Buying Property in Colombia: From Purchase Agreement to Closing
The following is intended to complement our video tutorial “Buying Property in Colombia: From Purchase Agreement to Closing”. Anyone planning to buy property in Colombia should review all the videos and articles in this series prior to actually making an offer
After finalizing a comprehensive, independent property title analysis, your local attorney can now focus on drafting a solid purchase agreement, manage any relevant pre-closing processes and assist you at closing. Below are key considerations you will need to keep in mind right up to the time you receive title to your new property in Colombia.
“PROMESA DE COMPRAVENTA”
In Colombia, it is pretty common for real estate attorneys to draft what is typically called a “Promesa de Compraventa” or “Promesa” which roughly translates to a “Promise of Sale.” This is the equivalent of a standard purchase agreement under local law. The purchase agreement will typically include things like:
- a description of the property to be purchased;
- payment terms;
- a payment schedule;
- legal disclaimers;
- liquidated damages clauses;
- arbitration provisions; and
- other obligations.
A good title analysis will also identify any significant legal issues that could impact your future ownership including, but not limited to:
- whether the actual property boundaries match the registration documentation;
- if there are any current tenants on the property; and
- whether the death of an earlier owner created heirs that could contest ownership.
IMPORTANCE OF TITLE ANALYSIS
As explained in our “Buying Property in Colombia: Title Analysis” article, organizing a comprehensive title analysis is essential when purchasing property in Colombia. The key benefit of having a good title analysis is that it can help identify all relevant risk factors involved in purchasing a target property. However, a good title analysis can also be invaluable for your local attorney as they negotiate and draft a solid purchase agreement.
For example, if your title analysis finds that:
- the property has a mortgage = the purchase agreement will include an obligation to pay off the mortgage;
- the property has a tax payment past due = the purchase agreement will include an obligation to pay it off;
- the property has a lien = the purchase agreement will include an obligation to cancel it;
- and so on.
Bottom line, a good purchase agreement incorporates the findings of the title analysis so that you can minimize risks as much as possible.
We will be returning to the mechanics of drafting a proper purchase agreement in future articles. For now, make sure that your local attorney has the knowledge and experience necessary to draft a comprehensive title analysis because a good title analysis will form the basis of a good purchase agreement.
In addition, keep in mind that your purchase agreement needs to protect you under all discernable scenarios, while serving to minimize the risk that the property will be transferred with less than clean title. You DO NOT want to be in a situation where a poorly drafted purchase agreement opens you up to either legal and/or financial risks.
It is probably now a good idea to highlight one of the biggest differences in how property is purchased in Colombia vs. what you may be used to.
If you’ve purchased property previously, you know that a normal process typically involves having the buyer deposit a portion or the full purchase price into an escrow account. It is only once the parties sign relevant legal documentation that funds are actually released by the escrow agent to pay off any debt on the property (mortgages, past due tax obligations, etc…) and to pay the seller their portion of the purchase price.
Unfortunately, it is rare for parties to utilize an escrow agent in connection with a property purchase in Colombia. Sellers in the market expect to receive sales proceeds directly from the buyer and any escrow services are prohibitively expensive and clunky for run-of-the-mill real estate transactions. In practical terms, this means that you will need to act as your own escrow agent by having to pay all debts on the property weeks, even months before you actually close on the target property.
While this can certainly raise red flags for foreigners, in practice, it is usually a non-issue.
First, by the time you make any payments you should have a solid, legally-binding agreement in place. While your obligations as the buyer are mostly limited to making payments by specific deadlines, the seller’s main legal obligation is to deliver clean title by closing. Failure to do this can mean significant legal and financial penalties to the buyer.
Second, the seller has a significant financial incentive to close on the transaction precisely because it is at closing that they will receive the bulk of the purchase price in the first place.
Bottom line, don’t be too worried about this issue. Our local law firm has been in the market for over a decade and we can confirm that it is exceedingly rare for this issue to affect foreign investors.
PAYING THE EARNEST MONEY DEPOSIT
Once your local attorney finalizes a draft of the purchase agreement you will need to nail down how to sign the purchase agreement and pay your Earnest Money Deposit. The actual mechanics and chronology may vary quite a bit depending on (1) the attorney you use; (2) the actual deal terms; and (3) the specific strategy involved. However, it should be noted that the Earnest Money Deposit is usually paid at the same time that the parties sign the purchase agreement.
Keep in mind that the Earnest Money Deposit is typically 10%-20% of the total purchase price depending on the location of the property but it is always negotiable. Payment can be made by a certified check issued by your financial institution or by local wire transfer. Cash payments are not recommended.
Ideally, you would want to transfer funds into your own brokerage account at least five (5) business days prior to signing the purchase agreement. This will give your local attorney sufficient time to draft and finalize relevant documentation you will need to sign in order to nationalize your funds and register your investment with the national bank of Colombia. We will delve deeper into the investment registration process in future articles. For now, remember that this process is exceedingly important for foreign investors. Failure to register your investment correctly can have significant legal, financial, migratory and tax consequences, so make sure your local attorney is experienced and knowledgeable about this process.
Finally, note that most investors will make one single international transfer equal to the full purchase price in order to pay the Earnest Money Deposit and any pre-closing/closing expenses and fees but you can certainly make multiple transfers along the way.
After you sign the purchase agreement, the parties will enter a pre-closing phase where each will have very specific obligations.
The buyer’s primary obligation will be to make specific payments on time. These may include paying:
- existing mortgage debt;
- lien obligations;
- past due tax bills; and
- HOA expenses.
For the seller, their most important obligations involve cleaning up any issues on the title so they can deliver clean title at closing. This can include:
- cancelling any liens on the property;
- clarifying any administrative discrepancy on the title; and
- paying off any debt on the property using buyer funds.
The actual mechanics and chronology of the pre-closing phase can vary widely depending on the specific transaction involved.
Once your local attorney confirms that the title of the property is clean and that all relevant legal obligations have been met, a closing is scheduled at a local notary. It is at this point that a good, reputable attorney will shine. Prior to closing, they will work with the local notary to draft a solid deed and related documentation that transfers clean title. And during closing they will review all the relevant documentation again and ensure that clean title remains through execution. It is at this point that you would sign relevant deed documentation and receive keys from seller. You will then receive title in your name several weeks later.
This post is being published for general informational purposes only and it is not intended to provide specific legal and/or tax advice. It should not be used as a substitute for competent legal/tax advice from a licensed attorney and/or accountant in your jurisdiction.