Lack of regulation makes investing in property abroad a risky business, writes Laura Slattery

Owning a place in the sun doesn't seem like too much of a financial stretch for a lot of people in post-economic boom Ireland, and with deposit-sized lump sums of more than €20,000 finally maturing from Special Savings Incentive Accounts (SSIAs), overseas property vendors will be fighting to book as many hotel conference rooms as possible to promote their wares.

The number of exhibitions, seminars and advertisements for overseas property has exploded over the past few years and it is expected that SSIAs will fuel the market. One estimate from IIB Bank says €3-€4 billion of SSIA money will flow overseas.

But Irish consumers' love affair with overseas property could end in tears because of a lack of regulation or advertising standards in the industry, the Irish Association of Investment Managers (IAIM) warned recently. If anything goes wrong, there is little or no protection for consumers.

Vendors regularly advertise high and supposedly guaranteed rates of return, without any qualification, according to the IAIM, which cites the example of an advertisement purporting to offer guaranteed capital growth of 50 per cent and a massive 10 per cent rental income on an apartment in "most likely the best coastal complex in Bulgaria".

The IAIM, which says Irish consumers' mania for buying overseas property is almost akin to the stock market bubble of the late 1990s, admits it has a vested interest in dissuading people from investing in property as it leaves them with more free cash to invest in the equity-linked products sold by the investment fund managers the association represents.

The IAIM insists that people shouldn't be inveigled into any investment under false pretences and that a code of practice should apply to the sale of all property similar to what the Irish Financial Services Regulatory Authority applies to other investments.

For its part, the financial regulator has frequently reminded consumers that property investments are completely unregulated, while its Little Black Book guide for SSIA holders advises people to be "very cautious". The offer of a high return usually signals that the investment involves a high risk, it adds.

Last year's report by the Auctioneering and Estate Agency Review Group recommended that a new regulator for domestic auctioneers and estate agents should also cover overseas property vendors.

Unfortunately for SSIA holders who want to use their money to snap up a Spanish villa or an apartment in the south of France, this regulator is not expected to be up and running for at least two years.

There is a need for the industry to be regulated, says Michael Lynn, a solicitor from developers Kendar Global Properties, which has offices in Portugal, Bulgaria, Romania, Slovakia, Hungary and Germany.

At the moment, it is a case of caveat emptor - buyer beware. Impulse buys are to be avoided.

"There are opportunities in all of these countries. You come home and you're punch-drunk with opportunities. You almost have to go to bed for a week.

"My advice is to take a breather before signing anything," says Lynn.

"In Ireland, it is said there are three factors to ensure success in the property market - location, location, location.

"With overseas property, it's investigate, investigate and investigate," he says.

Reputable property companies despair at the mis-selling practices of the cowboys who drag the market into disrepute, but they also say that some consumers can be naive about the purchasing process, failing to get independent legal and tax advice.

"People tend to leave their brains behind at the airport", is how Elaine Higgins, managing director of IFG Spain, a subsidiary of Irish financial services group IFG, puts it.

"People who wouldn't dream of not getting a survey done and not getting a solicitor at home won't bother doing either in Spain.

"You would think they would be doubly cautious in a foreign country, but they're not."

Instead, they buy directly from the estate agent without consulting anyone else.

"The estate agent is not a tax or a legal expert. They want to sell the property, so the last thing they will do is tell potential buyers something that will put them off," Higgins points out. "People need to remember that property prices can go down as well as up."

Three years ago, the Spanish market was booming; now it has quietened down, making it perhaps a better option for holiday home hunters than pure investors, according to Higgins.

Some consumers aren't in it for a quick profit: they want reassurance that they will get clear sea views, generous square footage and crane-free surroundings for the two or three weeks a year they spend there.

They will nod away to the estate agents' promises about the capital appreciation and rental income without giving it too much thought.

But owners can end up in a financial mess if they don't do their homework, and tax is one area where they slip up.

"In Spain, there is a wealth tax for non-residents and a tax on rental income even if the property is not being let. Neither of those taxes exist in Ireland, so people usually don't know about them," says Higgins.

Most Irish buyers in Spain have not been tax compliant. "The Spanish authorities have not been particularly conscientious in the past, but there is evidence that they are now clamping down on tax offenders," she says.

Authorities have the right to seize and auction the property if the owners do not pay. However, a voluntary declaration of tax liabilities, even if it is late, will be looked on favourably, with the penalties reduced or even waived.Most countries will have tax and legal quirks that won't be automatically familiar to Irish buyers.

For example, French inheritance laws are substantially different to those in the Republic and the UK. Children have an automatic right to inherit property which can lead to complications if there are children from previous relationships.

The double taxation treaty between the Republic and France, which is being renegotiated, does not cover capital gains tax (CGT), which is 16 per cent in France if the property is sold in the first five years and reduces by 1.6 per cent for the next 10 years.

However, in practice people are not hit with 16 per cent in France and then asked to fork out another 20 per cent - the CGT rate in the Republic. They usually pay the difference, or 4 per cent, to the Revenue Commissioners here, according to Larry O'Connor of Overseasproperties.com, which specialises in French leasebacks.

The French leaseback scheme is an example of how the tax laws in other countries can be greatly beneficial to overseas property hunters. The scheme, which has been in operation for 20 years but has become popular with Irish investors only in the last five years, allows purchasers to write off French VAT - payable at a rate of 19.6 per cent - over 20 years.

The buyer signs a lease agreement with a management company, usually for nine or 11 years, and the contract can be renewed up until the 20-year point. The deal offers rental yields of 3-5.5 per cent and can include one or two weeks' personal use.

As the VAT refund will be partially clawed back if the property is sold before the 20 years are up, leasebacks are not designed for people who want to make a quick profit, says O'Connor.

"I would look at leasebacks almost as a pension fund," he says.

Both O'Connor and Lynn agree that Irish buyers make the mistake of focusing purely on price. "An apartment costing €80,000 in Bulgaria is only great value if it's great value in Bulgaria too," says Lynn.

"Discerning buyers will look at more than just price," says O'Connor. "They need to ask: who's going to rent these properties? What is the likely capital appreciation? How easy is it to get there and who's going to buy this off me?"

Overseasproperties.com has already taken bookings from people whose SSIAs are due to mature.

With properties near Cannes on its books at about €200,000 and 80 per cent finance available from French banks, a couple with a combined SSIA lump sum of €40,000 will easily be able to cover the 20 per cent they have to stump up themselves, O'Connor notes.

But buyers need to be clear about what it is they want from their overseas property, according to Lynn.

Is it just a holiday home or are they also expecting it to be a tax-efficient money-spinner that diversifies their property portfolio?

"Don't assume that just because you had a great holiday there last year, that it will make a great investment."