Who Says What’s Fair Market Value?
I own a beachfront lot in a development in Nicaragua. Recently, the developer contacted me asking if I’d like to sell it. In fact, he knew that I was interested in selling, as I’d had the lot listed for sale with his sales office for several months.
The market in Nicaragua is generally down, thanks both to the global economic woes of the last several years and, as well, to the country’s Sandinista President Daniel Ortega. Danny’s return to this role four years ago has created a high level of uncertainty about the future of this country. Most foreign investors have shied away.
In other words, when I listed my lot with the developer last year, I didn’t expect to sell it, and I certainly didn’t expect to sell it anytime soon for my asking price.
Still, I was surprised when the developer got in touch to offer me about 40% of what I’ve got the lot listed for with him.
Okay, I thought. Maybe the Nicaragua market is worse off than I realized. Frankly, I thought, if prices have fallen as far as this offer would indicate, maybe I should be buying…and maybe I should be recommending that my readers.
I checked with the developer’s sales office, which, I learned, is listing non-beachfront lots in the same phase of the community as my lot…for the same per-square-meter cost as he was offering to buy my front-line lot.
Why would he do that? Maybe he’s land banking, trying to buy up anything he can at super-distressed prices while, as he explained it to me, the market is “dicey” and everyone’s growing ever-more nervous in advance of the upcoming presidential election. Fair enough. In this case, thanks, but no thanks…
However, there could be another reason for the offer, one that I’ve witnessed in the past. The developer could have a buyer for a beachfront lot but not an available beachfront lot to sell him. In this situation, a developer might approach an owner to offer to buy back his beachfront lot, offering a low price but cash and a quick closing.
Then the developer turns around and sells the lot to his new buyer for more.
I’ve watched another version of this play out several times in the Panama City condo market in recent years. During the boom, pre-construction prices for condos in this city were going up so quickly that developers began to feel like they were losing out on additional profits that their early buyers, who’d bought super low but were taking possession at the high, would enjoy.
Several unscrupulous developers in this town responded by slowing or halting construction. As buyers grew concerned about their investments, the developers approached them to offer to return their deposits and let them out of their contracts…the developers secure in the belief that they’d be able to turn around and quickly resell those units at prices well inflated from what the early buyers had paid.
In one case I know personally, the developer was more blatant. He didn’t give early buyers an option; rather, he simply returned their deposits to them, after having held them a year or longer, annulling, as far as he was concerned, the sales.
This robbed investors of profits, and it left local buyers in a position of not being able to afford to buy elsewhere, as the market had so spiked in the intervening months. Lawsuits ensued, and the heated discussions continue.
How can you protect yourself from this kind of thing? The truth is, you can’t completely. Be aware of the current state of the market and of current fair values anywhere you’re invested. Have an idea what you think your asset is realistically worth and, then, should an offer come, you’re in a position to determine whether or not to accept it.
And always, but especially when buying pre-construction, use an experienced local attorney (who is not the developer’s attorney) to review and negotiate your contract. This may not keep a greedy developer from trying to cheat you, but it should help provide some recourse in that event.
Lief Simon
