Careful when buying Pre-Construction Properties In Brazil

Buying pre-construction or off plan properties in Brazil has become almost a fever for the past 3 years. National and foreign investors have noticed the generous returns of such investments in Brazil and now what we are seeing is a consistent and considerable increase in sales of pre-construction properties to foreigners and foreign companies. However, buying an off-plan property requires, if not more, the same amount of homework needed when buying a regular piece of real estate.

The regular title search needed to buy real estate, in this case should be more thorough. Besides checking for related title defects, such as, survey errors, title flaws, fraud, forgery, undisclosed liens and encumbrances, and a host of other problems, buyers shall request their attorneys to double check the financial and fiscal situation of the developer; that because it is common to see newly opened development companies going bankrupt in the middle of their constructions, leaving buyers with big damages and few legal recourses.

The most famous case was known in Brazil as the "Encol" case, whereby more than forty thousand (40,000) families who bought property from this developer claimed to have suffered financial damages due to their default in delivering the properties as contracted, and subsequently, due to their bankruptcy. Note that "Encol" was considered to be a big development company; needless to say what risks a buyer should be looking at when buying from a small and newly opened development company.

Pursuant to the Law n. 4.591/64, all developers, before they are able to start selling, shall have complete set of innumerous documents, permits, disclosures, etc. On the other hand, the buyer shall always request a copy of such documents. Some of these documents must analyzed by an experience professional in order to make sure that the developer is in accordance to the Law, and therefore reducing, quite considerably, the risks.

To name a few, documents such as: 1)Titulo de propriedade, ou de promessa de compra e venda ou de cessao de direitos ou de permuta; 2)Certidoes negativas de impostos federais, estaudais e municipais, de protestos de titulos, acoes civeis e criminais e de onus reais relativamente ao imovel, aos alienantes to terreno e ao incorporador; 3)Registro da Incorporação; 4)Certidao Vintenaria do terreno; 5)Projeto de Construcao aprovado; 6)Certidao Negativa de Debito da Previdencia Social e Receita Federal; 7)Memorial Descritivo; 8)Declaracao de carência; 9)Atestado de idoneidade financeira; shall always be requested and properly analyzed.

Once these and all the other documents are provided and double checked by an experienced and impartial professional (that excludes the realtor who are selling the property of course), buyers shall have no problems, and if they do, they will be able to have legal recourse against the developer.

Some irregular clauses developers like to have in their contracts:

1) The address of the property is usually unidentifiable, meaning, it describes the property in a corner of an intersection of two streets, all intersections have four corners, and the buyer cannot know which corner the contract is referring to.

2) The description of the unit is usually insufficient, they often refer to the unit with number only and ask buyer to refer to the floor plan. However, in the contract shall have the full legal description of the unit, describing how many square feet it has, as well as the correspondent "fracao ideal" of the entire condominium.

3) One of the most famous clauses. Developers like to have inserted a clause that affirms that buyer has read, reviewed, and understood the "memorial descritivo", floor plans, garage description disclosure, which are not usually given to buyers, unless when requested.

4) Special attention to a clause that prescribes that developer may get financing during construction and give the bank the property as collateral. In this case, be aware even after buyer pays it all off, there could be a lien in the title regarding the condominium's "fracao ideal", which can become a title cloud for the new unit owner.

5) Look for a clause that prescribes that buyer can only transfer/sell the rights of the contract/property to someone else once buyers have paid it all in full and with the developer's approval, leaving buyer at the discretion of the developer in order to authorize the sale of the rights or the property to someone else, even if the property is paid off.

These are only a few examples of some irregular clauses often seen in pre-construction purchase and sale agreements. You, as the buyer, must look carefully in the purchase and sale contract in its entirety and always double check with an impartial and experienced professional for unforeseen flaws, irregular clauses, and illegalities.

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