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Buying property in Brazil: scams and pitfalls

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Everything you need to know is included in our Brazil Property Pack

Brazil's stunning landscapes and growing economy make it an attractive destination for foreign real estate investments.

But it's worth noting that navigating the property market here can be a bit of a complex journey, especially for those who aren't local residents. There are plenty of potential hurdles and hidden pitfalls along the way that could easily catch you off guard if you're not careful.

Our group of property buyers and local partners have shared various problems with us. We've listed them all in our Brazil Property Pack.

This article provides a brief overview of potential pitfalls that may arise during the property buying process in this country.

Is it safe or risky to invest in real estate in Brazil?

Buying residential property in Brazil poses a unique set of challenges and risks, which requires careful consideration and due diligence, especially for foreign buyers.

While the country offers vast opportunities for real estate investment, its intricate legal landscape and history of property disputes necessitate a cautious approach.

First and foremost, scams are indeed prevalent in the Brazilian real estate market.

There have been instances where properties were sold by individuals who did not hold legitimate ownership, leading to protracted legal battles. A notorious example is the case of Grilagem, where fraudsters produce fake property titles and sell lands they do not own, particularly in the Amazon region.

Foreign buyers, often unfamiliar with the local real estate environment, can easily fall victim to these fraudulent schemes.

Moreover, Brazil's property market is notorious for its bureaucratic hurdles and lack of transparency. The process of buying property involves numerous steps, from checking property titles to ensuring that there are no outstanding taxes or debts associated with the property.

The legal system, known for its sluggishness, can be a significant barrier, especially when it comes to resolving property disputes. These disputes can drag on for years, draining financial resources and patience.

Foreigners face additional layers of complexity. Brazil's laws on property ownership for foreigners are stringent, particularly when it comes to purchasing land near the country’s borders and coastlines.

There are also challenges associated with obtaining financing from Brazilian banks, as they generally require extensive documentation and local credit history.

In terms of laws and regulations, while Brazil has a comprehensive legal framework designed to protect property buyers, enforcement is inconsistent.

Corruption and red tape often impede the effective implementation of these laws, leaving buyers vulnerable.

However, it's worth noting that the Brazilian government has taken steps to stimulate the real estate market and protect buyers. Programs like Minha Casa Minha Vida have been implemented to increase access to affordable housing. But these initiatives have had varied success and their impact on foreign buyers is limited.

Beware of mistakes when buying property in Brazil

The "usucapião" process

When purchasing residential property in Brazil, one specific issue you should be particularly cautious about is the "usucapião" process.

This is a legal means by which someone may acquire ownership of land through prolonged, uninterrupted, and uncontested possession, sometimes even if the initial occupation was illegal. In Brazil, depending on the type of usucapião, this period can vary from five to fifteen years.

Here's where the context is crucial for you as a foreign buyer: If you are considering a property that has been occupied by someone other than the seller, even if the occupant is not currently present or the occupation was in the past, you should verify that the seller has clear, uncontested ownership.

It's not uncommon to encounter properties with a history of occupation by individuals other than the registered owner. This can potentially lead to a claim of usucapião, where these occupants may have acquired rights over the property.

To avoid falling into this trap, you must conduct a thorough due diligence process.

This involves reviewing the property's full legal history and confirming the legitimacy of the seller's ownership through a detailed examination of the "matrícula do imóvel" at the local "Cartório de Registro de Imóveis" – the real estate registry office. This document contains the complete transaction history of the property and any liens, encumbrances, or legal issues attached to it.

It's also recommended that you engage with a reputable local lawyer who specializes in real estate law to help you navigate the complexities of Brazilian property laws and ensure that the property you are interested in has a clear title, free from any possible usucapião claims.

The frequency of such issues isn't well documented, but they are common enough that careful legal review is a standard part of the real estate transaction process in Brazil.

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The issue of "fração ideal"

Another potential pitfall specific to Brazil that you must be vigilant about is the issue of "fração ideal" when purchasing in a condominium ("condomínio") setting, which is common in cities like São Paulo or Rio de Janeiro.

The concept of "fração ideal" refers to the undivided interest that each condo owner has in the common areas of the building or complex.

When you buy a condo, you're not just purchasing the individual unit; you're also buying a proportional share of the building's common property (like the land, lobby, amenities, etc.).

Here's where the context matters for you - sometimes, the size of the "fração ideal" is not proportional to the size or value of the private unit itself.

This discrepancy can lead to unexpected costs or legal challenges.

For instance, the "fração ideal" determines your share of the overall property taxes (known as "IPTU") and your monthly condo fees ("taxa de condomínio"). If the "fração ideal" assigned to your unit is larger than you'd expect given the size of your unit, you could end up paying more in taxes and fees than anticipated.

To prevent potential issues, it's important to undertake several actions. Begin by thoroughly reviewing the condominium declaration, known as "convenção do condomínio", as well as the internal regulations or "regimento interno".

This will help you understand the allocation of "fração ideal" and its implications on your obligations.

Next, verify the "fração ideal" for the unit you're considering by checking the property records at the local real estate registry office, which in Portuguese is referred to as "Cartório de Registro de Imóveis". It's also wise to compare the "fração ideal" with the actual size of the unit to determine if the costs associated with it are reasonable.

Lastly, consulting with a local real estate attorney can provide valuable assistance. They can help you comprehend the implications of the "fração ideal" and ensure that all condominium documents and financial statements have been meticulously reviewed.

The regulations linked to the "Código Florestal"

Another less commonly known issue you should be aware of involves environmental regulations, especially when buying property in coastal areas, such as those near the famous Brazilian beaches.

In Brazil, there is a federal law known as the "Código Florestal" (Forest Code), which includes regulations that cover areas of permanent preservation ("Áreas de Preservação Permanente" - APPs).

For instance, if you're considering buying property close to a beach in a city like Salvador or a scenic spot in Florianópolis, you need to be aware that these areas may fall under APPs.

Properties in APPs are subject to stringent restrictions with regards to construction, deforestation, and land use. It's not uncommon for unwary buyers to purchase a property with plans to develop or renovate, only to find out that environmental regulations severely limit what can be done.

To protect yourself, you should investigate whether the property falls within an APP. You can do this by consulting the "Cadastro Ambiental Rural" (CAR) which is the rural environmental registry, or by checking with the municipal environmental authorities for urban areas.

Also, ensure there's an environmental license or a valid "certidão de uso do solo" (certificate of land use) for the property, which confirms that the land use is in compliance with environmental regulations.

Understand that even if previous owners have made changes to the property, you could still be held responsible for environmental infractions as the current owner.

Thus, it's crucial to ensure that no illegal alterations have been made. If the property is within an APP and you still wish to proceed, consult with an environmental lawyer who specializes in Brazilian environmental law. They can assist with the due diligence process and provide advice on any constraints or legal risks.

The "laudêmio" fees

This issue may not be very frequent, as it only applies to properties close to the sea, but when it does apply, it can be quite significant and could impact your investment.

When purchasing residential property in Brazil, you should be particularly cautious of the "laudêmio" fees.

This fee is a relic from the Portuguese colonial times and is unique to Brazil. It is a charge that you might have to pay if the property is located on land that is considered "terreno de marinha" (maritime land), which means land within 33 meters from the high tide line.

This type of land is owned by the federal government, and when you buy property on such land, you're essentially paying for the right to use it, not to own it outright.

The context where this mistake might happen is when you buy a property in coastal areas, which are popular locations for residential properties, especially in cities like Rio de Janeiro, Salvador, or Recife. Many foreigners are unaware of this additional cost, and it can come as an unpleasant surprise.

It's not a fee that's paid annually like a tax, but it's paid on the transaction of the property, and sometimes when improvements are made to the property. The laudêmio fee can be about 5% of the sale price, which is a significant amount. It's also important to note that this is on top of the "taxa de ocupação" (occupation tax) and "foro" (ground rent), which are also applicable to these maritime lands.

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"Direito de Preferência" or "Preemptive Rights"

In Brazil, when you're part of a "condomínio", particularly in co-owned buildings or land, there may be a clause in the ownership agreement that grants other owners preemptive rights to purchase a property before it can be sold to someone outside the current owner's circle.

This means that when a property is put up for sale, it must first be offered to other co-owners or to the tenants if it's a rental property, under the same conditions as it would be offered to an external buyer.

This is a legal provision under the Brazilian Civil Code (Código Civil), particularly articles 504 to 506, which can cause unexpected delays and complications in your property purchase.

The complication arises when this right is either not respected or poorly managed, leading to legal challenges after the property has been acquired. If the preemptive right is exercised after you've made a deal, you could potentially lose the property or face a legal dispute.

You should explicitly ask the seller about the existence of such rights and ensure that they are properly waived or fulfilled before the sale is concluded. This involves checking the "Convenção do Condomínio" or the "Contrato de Compra e Venda" for any clauses regarding preemptive rights.

Also, verify with the property management ("administração do condomínio") whether any other owners or tenants have expressed their intention to exercise this right.

Ensure that your purchase agreement includes a clause that protects you in case someone comes forward with a claim based on preemptive rights after the sale is finalized.

Since preemptive rights are tied to civil law, they're generally well-known by Brazilian lawyers and real estate professionals, but they may not be on the radar of foreign investors.

This oversight is not necessarily common due to negligence, but rather because it's a legal detail that doesn't exist or is handled differently in many other jurisdictions.

INSS na construção civil

This is a social security tax related to construction work. This tax is levied on any construction, renovation, or significant maintenance work on properties in Brazil.

Here's why it's pertinent when you're buying residential property.

If you're purchasing a property that has recently undergone construction or significant improvement, there may be outstanding INSS contributions that have not been paid by the previous owner or the construction company responsible for the work.

This liability can, under certain conditions, be transferred to the new owner, meaning you could be responsible for settling these debts.

Moreover, in Brazil, before selling a property that has had construction work, owners need to obtain a "Certidão Negativa de Débitos" (CND) from the National Institute of Social Security (INSS), which certifies that there are no outstanding social security contributions related to the construction work.

Failure to present this certificate can hinder the sale process and might become a problem for you as the buyer.

To safeguard against this issue, ensure that the seller provides the CND related to any recent construction or renovation on the property.

Also, have your lawyer confirm that all INSS contributions have been made for any workers involved in the property's construction or renovation. This may involve checking the "Livro de Inspeção do Trabalho" or employment books and contracts.

If the property has been improved and there's no CND, ask for proof of the "ART" (Anotação de Responsabilidade Técnica) and corresponding INSS payments. The ART is issued by the Regional Engineering and Architecture Council (CREA) and is tied to any civil construction work.

Failure to address this before finalizing the purchase could mean you'll be subject to fines and will have to make the outstanding payments yourself, which could significantly affect the overall cost of your investment.

Vícios ocultos

Another common pitfall - the "vícios ocultos," or hidden defects in property law.

This is a legal concept in Brazil which refers to defects or issues with a property that are not immediately apparent at the time of sale and can be quite problematic for new owners.

When you purchase a property in Brazil, the seller is obliged to ensure that the property is free of hidden defects. However, the identification of these defects might only occur after the purchase has been completed. Under Brazilian law, specifically under the Consumer Protection Code ("Código de Defesa do Consumidor"), the buyer has a certain period to claim against the seller for such defects once they are discovered.

Here's how hidden defects could become an issue for you.

For instance, a property might seem in excellent condition, but later you could find issues like poor electrical wiring, structural problems, plumbing issues, or even legal complications like improper zoning, all of which were not disclosed during the buying process.

Identifying these issues can be challenging, as they often require a thorough inspection by a professional, and even then, some defects might only become evident over time or under specific circumstances.

To protect yourself from the consequences of "vícios ocultos", you should have a comprehensive property inspection completed by a reputable professional before the purchase.

Also, make sure they check for any common issues that might not be visible during a casual walkthrough.

Understand the terms of the "termo de garantia," the warranty term that holds the seller accountable for any hidden defects discovered post-purchase within a legally defined period.

If possible, include clauses in the purchase contract that specifically address the liability for "vícios ocultos" and outline the recourse available to you should any defects come to light.

While this concept is not unique to Brazil, the Brazilian legal framework surrounding "vícios ocultos" and the recourse available to the buyer can be quite specific. For instance, the period during which you can make a claim, and the process of doing so, will differ from other jurisdictions. Typically, you would have a period ranging from a few months to a few years to discover and report such defects.

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The "ITBI" – Imposto sobre Transmissão de Bens Imóveis

This is a transfer tax that must be paid whenever there is a change in property ownership, and it is specific to the municipality where the property is located.

The ITBI rate varies by municipality, but it generally ranges from 2% to 3% of the property value as assessed by the municipal authorities, not necessarily the purchase price.

The key issue arises from the discrepancy that can exist between the property's market value and its fiscal value, known as "valor venal." Municipalities may reassess the property at the time of sale and assign it a higher fiscal value, which could significantly increase the ITBI due.

Here's how this could become a problematic oversight for you. First, you might budget for the ITBI based on the purchase price of the property, but if the municipality reassesses the property at a higher value, you could be faced with a higher tax bill than anticipated.

There is also a timing consideration. The ITBI must be paid before the new deed is registered, so any delay or discrepancy in assessment can hold up the entire transaction.

To manage this issue effectively; consult with your real estate lawyer to get an accurate estimate of the potential ITBI based on the fiscal value of similar properties in the same municipality.

Moreover, confirm with the local municipal tax authority ("Secretaria Municipal da Fazenda") what the fiscal valuation of the property is and how much ITBI you will be responsible for before finalizing the sale.

You should be prepared for the possibility of contesting the fiscal valuation if it seems excessively high. This would likely require the assistance of a local tax expert or attorney who can navigate the municipal bureaucracy.

While this transfer tax is not unique to Brazil, the way it is calculated and its potential variability can catch foreign buyers by surprise, making it an important consideration when planning the financial aspects of a property transaction in Brazil.

The frequency of this issue varies from one municipality to another and depending on market conditions, but it is a routine part of property transactions and can have a material impact on the total cost of purchasing a property.

Properties with multiple registrations ("matrículas")

In Brazil, due to bureaucratic inefficiencies and outdated systems, a single property can occasionally have multiple registrations ("matrículas") at different cartórios (registries).

This can result in the same property being sold to different people by different sellers, who may each hold a seemingly legitimate registration.

For a foreigner, especially one who might not be fully aware of the complexity of Brazilian bureaucracy, this can be a significant pitfall.

Here's what you need to consider.

Prior to purchase, you should conduct a thorough check of the property's registration. This means not only confirming that the seller has a registration but also investigating whether there are any other registrations for the same property.

Ensure that a comprehensive title search is conducted at multiple local property registries to confirm the legitimacy of the property's documentation.

It's crucial to work with a reliable and experienced local lawyer who understands the intricacies of property law and the local real estate registry system.

While instances of fraud are not a daily occurrence, they happen often enough to be a concern, particularly in regions with more pronounced bureaucratic disarray or where there is high pressure on real estate markets.

This type of situation can lead to lengthy and costly legal battles to establish the rightful ownership of the property.

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