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Buying property in the Philippines: scams and pitfalls

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Everything you need to know is included in our The Philippines Property Pack

The Philippines' affordability and growth potential make it an appealing destination for foreign investors in real estate.

For those who aren't familiar with the area, getting into the property market there can be quite a challenge. You may encounter unexpected issues and pitfalls, so it's essential to stay vigilant.

Our community of property purchasers, in conjunction with our nearby experts, has identified a multitude of problems. We've listed them all in our Philippines Property Pack.

We’re going to take a closer look at a few of these in this article.

Is it safe or risky to invest in real estate in the Philippines?

It's undeniable that The Philippines has a strong stance on land ownership.

Foreigners are categorically barred from owning land. This regulation stems from historical invasions and colonialism, which has shaped the country's protective attitude towards its land.

But, interestingly, this hasn’t deterred foreign investments. Many navigate this by utilizing the Condominium Act: while foreigners can't own land, they can own the buildings upon them. Thus, condominiums, especially in cities like Cebu and Davao, have seen surging interests.

Another tactic has been establishing corporations with a majority of Filipino shareholders and buying property under the corporation’s name.

The risks in the Filipino property market aren’t just theoretical. Take the case in Tagaytay, a popular highland retreat.

Several buyers were lured by a developer promising prime properties with Taal Volcano views. Unfortunately, many found out too late that their titles were dubious, and some properties were on land earmarked for agrarian reform.

Such incidents underscore the importance of proper verification.

While the government has tried to instill confidence through institutions like the Registry of Deeds, the on-ground scenario can differ.

The Philippines has its challenges with bureaucratic inefficiency and red tape. It's common to hear of property transactions delayed because of pending paperwork or sudden changes in local regulations.

The Philippines, unfortunately, doesn’t have the swiftest of judicial processes. A land dispute in Boracay is illustrative of this. A beachfront property, claimed by multiple parties, took years in court before a resolution was in sight, and by that time, the property’s value and usability had been affected.

Given these intricacies, due diligence isn't just a buzzword—it's vital. Beyond just working with reputed real estate agents, foreigners would benefit from local partnerships or hiring local experts who understand the terrains of Filipino property law and local customs.

The government's efforts to spur growth, especially in tourism, sometimes come with unexpected consequences.

For instance, the rehabilitation efforts in Boracay in 2018 saw the island being closed off to tourists. Property owners, especially those who banked on rental income from tourists, found themselves in a lurch. This showcases the potential volatility and the need for foresight.

The experiences of foreigners who've bought property in The Philippines are a mixed bag. While some laud the returns on investment, especially in booming areas like Bonifacio Global City, others caution about the intricacies of navigating local norms.

For instance, 'right of way' issues, where properties become inaccessible because neighbouring lands are privately owned, can be a real challenge.

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Potential real estate buying mistakes in the Philippines

The complexities of the "Land Classification Map"

When buying residential property in the Philippines, a common mistake that is often overlooked, especially by foreigners, is neglecting to verify the property's classification in the "Land Classification Map" maintained by the Department of Environment and Natural Resources (DENR).

This step is crucial because in the Philippines, lands are classified into either Alienable and Disposable (A&D) land or Forestland/Protected areas.

A&D lands are those which have been officially declared by the government as available for residential, agricultural, or commercial use.

On the other hand, Forestland, including protected areas, are intended for preservation and cannot be owned by private individuals, even if they have a title. The confusion often arises because some properties might be sold with titles, but if they fall under Forestland or protected areas, those titles are essentially void.

This mistake is not uncommon, as many buyers, particularly those not familiar with local regulations, assume that a property with a title is automatically eligible for residential development.

However, you should diligently verify the land classification to ensure that the property you're interested in is not in a protected area.

To do this, you can request a certification from the Community Environment and Natural Resources Office (CENRO) or the Provincial Environment and Natural Resources Office (PENRO).

This step is crucial to avoid legal complications or the possibility of losing your investment in the future.

The risks related to the unpaid real estate taxes

Another specific pitfall when buying residential property in the Philippines is overlooking the importance of verifying the property's tax declarations and arrears.

In the Philippines, it's not uncommon for properties to have unpaid real estate taxes, which can accumulate over years. This issue is particularly prevalent in the case of inherited properties or those that have been under a single ownership for a long period.

As a buyer, you should be aware that unpaid real estate taxes can become a significant liability.

In the Philippines, the responsibility for these arrears often transfers to the new owner upon purchase. This means that if you buy a property without checking for outstanding tax liabilities, you might end up being responsible for a substantial amount of unpaid taxes.

To avoid this, you should request a "Tax Declaration" document for the property from the seller and verify this information with the local government's Treasurer's Office. This document provides details about the property's tax history and any outstanding liabilities.

Ensuring that all taxes are paid up to date before finalizing the purchase is crucial to avoid unexpected financial burdens.

This pitfall is somewhat unique to the Philippines due to the way real estate transactions are handled and the common occurrence of long-standing, unpaid property taxes.

It highlights the necessity of thorough due diligence in property transactions in the Philippines, especially for foreign investors who might not be familiar with these local nuances.

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The issue of "Right of Way"

Another unique pitfall in the Philippines when buying residential property is the issue of "Right of Way".

In the Philippines, it's not uncommon for properties, especially in rural or semi-rural areas, to lack a legal access road or right of way. This means that while you may own a property, accessing it could involve crossing someone else's land.

The absence of a formal right of way can lead to legal disputes and difficulties in accessing your property.

In the Philippine context, this issue often arises due to the informal subdivision of larger ancestral lands over generations, leading to properties being landlocked without direct access to a public road.

If you're buying a property, especially outside of well-developed urban areas, you should carefully check if the property has a legal right of way.

If not, you may need to negotiate with neighboring landowners for access or face potential legal battles to establish this right.

To avoid this pitfall, you should examine the property's title and survey plans, which should indicate access routes. In cases where there's no established right of way, it's advisable to seek legal counsel to understand your options and potential solutions

This issue is particularly relevant in the Philippines due to its complex land ownership patterns and the historical subdivision of land.

As a foreigner, being aware of this unique aspect is essential to ensure that your property investment doesn't become entangled in access disputes.

The concept of "Illegal Subdivisions"

A notable pitfall in the Philippines when purchasing residential property is the issue of "Illegal Subdivisions."

In the Philippines, there is a prevalence of subdivisions or property developments that are not compliant with government regulations. These illegal subdivisions are often developed without the necessary permits or clearances from the local government or the Housing and Land Use Regulatory Board (HLURB).

Buying property in an illegal subdivision can lead to various legal and logistical problems. For instance, the local government may not provide basic services such as water, electricity, or road access.

More seriously, there's always the risk of future demolition or legal action against the property owners within these subdivisions.

To avoid this pitfall, you must ensure that the subdivision where you're buying a property is duly registered and has all the necessary permits and clearances. You can verify this by checking with the HLURB and the local government unit. They should be able to provide information about the legality and compliance status of the subdivision.

This issue is particularly pronounced in the Philippines due to the rapid and often unregulated growth of residential areas, especially around major cities.

As a foreigner, you may not be aware of these nuances, making it crucial to conduct thorough due diligence and seek advice from reliable real estate agents or legal advisors familiar with Philippine real estate laws and regulations.

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"Heirs' Consent" and its issues

A less commonly known but significant pitfall when buying residential property in the Philippines is the issue of "Heirs' Consent" in properties that are part of an inheritance.

In the Philippines, inheritance laws dictate that all legal heirs have a stake in a deceased person's property. This can be particularly complicated in cases where the property was not formally divided among the heirs or there was no will.

The pitfall here is that you might negotiate and pay for a property, thinking you're dealing with the sole owner, only to find out later that there are other heirs who have a legal claim to the property.

This situation can lead to legal disputes and potentially invalidate your purchase if it turns out that not all heirs consented to the sale.

To avoid this, you should verify the ownership history of the property and ensure that all potential heirs have given their consent to the sale. This might involve checking the family background of the seller and ensuring that a proper extrajudicial settlement of the estate, if applicable, has been completed and duly registered.

This issue is particularly relevant in the Philippines due to the common practice of informal property transfers and the complexities of Filipino family structures and inheritance customs.

The issue of "Restrictions on Foreign Ownership"

Another specific pitfall in buying residential property in the Philippines, especially for foreigners, is the issue of "Restrictions on Foreign Ownership."

In the Philippines, the law restricts the ownership of land by foreigners. According to the Philippine Constitution and the Public Land Act, foreigners are generally prohibited from owning land, although there are some exceptions.

Foreigners can legally own a condominium unit or an apartment in a building, provided that the total foreign ownership in the building does not exceed 40%.

However, for land, the restrictions are more stringent. A common misconception among foreign buyers is that they can own land in the Philippines through certain arrangements, like setting up a corporation or through a Filipino spouse or partner.

While there are legal structures involving corporations that may allow for some level of control over land, outright ownership is not possible for a foreign individual.

The pitfall lies in entering into informal or legally ambiguous arrangements to circumvent these restrictions. Such arrangements can include buying land in the name of a Filipino citizen (like a spouse or a friend) or forming a corporation where the foreigner appears to have less than the actual controlling interest.

These practices can lead to legal complications and the potential loss of investment, as the arrangement may be challenged or deemed invalid under Philippine law.

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"Lahar Flow" and its disasters

A more specific pitfall in the Philippines is purchasing property in areas with a high risk of "Lahar Flow" without proper awareness.

Lahar, a destructive mudflow on the slopes of a volcano, is a significant hazard in regions near active volcanoes like Mount Pinatubo and Mayon Volcano. These areas, while scenic, pose a unique and severe risk due to potential volcanic activity.

The mistake often made, particularly by foreigners, is underestimating the risk or being unaware of it when buying property in these regions.

Properties in areas like Zambales, Pampanga, and Albay, which are near active volcanoes, can be at risk of lahar flow, especially during heavy rainfalls or volcanic activity.

To avoid this pitfall, you should thoroughly investigate the geological history and risks associated with the area. This includes consulting with local government units, the Philippine Institute of Volcanology and Seismology (PHIVOLCS), and possibly seeking advice from geologists.

It's also advisable to review historical data on volcanic activities and their impacts on the surrounding areas.

Moreover, understanding the local infrastructure's capacity to deal with such natural disasters is crucial. Some areas may have protective measures and evacuation plans in place, while others might be less prepared.

This risk is very specific to the Philippines due to its location in the Pacific Ring of Fire, making it prone to volcanic activities.

"Informal Settlers" or squatters

In the Philippines, a unique and often overlooked pitfall when buying residential property is the issue of "Informal Settlers" or squatters.

This situation occurs when individuals or families occupy and establish homes on land they do not own, without the legal permission of the landowner. This issue is particularly prevalent in urban and suburban areas in the Philippines.

The challenge arises when you, as a prospective buyer, find a property that appears suitable but later discover it is occupied by informal settlers. Removing these settlers can be a complex, time-consuming, and sensitive process, often involving legal proceedings and negotiations.

In some cases, the law requires the landowner to provide adequate relocation assistance to the settlers, which can add to the cost and complexity of acquiring the property.

To navigate this pitfall, it's essential to conduct a thorough on-site inspection of the property and its surroundings. You should also inquire with the local barangay (village) office or neighbors about the history of the property and any issues with informal settlers.

Furthermore, checking with the local government units for any past or ongoing disputes related to the property is advisable.

This issue is somewhat unique to the Philippines due to the combination of rapid urbanization, poverty, and the lack of affordable housing, which has led to the proliferation of informal settlements.

As a foreign buyer, understanding this aspect of Philippine real estate is crucial to avoid legal and social complications that could arise from dealing with properties affected by informal settlers.

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The risk potential of "Title Frauds"

A specific and critical pitfall to be aware of when buying residential property in the Philippines is the potential for "Title Frauds."

In the Philippines, there have been instances where the same piece of land is sold to multiple buyers, or the land sold is under a falsified title. This issue is particularly challenging due to the complexity of the land title system in the Philippines and the prevalence of unofficial and sometimes fraudulent transactions.

Title fraud in the Philippines often involves forged documents, including fake land titles (known as "TCT" or Transfer Certificate of Title) or altered land survey boundaries.

Sometimes, unscrupulous individuals present themselves as the rightful owners of a property, using fabricated documents to substantiate their claims. As a buyer, especially a foreigner who might not be familiar with the local systems, you could fall victim to such scams, resulting in significant financial loss and legal troubles.

To avoid this pitfall, it's essential to conduct a thorough due diligence process.

This includes verifying the authenticity of the land title with the Registry of Deeds, checking the seller's identity and legal capacity to sell, and confirming the property's history and status with local government units.

It's also advisable to consult with a reputable real estate lawyer or a trusted real estate agency.

Additionally, you should be wary of deals that seem too good to be true, such as properties offered at significantly lower prices than the market rate. These can often be red flags indicating potential fraud.

"Ancestral Lands" and its risks

A more specific pitfall in the Philippines when purchasing residential property is the issue of "Ancestral Lands," particularly in areas with significant indigenous populations.

Ancestral lands are areas recognized by the Philippine government as the ancestral domain of indigenous peoples (IPs), and they have special legal protections.

The challenge with ancestral lands is that they cannot be sold, transferred, or leased to non-members of the indigenous communities by law. However, there have been instances where ancestral lands have been offered for sale to unsuspecting buyers, including foreigners, without disclosing the land's protected status.

Such transactions are not only illegal but can also lead to serious legal and social conflicts.

To avoid this pitfall, it's crucial to research the location of the property you're interested in. If it's in or near areas known for indigenous populations, such as parts of Mindanao, Cordillera Administrative Region, and some provinces in Luzon and Visayas, extra caution is needed.

You should verify the status of the land through local government units, the National Commission on Indigenous Peoples (NCIP), or the Department of Environment and Natural Resources (DENR).

This issue is unique to the Philippines due to the country's recognition and protection of indigenous peoples' rights, particularly concerning their ancestral domains.

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