Poor understanding of rights of possession (ROP) on the part of foreign investors is the biggest obstacle to investing profitably in ROP as the main risks are well understood and easily resolved.
- The biggest obstacle to consistently purchasing and profiting from ROP land isn’t the unusual system, it’s the poor grasp of the system by foreign investors.
- Historically, challenges to ROP claims come from either a family member of the seller or from a neighbor of the seller.
- The way to resolve this problem is to go into the community and get signed affidavits from neighbors and family stating that the land in question is solely possessed by the seller.
Warren Buffett famously described the junk bond market as weeds priced as flowers. He warned anyone who would listen to stay away. In spite of the risks, Buffett found junk bonds that he actually liked. He never wavered from his opposition to junk bonds. But in a perilous market, he was able to find opportunity that justified the risks.
Purchasing rights of possession (ROP or derechos de posesorios) is as risky as any random junk bond. Unprepared and uneducated investors can get seriously burned. But an informed investigator can consistentlypurchase properties in prime locations safely and profitably.
Who Owns the Land
Uncertainty over who really possesses the land is the primary source of risk when investing in rights of possession. Rights of possession can be registered with a number of different authorities, but there is no centralized database listing all ROPs and most ROP land isn’t registered at all.
As a result of this confusing situation, the person selling the ROP might not even have the right to sell the claim.
ROP is designed to protect the rights of communities that have been using the land for generations without going through the expensive and contentious process of formally titling land.
Imagine a family that’s lived and worked the land for generations. As their needs grew, they expanded their farming to include unused adjacent land. They didn’t buy the new land because nobody had the authority to sell it. The choice between feeding your family and starving in bureaucracy is an easy one to make.
The community grew with the needs of the people and the people knew that the laws governing ROP protected their community and the equity that they built in to it.
Now you have several generations, including cousins, aunts and uncles, all working the land. They all live close by. They help each other and share when necessary. Who then owns the pasture where everyone’s cattle grazes? And who gets to sell it?
This simple, practical arrangement is at the root of how investors get into unwanted trouble. Historically, challenges to ROP claims come from either a family member of the seller or from a neighbor of the seller. Maybe one brother is in financial difficulties and needs money now, but his siblings still need the land. Maybe the family is moving to the city, but the neighbor still needs the pasture they share.
Sometimes the problems are a result of innocent mistakes or sometimes they are the result of deliberate attempts at fraud. Either way, proper investigation will unearth most problems before any purchase and protect the investment from the problems it can’t find beforehand.
Mitigating the Risks
The way to resolve this problem is to go into the community and get signed affidavits from neighbors and family stating that the land in question is solely possessed by the seller. Doing this will uncover legitimate competing claims and attempts at fraud on the part of the seller and it will protect the investment in court.
With a good pre-purchase contract that includes a due diligence period where the purchaser’s capital is not at risk, the seller should be an important ally in getting signed affidavits.
If the seller isn’t trying to commit fraud, then most sellers are happy to connect purchasers with the community to facilitate the sale.
If the seller is resistant, then that’s the first sign that something may be amiss. Even without help from the seller, attempts at fraud in these tight communities are quickly revealed through this sort of investigation.
The affidavits also provide protection after the purchase. If some long lost uncle returns and thinks he can make a quick buck, he will have a difficult time making that claim because his whole family has sworn that the original seller had sole rights to the land.
Then, after consulting with the community, it’s time to check for registered claims with various authorities and finally purchase the land if nothing is amiss.
The biggest obstacle to consistently purchasing and profiting from ROP land isn’t the unusual system, it’s the poor grasp of the system by foreign investors.
Investing in ROP is no different than any other sort of investment. Once the understanding is there and it can be done safely and profitably.