the title to the land to protect them so the construction lender can recover from a deal that goes nowhere. Banks generally make sure they have a way out or they don’t ever get to be big banks. The bank is the lender and the developer is the one going to take the losses and that is the way things generally go but if it goes well both get wealthy. What we are seeing today is a number of projects moving at incredibly slow rates. When we drive by we hardly see any progress. Yes there are a few people working there daily but the progress is a mere fraction of the progress you would see in other major cities around the world. One could venture a guess (just a speculative guess not a statement of fact by any means) that the lenders are looking to see if the buyers are real buyers before they get in too deep so they drag things out with a minimum of construction waiting for more payments to come due and then see what happens. If the flipper/buyers make three or so payments the banks will become more comfortable with proceeding. Will the flipper/buyers make numerous payments, your guess is as good as ours but we think the flipper will not make payments unless he has a sales contract in place at a profit.

Will these Panama City Condo Projects Complete ? – We think a lot of them will never get built. The developers throw shows in New York, Toronto, Barcelona and other places fishing for flippers who have no intention of ever moving there. The theme of the show is not come flip my real estate project, it is retire in Panama. The sales people working these shows do not get paid unless there is a sale so they soon figure out what sells- flipping. There are people who have flipped real estate around the world with success at times. This is all some people do. They are plugged in to the right people and get in on the ground floor. Others who do not understand the complexities (some of which you have already read) and have heard of others who have done well take a seminar or go to a show and get sucked in. The buyers these developers have are often not real buyers. The lenders are very afraid of these buyers and act accordingly.

Will the Buyers Get Their Money Back? – We think most will in the case of a project failing to move forward and closing. Panama is very against fraud and there would be pressure on the developers to refund. It is of course better for the developer to drag things out while trying to find more real buyers, and wait for the flippers to default and then push ahead perhaps at a lower profit margin. If the developer sees his situation as hopeless he can of course drag things out and wait for the flippers to default and then shut down with little or no refunding left to do. On the other hand if the developer can complete the project as agreed he stands to make a fortune and this is their true intent. Due to the large amount of units going up, high prices, rise in construction labor and raw material costs, rising interest rates, a dropping North American real estate market and other factors things may not go the way they intended them to go. This means they got caught in a unique and relatively unpredictable blend of market conditions that may be present insurmountable obstacles.

Panama Real Estate Flipping Frenzy Over – Last year the flipping frenzy was off and running. North American housing prices were still holding and people could sell and come here to retire. Now with the collapse of the North American real estate market the amount of people who would actually buy and move into these units is greatly diminished because they can not sell their home and use the equity to buy an inexpensive Panama home. For a while recently after the boom was out of the gate the Panama Condo prices were as high as the Florida prices, now the Florida prices are actually lower. One famous project in Panama City (Trump Tower) is not even assigning buyers a unit number. They intend to hold a lottery or drawing at completion or close to it before they actually tell the people what unit they actually get so it could be on the 9th floor or the 34th floor, go figure. Now we are seeing people who bought these units trying to sell them even at a price lower than what they paid and this is before construction has begun. People all over Panama are trying to sell units they bought for speculation at lower prices taking a loss and there are no buyers. Can this mean a glut of rental units?

Why Can’t Panama Real Estate Hit High Price Levels - In major cities like Paris, London, Rome, Barcelona, New York, etc. real estate prices can hit $5,000 to $10,000 a square meter agreed. But what people are missing is that these cities have things going for them that Panama City does not have (thankfully). We do not have a major stock exchange, a major futures exchange, or a major commodities exchange. We do not have two or three major international airports serviced by 60 airlines. Our airport is the size of a city airport in the USA of say 500,000 people. We do not have trams, buses etc for people to get around our airport, it has one terminal building. We do not house major industries like insurance, advertising, printing, defense industry, energy industry, computers, electronics, pharmaceutical, and so forth. We do not have major league baseball, football, hockey, basketball. We do not have large famous ballet companies, opera companies, Broadway plays or the like. The last plays I saw advertised in panama were Hansel & Gretel and Peter Pan. We do not have major motion picture studios here. We do not have world class museums or art galleries with a very few small specialized exceptions. There is no major amusement park operator like Disney, Universal Studios, and Six Flags etc. We are not known for world class hotels known around the world, same for restaurants and nightclubs. A night out in Panama is dinner and a movie. We do not have a large population center like New York. We do not have a large underground mass transportation system like Paris, London and New York. We do not have world class zoos, botanical parks and marine parks. We do not have any automobile manufacturers building cars in Panama. No one is building aircraft in Panama. We could keep going and going. Panama is a banking center and has the Panama Canal. Much of the other business here is retail or service related. Panama does have world class medical service complete with a John Hopkins Hospital. Not being a world class city with all that comes with that we probably will never be able to support real estate prices approaching what those cities can sustain. There are many people in those cities with money that need to be there for business reasons. Remember there are almost no commercial buildings being built in Panama so do not expect Panama City to be a Paris or Rome based solely on retirees, this will never happen. Retirees are never go to pay top dollar. Retirees leave places like New York, Miami, Los Angeles, Toronto or London. Why? To save money their earning years are over and they no longer need to be in these large cities for business reasons. How many people do you know who when they retired mover to New York, Paris, London etc. See what we mean. Panama can not support high housing prices. We think the threshold is about $1000 a square meter. Remember there are numerous places they could go to if Panama became priced very high like $2500 a square meter like even Florida would be cheaper.

What Do We Think Will Happen – We think a lot of the real estate projects will never get built. By and large we think and hope the investors will get their money back. It will not be all that cost effective to come to Panama and sue a real estate project for amounts of $5,000 to $25,000. The chances of a recovery would be extremely minimal and the legal expenses could exceed the recovery if there ever was a recovery. Suing the developer personally would probably never be successful. We think some projects will get built and after some layers of flippers go out by default, the prices will settle down to a realistic lower level. By realistic level we see $900 a square meter to perhaps $1300 a square meter for the top drawer high rises, perhaps $1000 a square meter as a good average. This will open the door back up for retirees seeking a nice quiet peaceful retirement home where they are safe, with good food, good weather etc. Prices of $1700 to $3300 a square meter are fantasy prices in our opinion. You may see developers dropping prices which will bomb the market for the completed units that are owner occupied. Developers after dropping prices may be forced to rent units which is the worst thing for them. If the developers go to renting they are desperate and just need cash flow to keep the bank from taking the property back from them so they rent and hope the market bounces back. The developers got greedy and pushed prices up way to fast the wrong way using flippers and now it is starting to come back and bite them. Don’t be surprised if some of these homes high up in the sky never happen.

What to buy in Panama – Go after the already built houses – this way you know your house is going to be built. Panama people like new cars and new houses. Used houses 7-10 years old are a great deal. Getting one at $900 a square meter or less is not at all hard to do. Single family detached houses (not townhouses in a project with a common wall, and not project development homes) are still a good buy. You can easily get a nice one with well over 3000 square feet for $200,000, yard, fence and all. The new condos are built worse than the older ones. The new ones have four per floor, older ones have two. The condos are all solid concrete. Fixing the floors, cabinets, bathroom, sinks etc in Panama is cheap. Replacing air conditioners is also cheap. That is the way to buy in Panama. Our law firm will handle your real estate contract for you for $300.00

If You Are A Panama Real Estate Flipper – What to do? Depends on the project. Come down here and look at the project to see what is going on or hire someone to take pictures of the project and email them to you. See exactly what is going on. Drive around Panama City and see what is going on in terms of real estate projects. See how many are just billboards on a lot and how many are really being built. Have pictures taken each month and compare. This will give you an idea of what is going on for real.