Untangling Cuba’s Real Estate Market
As we continue our series on Cuba’s new real estate marketplace, it becomes clear how difficult it is for the bureaucracy that is Cuba to implement change. The passage of the November, 2011, law permitting Cubans to buy and sell residential real estate has liberated Cubans homeowners to a degree, confused international buyers and sent early ripples through the economy. One element of the new real estate market is that it demonstrates freedom comes at a price.
More than three years later, the law authorizing the creation of a real estate marketplace is mired down with obstacles that give interested parties a good look into the confusing, laborious bureaucracy that Fidel Castro dedicated his life to install. Trying to separate government and the Cuban people from Fidel’s control network is no easy task and one that often leaves all parties shaking their heads.
Yet, for those dedicated souls that take the time to ask the questions, get the answers and make brave decisions, good things can happen. Many international buyers are waiting in the wings for straight answers to straight questions but they may not come immediately. Cuba’s real estate marketplace is burdened with inconsistencies.
One of the best reports depicting the law and some of the obstacles was published in April, 2014 by the Brookings Institute which dubbed passage of the law as, “among the most impactful of the reforms undertaken in Cuba since Raul Castro became President in 2008.”
Those who have the patience will one day realize that Cuba’s real estate has vast potential. At a glance, it appears many, but not all Cubans, seek to capitalize on their new title rights but recognition of some of prevailing market conditions including confusing legalities, punitive taxes due upon sale and inconsistent property valuations have the heads of most buyers and potential sellers spinning.
One of the biggest obstacles impacting the market is the absence of a mortgage industry. This makes it especially challenging for Cubans whose average income is in the vicinity of $20 per month to purchase property. If the buyer is fortunate enough to own a home, he or she must sell that home before closing on the new house. Cubans are only permitted to own one primary residence and one vacation home, a luxury only a few buyers can manage.
For this type buyer, they must pay 4 percent tax on the sale of their property and then another 4 percent on the purchase of the new residence. The asset transfer tax may pad government coiffures but is proving bothersome for buyers and sellers, who are finding interesting ways to avoid the tax.
Government is so anxious to see properties sell and collect their tax, that they have taken to announcing residential listings on television and radio along with the addresses and contact information of homes in various areas that are new to the marketplace. This is a free service because it is a “public service.”
The lack of a proven real estate industry, absence of a central database that records selling prices and general confusion about the legality of real estate agents and brokers and the legality of commissions weighs heavily on the market. The Brookings report indicates that many Cubans have their property for sale but at unrealistic prices.
In the first ten months of 2013, 659,968 residential properties were registered in the country. Only about 33 percent of those registrations were connected to a housing transaction. The remainder was registered to pave the way for a transaction that may or may not occur in the future.
Of the 33 percent that were certified for transaction purposes, it is difficult to ascertain how many are related to actual sales. Cubans have other options, such as rent, donations and swaps that help them avoid paying the asset transfer tax.
Pricing is a bit of a mystery. Cuba has an assessment office where values are believed to be greatly understated. Yet, this is often the figure that serves as a launching price to which Cubans usually make upwards adjustments to their asking price. The adjustment to a Cuban buyer is usually reasonable and far less than the homeowner would ask from a Cuban buyer who has foreign backing.
Government encourages residents to reach out to family members who have left the country to provide financing for provide necessary funding. The Castro government is counting on ex-patriates to support family members and bring money back to the island.
Cuba’s previous efforts at privatizing real estate was burdened by a statue known as derecho de tanteo, the government’s right of first refusal on all real estate. The 2011 real estate law eliminated this policy for Cubans purchasing Cuban residential properties.
For international buyers, the right of first refusal still exists. The only internationals who can legally purchase property in Cuba must declare Cuba as their primary residence. However, there is apparently legislation in progress that would permit foreigners to acquire properties at sites developed by international investors. This would include the 1,000 homes to be constructed at the Carbonera Golf Course site in East Havana.
If this law passes, it would serve two purposes: attract internationals to the island and help the developer by allowing qualified buyers into a limited market. Not many Cubans can afford the Carbonera homes, which would be ripe fruit for internationals wishing to live in Cuba and play on the largest golf course in the country.
Then, there are questions about the legality of the real estate profession, real estate lawyers and commissions. Earlier this year, Raul Castro told government that real estate agents should be recognized as participating in a legal entrepreneurial pursuit. Yet, many agents in the country have not received the message and still operate in the dark. At the same time, commissions are considered illegal. This leaves the agent at the mercy of the seller or buyer, whoever agrees to pay the agent. As you might expect, in Cuba’s real estate market, everything is negotiable except the government’s tax.