Investor and author Tom Villinger knows the market since 1994 and shares his insights with Lankaland clients.
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“I have heard many horror stories”
Let’s analyze the background of these stories, which always is similar: “I trusted a friend like my brother/son, listened to his advice, gave him my money” – and lost everything.
All these horror stories have one thing in common: the foreign investor trusted “friends” and got cheated. I don’t know horror stories involving reputed brokers, consultants, law firms or company secretaries.
Reputed professionals or amateurs?
The professional has worked hard to build up a reputation for himself over years and in an environment of competent competitors. One serious mistake (not to speak of fraud) and his source of income is gone. The leading professionals in the Sri Lankan market for up-scale foreign villa investors all are extremely careful and cautious to perform decently. Yes, the ask money for their services. So is every professional in the world. They might not be the cheapest. So is every expert in the world.
An amateur is a small time operator with no name nor reputation to lose. He has no education on the fields that are important to the investor. If he in the role of the amateur messes up completely then that's bad luck for investor with the money. In case of a crook the same applies. No crime was committed.
Amateurs might be the nicest and most honest chaps. Great friends. And they even might not be spoiled or tempted by the money the investor brings with him and the immense trust he has. But even being perfectly benevolent the amateur will cause harm to an investment just be being amateurs. Some smaller, some bigger.
I strongly recommend to meet with professionals and challenge them yourself, like you would at home. Ask for proof of reputation. Ask for people who can recommend the professional. Ask for reference projects.
Stay closest friends with the amateur, but don't risk to do business with him. Use the services of professionals.
Selection of property and location
Professionals
Based on knowledge, experience and facts, professional brokers will provide recommendations according to the requests of the client. The client can select between the most suitable purchase or lease options.
Amateurs
Even the most benevolent local friend will always prefer the property that’s closest to his family home (future job on site without having to move and travel to the job site).
Local friends always vote against rural plots. They are afraid of the locals there (no joke!). To them the city is ideal (better schools, more shopping, lots of busses for travels to family members) – but we find the city noisy, dirty and dangerous (the latter a prejudice).
Crooks
The crook will try to promote his own property (“an opportunity from my cousin”) because of the enormous commission or the most expensive one with as many bedrooms as possible (large family will enjoy space after his intended hostile take-over).
Possible loss
The investor might miss purchasing a perfect property and select a location not really fit for his purposes (missed chance).
Purchase of property
Professionals
The investors pays a broker fee (3.5 - 5%).
Crooks
Crook's commission on land purchase without broker: the crook agrees with the seller to keep everything beyond the seller’s (often already inflated) price. This way investors pay often pay a doubled or even tripled price. Very common. Loss: very high.
Crook's commission from broker: crooks often approach the broker secretly after an inspection to ask “what’s in it for me if I recommend your land to my foreign friend”. Loss: friend recommends the wrong property.
Possible loss
Money. The investors pays (much) more for the property than he would have had to (money lost).
Strong or weak ownership title
Professionals
Weak title means that there are (known or unknown) co-owners of the property from past time inheritance who might claim their rights over a period of 30 years. If they claim their share they can't push you out of the property but they can block any construction until the case is settled in court (5 - 15 years).
There are many levels of weakness. If for instance there is a house on a plot with a wall around it and no claim since 20 years despite of a land described as "undivided" in the last deed of transfer one can consider buying: the house is there, the wall is there, and it is extremely unlikely that there will be trouble. If on the other hand there are possible claims attached to a land without house and with lonly a "green fence" (boundary marked by trees) that's most likely a no-buy.
Decent lawyers thoroughly check the validity of a property title by checking the pedrigree of ownership 30 years back and refuse to notarize weak title transfers. They will refuse to recommend weak titles despite losing the transfer fee. Thus there will be no problems to construct on the plot or sell the property later.
Amateurs
Amateurs might recommend a sloppy lawyer who does NOT check the title without being expressively instructed (which the amateur forgets or doesn't know he should) or interprets a weak title as valid (thus not losing the fee for the transfer). The lawyer is not committing a crime when acting as described. Loss for the investor: weak title properties will be extremely difficult to sell later. Claimants (should be discover during the title search!) might obstruct any construction after purchase. There will be a big surprise and loss in the future.
Possible loss
Severe! Weak title properties might be extremely difficult to sell in the future (20 - 60% under value). Your construction might be stopped by claimants who will agree to further construction only after a heavy payment (delay and money lost).
Company incorporation
Professionals
A specialist incorporates company structures for foreign investors regularly. He knows the pitfalls when foreigners are involved and has means to avoid them. He will present proof of a successful incorporation.
Amateurs
Amateurs don't know the few specialists for foreign investors's company matters. They will most likely recommend a company secretary who is only experienced in handling companies of locals where other laws apply. The weak spot will be the trusteeship agreement of which such company secretaries have never heard of. Your incorporation (prior to property purchase) might get stuck. The property purchase doesn’t happen.
Many amateurs are convinced that foreigners can't get hold of freehold property in Sri Lanka at all. The don't know the company structure principle.
Crooks
The crook will try to convince you that you don’t need a company structure (“Too complicated, too expensive.”). He’ll suggest that he become the registered owner and you get a lease plus a signed and stamped agreement, that the crook will agree to any sale of the property you intent – without compensation. Unfortunately you can’t force him to sell on the basis of this agreement. Even if there is a clause in your notarized and officially registered lease saying “I, the owner, promise to sell the property if the foreign lessee wants me to” it is not enforceable nor valid! Right of first refusal in the lease? Not enforceable. Promise in the lease not to sell the property? Not enforceable. The good news is: the lease can’t be challenged.
Possible loss
Weak company structures can cause trouble with the Registrar of Companies or in business operation. Fortunately a professional could rectify the mistakes (headache, little money loss, your buyer might lose patience).
Having no company structure is a big mistake because you only have the lease and depend on the amateur or crook to sign when you want to sell your investment to a party who isn't satisfied with "lease only" but insists on freehold.
Always (!) purchase through company structure.
Tustees and trusteeship
Professionals
Professionals run a Trusteeship Company and offer the service to hold the 51% majority of the client’s property holding company in trust for the required 20 years before the foreigner may own 100% of the property holding company. There is a well structured trusteeship agreement and a defined yearly trusteeship service fee.
If the foreigner wants to sell the property/company structure the trustee is forced by the trusteeship agreement to cooperate for a very low pre-defined fee.
Amateurs (and worse)
Total loss variety (90% of all horror stories): The crook acts as a straw man: the property is bought and registered in his name from the money of the foreigner. Contracts (often even bearing the certification stamp of the notary) “guarantee” the foreigner all rights on the property; unfortunately are these contracts worthless. The “friend” is the owner and can sell the property any time and keep the money. With a lease you could at least use the property for 99 years. You could also sell the remaining years of the lease without the owner's approval. However, you wants to buy 80 years of lease when the straw man and his family live in the house and there is no way to get them out?
Severe loss variety: The crook acts as the trustee in a company structure (1% of all investments): usually there are unprofessional or no trusteeship agreements which puts the crook” in the position to blackmail the investor in case the investor wants to sell.
Another big disadvantage: if the trustee dies his wife and children will inherit the property and the trusteeship agreement will be null and void. The investor has to start begging the heirs to … - well, that’s total loss.
Lease
Professionals
The lawyer will check the title as in case of purchase and only recommend a lease when the title is clear. However, in case of a walled property with a house on it that you only want to renovate and not construct additional buildings even a little weakness in the title might be acceptable. The lease contract will ensure that any new construction and also the demolition of the buildings are allowed. Under certain circumstances the lawyer will recommend to incorporate a Sri Lankan company (with you holding 100% shares and being sole director) as the lessee.
Amateurs
The amateur will recommend a lawyer who will draft a standard lease agreement that doesn't necessarily include certain paragraphs that might become vital for your project.
Who lives in the house or on the premises?
Professionals
All professionals will recommend that you don't let anybody live in your house or on your land without a contract. After 60 days without you complaint you can't just expel the person living in your house or having built a little hut on your land. So there usually is a contract of employment (not rental or lease) saying that it's part of the duties of the employee to stay in the house or on the premises and that he will vacate the premises at the end of the employment. Employer is the company structure owning the property, not the individual foreigner .
When Sri Lankan bosses employ people taking care of their houses they often have a time contract that will be renewed after an interruption of a particular length for legal reasons. In any case, the professional will know what to do in advance to avoid unwanted people living on your land. And one never knows who one day might become unwanted...
Amateurs
Foreigners owning holiday homes without rental ambitions often asks a local friend to live in the house while he is abroad. The local person or family moves out during the stay of the foreigner. Well, that's the theory. Mostly the foreign "owner" becomes a guest in his house after a while which he might or might not mind.
Larger scale investors aks the friend to become manager and move into the guest house without valid contracts.
In case of conflict it is almost impossible to force a person out of the house who was permitted to live in it for more than 60 consecutive days without a contract.
Crooks
Crooks intent to find a foreigner to build the house that they take care of and finally take over. This of course is possible only as long as there are not valid and enforcable contract defining the rights of the investor. And usually there are none, particularly if the crook has managed to pose as "best friend" or lover of the foreign investor
Possible loss
Even the best property title is worth nothing if one has a person living in the house who refuses to move out. Substantial "compensations" have to be paid to get rid of former friends that turned rogue squatters (very common story, large amount of money lost).
Make sure nobody lives in your house without contracts defining the end of cohabitation. Distinguish between friendship/love and business relationship.
Construction
Professionals
Professional lawyers will only recommend the purchase of a property where you can build what you have in mind.
Professional real estate agents will point out the limitations of construction by the beach, next to lakes/lagoons and rivers. And they know with whom to negotiate in what manner (because they have done so a dozen times before with the same people). You know what to expect.
Amateurs
Amateurs don't prevent you to purchase a property with a weak title, which might lead to unexpected police visits on day two of your construction. A claimant has asked the court to stop the construction until his claim is decided on in court. You have the choice to interrupt for years or buy the claimant out, hoping that no other claimant pop up the next day.
Amateurs are not familiar with the rules and the practise of the Coast Conservation authority nor do they know the laws dealing with building permits. They are convinced that their good connections will get everything sorted out and that they can buy permit and approvals. That might have been true 10 years ago, but nowadays everything goes much more by the book. You might built and even complete construction - but it's illegal.
Possible loss
Interruption of the construction (hassle); necessity to buy out claimants (expensive). Illegal construction which will be difficult to sell (loss on sale).
Construction consulting
Professionals
Architect and consultants (experienced in rental market etc.) might join to streamline the project for rental income, resale value and personal comfort of the investor.
The architect (or the like) consults the investor and gives a rough estimate.
Amateurs
The local amateur usually tries to talk the investor into a family oriented guest house with as many rooms as possible. He is convinced that this is the best business (and the only one he might even be able to handle).
Possible loss
Your good money builds a project that isn't the best way to generate profit - if it does at all. In addition such a project can later be sold only to local investors or very cheap to foreigners (loss on resale).
Construction costs
Professionals
The architect will make an exact description of all features of the construction. Then he collects quotations. The architect’s fee will be x% of the project costs or a flat fee. No hidden commissions will go to the architect.
Amateurs (and worse)
The amateur will not be able to precisely describe the features of the construction. He will come forward with a floor plan (from a local architect, designing for local life style) and ask a relative/friend in construction for a quotation. The price looks good, but finally the friend (98% of all cases) will a) not complete for that price and b) build in an extremely poor standard (often despite using some top notch materials). Often the benevolent amateur is cheated by crook constructors, even if they are members of his own family. Example: thinner doors, thinner rafters wider apart, thinner walls, less steel in concrete, meager foundation, limited wiring, no gutters, cheap tiles, wet instead of dried wood for doors and windows. Loss: even when construction stays within budget the value of the product if a quarter to a third below what the investor paid for.
Crook
The crook will make a “calculation” himself the “cut out the greedy contractor” – thus be the super-greedy contractor himself. When the money is finished but the construction only 45% completed the foreigner has to send more money or give up and become one of the not so few who are, with a broad smile, described as “he doesn’t come anymore.” Loss: due to greed plus incompetence construction will cost twice or triple as expected = 50 – 100% more than when working with professionals. Please add the 300% extra headache.
Possible loss
Lots of headache. The building will not meet the standards that the investor expects (cheap quality for rather cheap money). Big money will be lost. The investor might pay 15 - 50% into the pockets of people cheating him.
Supervising construction
Professionals
Either the architect supervises, or (or in addition to the architect) an independent supervisor (from far, far away with no local family connections!) is hired to permanently be on site. Fixed salary for checking and counting deliveries, checking concrete mixes, making payments. Hidden commissions would be considered a criminal offence.
Amateurs
The investor pays a salary for organizing and supervising construction and hopes that no further commissions are collected and that the amateuer spends all of his time on the construction site.
Crooks
The crook collects a commission on the purchase of building material (inflated prices, incomplete deliveries, fake bills, sand and gravel loads 15% lighter than average etc.)
The crook causes “evaporation” of building material (= 10% of all cement bags are delivered to the crook’s own home improvement site)
The crook collects a commission on contracting (>20% by contracting teams of masons, carpenters, electricians etc. who inflate their prices)
Possible loss
Substantial loss of material through theft. Substantial loss of money through commissions the crook collects. Low quality of the building by incompetent supervision (lowers resale value).
Management of villas or guest houses
Professionals
A reputed villa management service with more than 10 villas will be able to hire (decent employment contracts!), register, supervise/control, and fire staff. For double safety staff could be hired by the management firm and not your firm. It can also check or keep the books, communicate with your company secretary, accountant, tax advisor. Regular reporting by email with photos is common. Payment: management fee.
Amateurs
Even the well minded amateur usually is not qualified for running a business with employees.
The friend gets a regular salary as a "manager".
If the manager is a friend usually he is not employed with proper contract (“You don’t trust me any more?”) and registration with authorities (ETF and EPF). This can cause severe trouble later.
Crooks
The crook selects staff that is obedient to him, preferably family members low in the hierarchy who are obliged to obey. He will collect commission on staff member’s income. To prevent staff to inform the investor of irregularities the crooks threatens the staff to accuse them of theft or threats of violence.
Crooks sent out vacant rooms for cash. Particularly during off-season rooms maybe rented for prostitution.
Crooks sell food and drinks for cash. For that the crook sell his own Arrack instead of the “official”. And sells the sea food of the company for unregistered cash and declares 30% of sea food stock had to be given to employees before it got spoiled”. This method is also common among staff that’s not well supervised/controlled.
It’s extremely difficult for you to get staff fired if your “manager” doesn’t agree (or is too weak). If you attempt to fire you crooks “manager” you’ll probably get threads. Most popular: “You don’t own the place, I do, and I’ll kick you out.” “I can make sure you’ll never get a visa to Sri Lanka again because I’m well connected.” “I’ll accuse you of drug trafficking, child abuse, antique smuggling and illegal work to get you kicked out of the country for good.” “I can’t protect you then from the mob that might come in the night to kill you.”
The crook will not vacate the property because there is no property work contract forcing him to do so. I you let someone live 60 days in your house without a contract you can’t kick him out.
The cook will create mock problems (sometimes cooperating with officials he is related to, preferably involving documents in Sinhala writing that you are not allowed to copy or photograph). The crook makes the investor believe that he has a major issue now. The crook of course has a secret solution involving substantial bribes – which the investors gives him the money for. Only there was no problem and no need for the bribe that’s split between the crook and his official(ly looking) friend.
Possible loss
Headache, headache, headache. Feeling insecure and even threatened on your own property. Loss of income
