By Jay Forte, Contributing Reporter
RIO DE JANEIRO, BRAZIL – Last year through November, around 40,900 sales contracts were canceled in Brazil by defaulting, equivalent to 43.4 percent of total real estate sold in the period, according to an exclusive report by local news agency O Globo earlier this week.
That means that for every one hundred real estate contracts, almost 44 of purchasers did not meet the conditions or did not want to take the contracts through completion.
The increase in the rate of defaults was expected due to rising unemployment, but according to executives in the construction sector, this extent was triggered mainly by investors who bought real estate thinking of their valuation and, as the market stagnated, fearing losing money.
The contract cancellation rate, which did not reach twenty percent before the beginning of 2014 but has begun to grow significantly since, reached 43.4 percent last year, mainly concentrated in the purchase of real estate with values between R$300,000 and R$800,000.
Charlie Jonas, a French expatriate living in Rio, and sales director for luxury real estate firm Rio Exclusive shared that although their market is in much more expensive properties, they have also seen contracts falter. “Unfortunately we did experience a sales contract default last year.”
Jonas explained some of the typical reasons it can happen. “The problem can be on the sale or on the buying side. [If the seller is] not in possession of the right documents or the condominium sued the owner for x, y or z reason. The same can occur with the buyer that isn’t completely clean on the legal side or simply doesn’t have available resources.”
To avoid getting into a contract default, he advises, “As a seller the best way to protect yourself is to make sure the buyer shows all required documents (CPF or CNPJ etc.). A proof of funds is the best way to make sure the buyer is serious.”
According to O Globo property developers are now seeking new regulation to curb this high rate of contract cancellations, as it leaves construction companies without sufficient guarantees to take credit, which causes delays in works of new ventures.
The report stated that the construction sector has been lobbying with the National Consumer Secretariat (SENACON), linked to the Ministry of Justice, to set default penalties of a percentage between 20-25 percent of the total value to be paid by the buyer, which may be retained by the construction company.
The Brazilian Association of Real Estate Developers (ABRAINC) and other entities in the sector, have also been discussing with the Ministries of Planning and Justice the regulation of rules to apply fines of 10-14 percent depending on the property value.