Rights of possession (ROP) has some important advantages and one big disadvantage compared to fully titled property.
Article Highlights
- The main reason to buy ROP land is that it is the piece of land that best fits the business plan.
- The biggest disadvantage ROP land has versus titled property is that it can’t be used to secure financing.
Purchasing ROP can be frustrating. The idea of possessing land instead of owning it is so foreign to most North Americans that many just give up and look elsewhere. But, once they understand the risks of ROP, there are just a few basic advantages and disadvantages that differentiate ROP from titled property.
Financing and ROP Land
The biggest disadvantage ROP land has versus titled property is that, since it isn’t titled, it can’t be used to secure financing.
It’s very important to be aware of this before you purchase because you need to use the property to maintain the ROP claim and one of the most common ways to use ROP property is to build on it. Obviously the property can’t be used to finance the infrastructure, so funds need to be in place to buy and build beforehand if you plan on building.
Outside the Maritime Zone (typically 200 meters from high tide), it is possible to title ROP land. This usually takes around 7-9 months. Once titled, the land can then be used for financing normally, so a good rule of thumb is a year’s worth of maintenance expenses need to be budgeted in eligible areas before financing options become available.
Tax Exemption
It may not be possible to use an ROP claim for financing because ROP is not technically owned, but, since it isn’t owned, it’s also not subject to property tax.
Property tax of about 2% is paid on titled land. The savings can be significant particularly on larger properties where other expenses scale better.
Building Codes and By-Laws
Some people choose to keep their property as ROP even when they could easily title the land because ROP is not governed by local building codes.
Local building codes cover everything from the minimum lot size to the width of any road on the property to the type of drainage. [/column] [column width=”33%” padding=”5%”]
If you plan on titling the property, it is best to build to code. If you don’t build to code, local authorities may slow down the titling process or force you to get everything to code anyway. Small transgressions are often allowed to pass, but exactly what depends entirely on the local authorities.
Even where title isn’t desired, it’s best to build as close to code as possible. Milton Friedman once said, “hell hath no fury like a bureaucrat scorned.” Flaunting local regulations reduces your options and invites petty retribution from officials you might need to deal with in the future.
Obvious contempt for building codes is asking for trouble. Small transgressions or following the spirit, if not the letter, of the code may be alright, but it depends entirely on local officials. Following building codes is definitely the safest and keeps the titling option open.
Availability
The biggest advantage of ROP over titled land is availability. Simply put, most of the best land, including 90% of all beachfront property, is ROP.
There’s no reason for an investor to compromise a business plan because they’re scared of ROP. If the right piece of land happens to be ROP, then take the time to learn about ROP and take the necessary steps to purchase the property safely. Then let the business proceed according to plan.
And there’s no reason for someone to automatically rule out a location for their dream home simply because it’s on ROP land. They need to consider whether they are willing to learn about ROP and then whether they are willing to take the necessary steps to maintain an ROP claim before making the decision.
Why Buy ROP?
If the land is needed for financing, then ROP is obviously not an option. Tax advantages are nice, but only get significant on larger properties. Fewer building regulations are also nice, but ignoring regulations reduces options and invites conflict.
The main reason to buy ROP land is that it is the piece of land that best fits the business plan.
NEXT: Preserving ROP Claims
About Park
Park Wilson, co-founder of Emerging Terrains, has been living and actively investing in the Latin American real estate markets since 2007. His boots-on-the-ground approach to scouting and choosing properties has led to the purchase of more than 6 miles of Latin American coastline. To reach Park, please e-mail him at info@emergingterrains.com Read More
