The most common and dangerous trap for investments in agricultural lands

The latest “trend” for Real Estate investments in Romania is definitely the purchase or concession of agricultural lands. Too many people, from experts (who know what they are doing) to amateurs who just “heard that it is a good business” are searching and buying this type of property. Some of them have a strategy, while the majority simply “goes with the flow”, like many others did in the past, for different market segments.

Next week I will talk to you about the advantages and disadvantages of such an investment, but today I would like to share with you the biggest and most often encountered trap that you might fall into while trying to invest in agricultural lands:

The most common and dangerous trap of all: “I will collect for you thousands of hectares”

There are too many people out there who keep on saying the same story: “We have about 2.000 (or 5.000 or 10.000, it doesn’t matter) hectares in this area, which we can compact in 3 – 6 months”. In order to make it look more attractive, they usually add the “cherry on top”: “You will not pay the price that others charge, when you buy the property 100% compacted, with all the profits going to the one who collected them before. You will pay much less and you will keep all these profits for yourself”.

If there are 100 people who lost their money while trying to invest in agricultural lands in Romania, about 80% of them lost their cash because they believed this story. But does this story “ring true”? Let us start from the beginning. (This post might be more interesting ofor the foreigners, but I also saw many Romanians losing money in the same way)

The status of agricultural lands in Romania after the communist regime

Romania used to be a world leader in agriculture and animal breeding. But after the communist regime, the leadership back then decided to sell off all the major companies that belonged to the State. Some of the properties (or companies with properties) were kept by the State and in the following years they were rented or sold, while many lands were simply given to people. So people without expertise were given lands, but they had no means to cultivate them. The same happened with animal breeding, with “not positive” results.

Lands in a “parcel”, a specific area of a few hundred hectares

So we ended up having hundreds of thousands of owners (if not millions) who own a small part of agricultural land, usually from 0,5 – 1,5 hectare (5.000 – 15.000 sq.m.). These people do not have their papers done, they just have a proof of ownership, let us call it property title. This is usually not registered with the cadastral authorities. Do they know which is their property? Probably not, as they only know that it is located “in this parcel”. What is a “parcel”? It is a specific area of a few hundred hectares. Every area is split into many “parcels”. So you have one hectare at “parcel” 34. This means that if the whole “parcel” is 300 hectare, you are one of the 300 owners and one day you will specify the exact limits of your plot.

Who decides where each property is located? The mayor used to do that, moving properties right or left (inside the “parcel”), but a law some years ago made this procedure more difficult. So if you want to buy these 300 hectare (for example), you have to assign this task to a local and he will bring you the property compacted. You wish…

A procedure I never trusted (would you?)

So what is the proposal you receive by these intermediary people “who control lands”?

·         “You will sign a pre contract”

·         “You will pay an advance of 20%” (this has also the version of 20% advance in an Escrow account).

·         “We will go to the area where we can collect lands and we will speak with the mayor and the locals who are in charge there. We have our own people for cadastral documents, measurements and notary of course”.

·         “We will sign pre-contracts with all the owners”

·         “We will assign the experts to create cadastral and topographical plans, measurements etc”

·         “In a few months everything will be ready and you will come to sign the final contracts” (this has also the version of “and 3 months later, we will start delivering to you X hectare per month”).

So, to sum up: “You give them your money in order to make pre contracts with the owners, they make the papers and then they deliver to you the plot compacted”.

Yeah and I am Stefan cel Mare, preparing to go fight the Turks. Hai!

A “slightly different” reality

There is always a 5 – 10% possibility if finding extremely serious and capable people who will be able to deliver to you what they promise, even with minor (or major) delays.

But usually reality is different:

·         Some of the owners are people who don’t even know how to write their name and they sign with a cross.

·         Many of them receive the advance payment (or all the money) and spend it in a few hours or days.

·         Then some of them declare that they were tricked and sues might start.

·         Another scenario is that the “important locals” constantly need more money, for various excuses. And you always think “I invested 100 Euro, isn’t it a pity to lose it for just 3 – 5 more?” The cadastral plans delay more than they told you, everything lasts much more and (of course) is more expensive.

·         Usually you end up summing 40 – 60% of the surface you were promised. Ok, you can accept a compact grade of 75 – 90% (or at least some investors accept it), but what can you really do with a grade of 40 – 60%? What is the added value you have? (0 or zero or nothing, I would say).

·         If you make the mistake to change your team of people and assign others to resolve the mess, you usually have even more problems, as they are not “friends” with the locals and they face many new difficulties.

·         I know more than 20 investors who are in courts for years, with unsolvable issues like the above mentioned ones, or any other possible version you can imagine.

What is the solution? Buy compact. It is more expensive, but it is also 100% safe

I personally advise my clients to buy compact lands. The “lands to be compacted” are a problem that only a local might solve. For example, a Greek who moved to Braila, managed to collect some thousands of hectares during a 4 – 6 years time frame, buying whatever was available and trying to compact his lands afterwards. How easy is this for a typical investor who just wants to invest without headaches? Impossible…

This is why I prefer lands with clear papers. 100% compacted, or even down to 70% grade (depending on each person’s criteria, location, the distance between properties etc). I want documents, things in order and no surprises. Yes, this is more expensive. But in 7,5 years in Romania I am proud to tell you that there is no one to blame me for having lost his money in stories like this. Compact properties have added value and can easily be bought and sold. Other type of properties are always in need of investors with “special skills of understanding and patience”.

What is your opinion?

PS. There are many more traps, but I think that you got an idea. For more, you need to ask me in person.

Next Monday, 03.10.2011:

Investing in agricultural lands: 5 advantages and 5 disadvantages