Sun, sea, sand and a whole lot of trouble. For some Irish investors, owning a residential foreign property has turned into a nightmare scenario. Tales abound of misleading promotional material, slumping market values, and legal battles.

Dublin-based solicitor Tom McGrath has seen it all.

"The fundamental problem is that this is an unregulated business," he says. "There's been a lot of people selling stuff who haven't been completely upfront."

Mr McGrath says he generally has two types of clients that come to him for help in relation to foreign property acquisitions: those seeking advice before they sign on the bottom line, and those who are "trying to pick up the pieces" of a contract gone wrong.

And the horror stories are almost enough to make you leave your money languishing in a post office account.

Mr McGrath recalls one woman who signed up for an apartment in Romania that she had paid €100,000 for, only to later find it was occupied by a local family. The builder subsequently agreed to give her an alternative property in the same development.

Another Irish investor acquired a property in eastern Europe and was shortly afterwards served an improvement notice by the local government. It added thousands of euro in costs to the overall purchase price.

"I find that the issues particularly arise in Romania and Bulgaria," says Mr McGrath. "There's corruption, certainly, but there's also an issue of some builders being asked for payment in cash. That saves them tax, but it's illegal of course and can cause thebuyer immense problems in the long run."

But these tales of woe aside, Mr McGrath acknowledges that he has "hundreds" of clients who have bought foreign property and who are very happy with the returns they've yielded.

As countries such as Poland, Romania, Slovakia, Hungary and others joined the European Union, there was a rush of capital to their cities. And, in many cases, the returns have been impressive.

Surge

A recent survey by international property firm Frank Knight showed that house prices in some eastern European countries continue to surge.

In Bulgaria, those values rose by almost 31pc in the third quarter of this year, compared to the same period a year ago, while in Riga, the capital of Latvia, prices rose more than 10pc in the latest quarter of 2007 versus the same quarter in 2006.

Such statistics can make it a mouth-watering proposition to buy into foreign bricks and mortar.

But there are also signs that some markets are cooling. Vilnius and Tallinn, the respective capitals of Lithuania and Estonia, are among those cities where the brakes are being put on property appreciation.

Frank Knight says that in the third quarter of this year, residential property prices in Vilnius rose 5.2pc year-on-year, compared to a 20.3pc rise in the same period last year. In Tallinn, they were up 5.2pc in the third quarter of 2007, compared to a 16pc jump in the same period last year.

"There's a bit of uncertainty amongst Irish investors when they look at eastern Europe now," explains Paul Daly of Savill HOK's international new homes division.

"Rental yields are now that bit lower in some markets, and we're finding that there's increasing interest in US acquisitions due to the weakened dollar. Some cities such as Boston and Chicago have been experiencing healthy property appreciation."

Daly claims that residential property prices in the two cities have grown an annual average of between 8pc and 12pc for the past four or five years.

Even as the credit crisis continues to bite, US cities continue to draw Irish buyers. If the dollar was to appreciate against the euro, Irish investors could generate further returns from US acquisitions, but it's a big if, and relying on currency fluctuations to generate a return is certainly not a wise modus operandi for the average investor.

Magnet

For the past couple of years, New York has been a magnet for Irish investment capital, with lenders such as Anglo Irish Bank and Bank of Ireland doling out mortgages to luminaries of Irish society.

Among the buyers in the city have been Domhnal Slattery, of Claret Capital, Eimear Mulhern, of Goffs, her brother, Ciaran Haughey, Gerry McCaughey, of Century Homes, as well as a number of auctioneers and other business people from around the country.

Indeed, this year alone, Anglo Irish Bank has dished out investment mortgages of at least $43m (€30m) to Irish people buying Manhattan apartments, while it has agreed well in excess of €1bn worth of mortgages in New York City during the past 12 months, according to municipal records.

Irish investors have been looking afield, too, to cities such as Austin, Texas, Las Vegas and Nevada.

"You have volatility in some states such as Florida, but others are proving more reliable," claims Mr Daly.

But it's continental Europe where most Irish money has been targeted, and new-found wealth has had a capacity to create new-found problems.

Darren Costello, managing director of propertyinvestments.ie, maintains there is a lot of scaremongering, but acknowledges that many investors have jumped in without exercising proper due diligence on properties they intend to buy.

"Also, some investors are sometimes blinded by the returns developers advertise," he says.

"A developer might sell a second phase for 40pc more than the first, and to investors it looks like the property prices have been soaring. The reality is, though, that those prices may not reflect the true market value."

Mr Costello points out that in Ireland or the UK, investors can examine property records going back decades to see what the real price appreciation has been, but for most eastern European countries, having only emerged from communism less than two decades ago, that isn't a realistic option.

"Investors have to look at property as at least a five-year play. They shouldn't be thinking they can flip it quickly after buying," he adds.

"The biggest fear is obviously that an investment property will decrease in value, but this is just like stocks -- if the price does slump, then it's probably the worst time to sell. If a property is still renting, it's likely the market price will recover in the longer term."

Mr Costello says that even in mature markets, difficulties can arise where people haven't done their homework.

"I know of people who've bought in France and haven't been able to rent their properties since last January."

He also says that good investment opportunities remain in the right areas. Duncan Lyster, divisional director with Lisney, agrees, but encourages investors to look at property from a micro level.

"Investors have to consider their potential investments a lot more carefully now," he says.

"That said, while property prices may be slipping generally in the UK, for instance, there are some areas within it where they're rising. You have to look at any market on a micro level to find the value."

Regional investments, improvements in local infrastructure and other factors can cause property prices to rise in one area, even though they may be stagnant or depreciating elsewhere.

Mr Lyster adds that there does appear to be an investor shift towards more core markets such as London and Paris, with a perception that they're a safer bet in uncertain times. Germany, especially Berlin, has also been heavily targeted by Irish buyers, on both the residential and commercial front.

"Germany has proved attractive and there was a notion that top quality property could be bought at 8pc or 9pc yields.

"But Germany is a mature market, and the good quality property certainly is not cheap."

Investors should also be cognisant of various tax issues that can impact them. Financial services group IFG estimates that Irish people own as many as 100,000 properties in Spain, and that some of them may be in for a nasty surprise.

"All owners of Spanish property are legally obliged to pay local taxes or rates," explains John Connolly, a research analyst with IFG.

"They are expected to pay wealth tax on a villa's rental value -- even if it is not rented out and even if they are not the full-time occupant of the property."

Failure to file returns -- and it has to be done by the end of December -- could have fairly dire consequences, claims Mr Connolly.

"Offenders can be investigated for the last four years of tax returns," he explains."The authorities can penalise you up to 300pc of the liability, with an additional 20pc administration charge, plus statutory interest on top of that."

Mr Connolly says that on a €300,000 property, tax could amount to €1,000, depending on its location. That means the owner could be liable for up to €13,000 in penalties should they fail to make a timely return and are subsequently successfully prosecuted.

The reality is, though, that for thousands of Irish investors, the love affair with foreign property has been altogether agreeable.

"It's clear, however, that as opportunities for rapid capital growth begin to evaporate in many markets, a more cautious investment stance is required.

"Don't be afraid to ask the vendor questions," counsels Tom McGrath. "And look for long-term investments."

Avoid pitfalls of buying a holiday home

By Charlie Weston

Many Irish buyers of overseas property have fallen foul of greedy, unscrupulous and downright dishonest developers.

False and misleading advertising and lax planning laws allow these cowboys on the continent to take some buyers to the cleaners.

Many analysts and economists have warned that overseas properties are overhyped and oversold.

So, if you are determined not to be dissuaded by these horror stories, how do you go about making a legal, cost-effective and stress-free purchase abroad?

- Research the market

The golden rule is to research, research and research again.

Remember, a villa that costs €100,000 in Bulgaria is only good value if it is good value in Bulgaria as well. Never mind how the price compares to Ireland.

If you are buying for investment purposes, be warned that developers may exaggerate rental returns.

Check things like supply and demand in the area: now and what is expected in the future; value of the property; its location and accessibility to it; whether it can be rented out; and the long-term growth potential.

- Get professional advice

Never buy a property without assistance from an English-speaking solicitor and without having the documents translated into English.

Get tax advice also. Spain, in particular, has a range of taxes we do not have here, like property tax.

Check out the inheritance laws where you plan to buy.

In some countries, it is not an automatic right that you can pass on your property to your chosen heirs.

- Have a strategy

Be clear about the role the property plays in your life. Is it a holiday home, a pension, or an investment?

The use of the property will have a major bearing on how you finance its purchase.

- Buy below market value

Buy a property that needs renovation.

It is amazing how many people are put off by a place that needs a lick of paint.

Alternatively, buy off the plans where you can secure big discounts.

But make sure the developer is reputable and see other developments they have been involved in. And try to find a motivated seller who needs to get rid of their property fast.

- John Mulligan