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When it comes to buying real estate in Colombia, making sure you fully grasp the property sales contract is essential.
Indeed, not fully understanding the document you will sign can lead to financial losses, including the forfeiture of deposits, payment of penalties, unexpected costs, legal expenses, and potential poor investment decisions.
We've heard countless stories of people making costly mistakes when signing their property agreement in Colombia. We want to help you avoid the same experience.
We'll give here a very brief overview regarding the property sales contract in Colombia ; if you want a full checklist, please check our property pack for Colombia.
What is the Promesa de Compraventa in Colombia?
In Colombia, the property purchase agreement is known as a "Promesa de Compraventa".
This document outlines the conditions and terms under which a property will be sold and purchased. It's a formal agreement where the buyer and seller commit to a future transaction of a specific property.
The "Promesa de Compraventa" is legally binding. Once signed, both parties are obligated to fulfill their respective commitments. For the buyer, this typically involves paying the purchase price, and for the seller, it involves transferring the property free of liens and encumbrances.
This agreement serves as a guarantee for both the buyer and the seller. For the buyer, it ensures that the property won't be sold to someone else, and the terms of the purchase won't change. For the seller, it provides assurance that the buyer is committed to the purchase.
International buyers or non-residents face additional considerations. They may need to comply with specific regulatory requirements, like registering with certain authorities or meeting financial regulations. It's advisable for international buyers to consult with a local real estate attorney or a real estate agent experienced in dealing with foreign transactions.
The "Promesa de Compraventa" is typically signed after preliminary discussions have concluded and both parties have agreed on the basic terms, but before the actual transfer of property takes place. It's an interim agreement leading up to the final sale.
There's usually a deposit involved, known as "arras" or earnest money. This amount varies but is often around 10% of the purchase price. This deposit demonstrates the buyer's commitment and is usually forfeited if the buyer backs out without a valid legal reason.
The process in Colombia might differ from other countries, especially in terms of legal requirements, the role of notaries, and specific contractual customs. For example, in some countries, the initial agreement might be less formal or not require a deposit. In Colombia, the emphasis on formal agreements and the involvement of legal counsel is more pronounced, reflecting the country's specific legal culture and real estate practices.
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What should be included in the property purchase agreement in Colombia?
In Colombia, a property purchase agreement, or "Promesa de Compraventa", should contain specific elements to ensure its legality and effectiveness.
This agreement is governed by the Colombian Civil Code and the Commercial Code, which provide the legal framework for real estate transactions.
Mandatory clauses in the agreement include the identification of both parties (buyer and seller), a detailed description of the property, the sale price, payment terms, and the date of property delivery. The agreement should clearly state the obligations of both parties. For the seller, this usually means delivering the property free of encumbrances or liens, and for the buyer, it involves paying the agreed-upon price.
Additional clauses often address issues like penalties for late payments, conditions under which the agreement may be terminated, and how disputes will be resolved. These clauses can vary depending on the specific circumstances of the transaction.
Conditions or contingencies can also be included. Common examples are the successful completion of a property inspection, the buyer obtaining financing, or the sale being contingent on the buyer selling their current home. These contingencies protect both the buyer and seller by providing clear conditions under which the transaction can proceed or be nullified.
Authentication by a notary is an essential part of the process in Colombia. The notary public verifies the identities of the parties involved and ensures that the document complies with legal requirements. This step is crucial for the agreement to be legally binding and enforceable.
The role of the real estate agent in Colombia is to facilitate the transaction between the buyer and seller. While the agent doesn't typically have direct implications in the legal aspects of the agreement, they play a vital role in negotiations, providing information about the property, and guiding both parties through the process. Their expertise can be invaluable, especially in ensuring that all necessary clauses are included and understood by both parties.
What's the signing process like?
Firstly, the agreement is bilateral, meaning it requires signatures from both the buyer and the seller. It's important to note that "the buyer" or "the seller" can indeed be several people. In cases where there are multiple buyers or sellers, each individual must sign the agreement.
Both parties need to provide certain documents and information for the signing.
Typically, this includes personal identification (like a passport or cédula for Colombian residents), proof of financial capacity for the buyer, and property documents for the seller, such as the certificate of freedom and tradition (certificado de libertad y tradición), which proves the property's legal status and ownership history.
The steps for signing usually follow this timeline.
| Step | Description |
|---|---|
Drafting the Agreement |
Both parties agree on the terms, and a draft of the purchase agreement is prepared, often with the help of a real estate agent or attorney. |
Review and Finalization |
Both parties review the final draft, make any necessary adjustments, and finalize the agreement. |
Signing the Agreement |
The agreement is then signed by both parties. This can be done in the presence of a notary, which is highly recommended for legal validity. |
There isn't a strict deadline for signing the agreement, but it's usually done once both parties have agreed on all terms and are ready to commit to the transaction. The duration for which the contract is valid should be specified within the agreement itself. Typically, this period aligns with the timeframes for completing necessary payments and fulfilling other conditions.
After signing, the agreement is registered with local authorities, a process usually facilitated by a notary. This registration is crucial as it formalizes the transaction and provides legal recognition.
Amendments to the contract after it has been signed are possible but require the consent of both parties. Any changes must be documented and ideally notarized to maintain the legal integrity of the agreement.
The typical timeframe for completing all necessary paperwork and approvals can vary, but it generally takes several weeks to a few months. This timeframe depends on the efficiency of local authorities, the speed of financial transactions, and the completion of any required inspections or assessments.
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How is the payment handled when signing a property purchase contract in Colombia?
When you sign a sales agreement, typically, you need to pay a down payment or earnest money.
The typical down payment percentage for a property sale in Colombia can vary, but it's often around 10% to 30% of the total purchase price. This serves as a commitment to the purchase and secures the property.
There may be upfront fees or costs associated with signing the sales agreement, including notary fees, legal fees if you're consulting an attorney, and possibly administrative fees if you're working with a real estate agency. These costs vary based on the complexity of the transaction and the professionals involved.
Payments are generally made to an escrow account rather than directly to the seller. This adds a layer of security for both parties, ensuring that funds are only released when all conditions of the sale are met.
The due date for the payment is specified in the sales agreement. It's not always immediate upon signing; it can be scheduled for a later date, often aligning with certain milestones or conditions being met, like a successful property inspection or the buyer securing financing.
Regarding taxes, there are indeed tax implications and property transfer taxes associated with the transaction. In Colombia, the buyer typically pays a property transfer tax, which varies depending on the location and value of the property. It’s important to factor these taxes into your overall budget.
You can negotiate the down payment amount with the seller. This is part of the broader negotiation process and can be adjusted based on factors like market conditions, the seller's urgency to sell, and your financial capacity.
If the sale falls through, what happens to the down payment depends on the terms of the sales agreement. Generally, it's refundable under certain conditions, such as a failed inspection or if the buyer can’t secure financing. However, if the buyer backs out without a contingency clause being invoked, they may forfeit the down payment.
Using a mortgage loan for the down payment is possible. Some buyers arrange for bridge loans or short-term financing to cover the down payment, then refinance with a traditional mortgage.
The role of an attorney or real estate agent in the payment process is to ensure that all financial transactions comply with Colombian law, the terms of the agreement are met, and the funds are correctly handled and transferred. They can also assist in negotiating the terms of the payment.
You should definitely request a receipt or confirmation of payment when making the down payment. This is your proof of the transaction and is crucial for record-keeping and legal purposes.
As for tax implications for the seller and buyer, the seller may be subject to capital gains tax on the sale of the property. The buyer, as mentioned earlier, is typically responsible for the property transfer tax. Both parties should consult with a tax professional to understand their individual tax responsibilities in the transaction.
What are the potentials risks and pitfalls?
You might be interested in reading our article about the common risks and pitfalls surrounding a property transaction in Colombia.
In Colombia, the property purchase agreement, or "Compromiso de Compraventa", has specific conditions regarding withdrawal by either party.
The buyer or seller can withdraw from the agreement, but the circumstances under which this is possible are usually detailed in the contract itself.
There is typically no standard cooling-off period in Colombian real estate transactions. Unlike some other countries where buyers may have a few days to reconsider after signing, in Colombia, once the agreement is signed, it is binding unless specific clauses allow for withdrawal. This makes understanding and being sure about the terms before signing extremely important.
If a buyer or seller withdraws from the agreement, they usually need a valid motive, which should be outlined in the contract. Common valid motives include failure to secure financing, undisclosed defects in the property, or a breach of contract by the other party.
If a buyer backs out due to an inability to secure financing, this is usually acceptable only if a financing contingency clause was included in the agreement. Without this clause, the buyer could lose their deposit or face other penalties.
Failing to fulfill obligations outlined in the contract can result in various penalties. These are often predefined in the contract and can range from forfeiture of the deposit to financial penalties or legal action. The specifics depend on the terms of the agreement.
In terms of the money, if a party withdraws legitimately based on contract terms, the handling of any deposits or payments will follow the agreement's stipulations. If the contract is breached, the wronged party may claim the deposit or seek compensation as defined in the contract.
Comparatively, real estate transactions in Colombia can differ significantly from those in countries like the United States or Europe. For instance, the lack of a standardized cooling-off period and the need for explicit contingencies are notable differences.
Potential risks and pitfalls in Colombian real estate transactions include misunderstandings of contract terms, overlooking legal encumbrances, property defects, and differences in legal procedures. Parties need to be vigilant about these aspects to avoid disputes.
Disputes are not uncommon and can arise due to a variety of reasons, such as disagreements over property boundaries, condition of the property, or fulfillment of contract terms. These are typically resolved through negotiation, mediation, or legal action. For example, a dispute over undisclosed property defects might be resolved through renegotiation of the sale price or by the seller making necessary repairs.
If defects or issues with the property are discovered after signing, the recourse available to the buyer will depend on the terms of the agreement and Colombian law. Typically, if issues were not disclosed or were misrepresented, the buyer may have grounds for legal action.
This article is for informational purposes only and should not be considered financial advice. Readers are advised to consult with a qualified professional before making any investment decisions. We do not assume any liability for actions taken based on the information provided.