The following is a guest post by Juan Jose Giraldo, Real Estate Lawyer.
The process of purchasing real estate in a foreign country, in a different language and culture can seem unnerving to any investor purchasing outside his/her home country. In Colombia it’s even worse because there is often a perception from the foreign investor that he could get “scammed” in some way if not done properly.
The reality is that there are pitfalls in any real estate deal but there are also many safeguards in place for all buyers of Colombian real estate and foreigners have all the same rights (and responsibilities) that Colombians have. However, making a successful real estate investment in Colombia often comes down to having the right legal advice and a proper due diligence process after you’ve made a purchase decision/negotiation.
Brad Hinkelman wrote a very good article here as an introduction to Medellin real estate for foreign buyers and my article is intended to build on the details of the closing process specifically. I hope this step by step guide can be useful to readers and my contact information is at the bottom of the article if anyone has any further questions or feedback. By familiarizing yourself with the entire process you will seem like an expert when negotiating with Colombians and communicating with your lawyer and real estate advisors.
Step 1: Before you sign – The Real Estate title search and property history/study.
After you’ve completed the “fun” part of your real estate search and are ready to turn a verbal offer on the property into a valid document, it is important to conduct a title search and study to ensure that a) we are negotiating with the real owner, and b) the property is free of any mortgages, liens or any legal actions that may affect the transferability of title.
What we call “Certificado de libertad” is a public record/certificate and can be obtained by your attorney with the matrícula inmobiliaria – which you can think of as the unique serial number for the property. In Medellín for example all matrículas start with a 001 located in the upper right part of the certíficado.
This title history precisely shows the transaction/ownership history of the property you are interested in. In the certificado, we’ll find everything that the property has gone through, such as previous negotiations, legal limitations, the current/actual owner, location of public notaries where other negotiations took place, mortgages placed on the property, among other annotations of interest.
From the certificado we can locate the escritura pública (property title) and much more detailed information of each transaction through which your property has passed over it’s lifetime. A good lawyer will retrieve physical and original copies of at least 2 previous escrituras to ensure proper historical conveyance of the property.
Example: One of the most interesting certificados that I’ve ever seen was this one here, just for fun. It’s for a property currently under the control of the National Police of Colombia but once belonged to Pablo Escobar. You can see ownership of the property going all the way back to the 1982 purchase of the lot and subsequent construction of the infamous Monaco building. All of this information is in the public record of Colombia.
Once the title study is complete and your attorney is satisfied with the results you proceed to the signing of the purchase contract or the Promesa de Compraventa and available by anyone with access to the registry systems.
Step 2: The Purchase Agreement/Contract
The contract we use to formalize the negotiation between the buyer and seller is called the promesa de compraventa. This contract brings the contractual obligation to fulfill their responsibilities in the transaction. The main components of a promesa are the following:
- purpose of transaction and identification of parties involved
- identification and details of the asset in question to be sold
- payment terms, amounts, dates
- commissions and or other fees or taxes to be paid
- proration of taxes and or public utilities
- closing dates and any final amounts/payments
- penalty clauses for non-compliance of either part
A few important notes/items to expect in a promesa:
- The purchase agreement is a private (not public) document. Contrary to local custom, it does not need to be notarized (taken to the public notary- for signature authentication) but it is highly recommended to have the security that the person you are dealing with is really who is signing.
- Obligations from the purchase agreement can be changed at any time if both of the parties agree and this process/amendment is called “otro sí”. If any terms of the promesa need to be modified it is much easier to do this via an otro si than create an entirely new contract.
- The anticipo or down payment (usually due on signing the promesa) usually ranges between 10-20% but can be as high as the amount required to satisfy a mortgage debt (when a mortgage is present).
- Penalty clauses are serious; both parties have to adhere to them. Either the buyer or seller could be liable for the penalty (usually set as a percentage of the deal value) if they do not comply with the term.
Step 3: Closing/Signing of Title
The most commonly asked questions during the the closing process are as follows:
- How long does it take to close?
- What are the closing costs?
How long to close?
The short answer is that it depends. At Casacol we’ve had closing period from offer to closing in less than 2 days. It’s a massive and unconventional effort to get all the required paperwork in order, but it can be done very quickly. In the case of a mortgage present on the property this will delay the closing process by 4-6 weeks and sometimes longer. In the case of seller financing we may not close for many months or even years as you have to pay the amounts owed 100% before they will give you the title.
But as a general rule, the closing process for a property where the buyer is a cash buyer and the property is free of any mortgage or lien will take from 2-3 weeks. During this time your attorney will work with the seller to get all the required documentation in order so that property title can be transferred.
The main documentation required are the following:
- When a mortgage is present: Levantamiento de hipoteca, basically a document from the bank and presented to the notary that states the property is free and clear of any mortgage.
- Paz y salvo de administracion, this is a certification from the HOA/Condo board that the apartment has no pending payments or debt to the association/building.
- Paz y salvo de valorizacion (if applicable) , this refers to the cancellation of any special city/municipal tax assessments such as FONVALMED (only Medellin).
- Paz y salvo de catastro, this refers to the cancellation of regular municipal property tax that must be paid for the entire calendar year of the transaction before title changes.
- Reglamento de propiedad horizontal, the building by-laws (if applicable) which allow the Notary writing the title change to verify all information related to the transaction.
How much are closing costs?
We can split closing costs (for the buyer) into two categories 1) notary fees/taxes, and 2) legal fees.
Fees payable at notary:
- Registro, this goes to the land titles registry office, 0.5% of purchase
- Rentas, this is a state tax, 0.525% of purchase price
- Gasto notariales, notary paperwork fees, this can vary by notary, but usually less than $1,000,000 COP.
Here is a link to a real receipt from a recent transaction with $390,000,000 COP title (escritura value – actual sale price was higher).
Note: The seller will pay the same taxes plus an additional tax what is called retención en la Fuente which is 1% of the total title value on the escritura.
This will vary lawyer to lawyer based on their experience in the field. In Colombia there is a national fee guide published by CONALBOS (national college of lawyers in Colombia) which attempts to set national standards for professional legal fees in Colombia based on input from lawyers across the country. Many professional fees in Colombia are set in terms of multiples of minimum wages (in 2016 = apprx. $689,000 COP).
Here’s are some Conalbos guidelines that we can infer for real estate contracts/legal fees:
- Title study, $689,000.
- Purchase contract, $689,000 + 0.002% of contract value
- Closing/title change, $689,000
- Complications due to mortgage/escrow, $ variable
For a simple $400,000,000 COP real estate transaction this would typically mean legal fees of $2,870,000 using the math. And the presence of mortgages and/or escrow complications around new project purchases could each add 1-2 charges of $689,000 on top. Extraordinary complications could incur additional fees as well, however these are in the small minority of real estate transactions in my experience.
Having said this some lawyers may charge more, some may charge less. Lawyers that vary too far from the average could be 1) inexperienced or 2) taking advantage.
Step 4: Registration of the Deed
After both of the contractual parties pay the all these values, we can proceed to get the title/deed registered at the Oficina de Registro de Instrumentos Públicos a Governmental office called to deal with registrations of property here in Colombia. This takes up to 10 business days (sometimes longer) and once registered your lawyer will send you an updated certificado de libertad with a note stating the last negotiation that took place with what is now your property.
Congratulations. At this stage you are likely the owner of your dream vacation home/retirement home/investment property and can rest assured that your property rights as a foreigner are identical to those that we all enjoy in Colombia and some of the most robust and well protected in all of Latin America.
Don’t hesitate to contact me with any questions by email email@example.com, phone/Whatsapp +57 3005296831, or my office in Centro Comercial Rio Sur, Cra 43A # 6 Sur – 26.
I wish all readers the best and safe investing in Colombia.
Juan Jose Giraldo.