Chile Economy — 09 December 2011

This article is an explanation of how to buy real estate in Chile. I am going to explain this by way of an example from my own personal experience, so you can consider this accurate because as a foreigner I had to stumble through all of this and can now can explain this to you. You can also consider this the (almost) worst case of what can go wrong. I say “almost ” worst because the absolute worst case would be to lose your money. In my case the only thing that went wrong is it took me 6 months to close the sale. Yes that is correct–6 months and I paid cash.  I imagine if you were to require a mortgage it could take longer but people have told me 3 months is normal yet 6 months outside the range of normality.

The Visit

In Chile paperwork is required for everything. When you tell a real estate agent you want to visit a property in most cases they will send an ordena de visita. No need to have your attorney read this.  It just spells out the real estate agent’s commission and lists the property you will visit. In Chile the real estate commissions is 2% although I understand you can negotiate that.  Still it is a bargain from the 6% USA standard where real estate agents have been sued for price fixing yet their price is still fixed.  When I was looking for farm recently the agent requested 2.5%.  When I bought a farm in the USA the real estate agent charged 10%.  No wonder these people are not popular.

 

The Offer

I found and made an offer on a 3 bedroom apartment in Providencia an upper class neighbourhood in Santiago.  I made sure it was oriented to the north so that in the winter I would receive the summer sun on my terrace and windows. If you are on the south side of an apartment building rest assured that in the winter it will be freezing cold with no sunshine.  In Chile central heat is considered a luxury although I made sure my apartment had that. Even in the spring and fall here it is chilly in the shade so you want to be in the sun. How depressing it would be to move to a country with such abundant sunshine and live on the shaded side of the building. You also want a view of the Andes mountains but do not get an apartment facing directly east towards the Andes because then you will not have enough sun.  Northeast or North are best while slightly west of North is OK.

When I told the attorney to make an offer on the property the real estate agent sent me a quote called an oferta de compra.  She also sent a aceptacion de oferta which can also be called a promesa de compraventa. My first mistake (I blame this on my attorney) is not having the buyer and seller sign this document. My lawyer had the idea to move ahead with the purchase and skip over the offer since I was eager to buy. As you will see later this left me without any leverage in getting the purchase settled because the promesa includes a clause that the seller deposit with the notary (the notary is sort of like a title company) 10% of the sales price or forfeit that if the seller fails to comply with the instructions coming from the notary. (The part which is not clear on this promesa is what happens when the seller is strapped for cash, as sellers often are, and does not have 10% to put into escrow. )

The Money

Real estate prices in Chile are quoted in monetary units called UF or Unidad de Fomento. You can think of an UF as a certain number of pesos. For example today 1 UF = 22,239.29 chilean pesos. The value of the UF is set by the central bank and is changed to keep pace with inflation. You can know the value of the UF today by looking in the internet or newspaper and you can know the value for several days in the future. One advantage of this is when you buy insurance for your new property the policy will be quoted in UF. And since UF has a built in inflation adjustment there is no need to add an inflation adjustment rider into your insurance policy.  (Yes you should buy earthquake insurance.  Mine costs $50 USD per month.)

Another term to know is vale vista. You can think of a vale vista as a cashiers check. The notary will hold onto the vale vista until the end of the title search which is explained below.

Mortgages

I have no information on mortgages in Chile since I did not request one. They are called “hipotecas”. The most common mortgage loan-to-value ratio in Chile is 85% meaning a 15% down payment while it is possible to get 100% financing.  Of course 100% financing is what cast the USA and much of Europe into the financial crisis we have today when the values of such properties fell below the value of the mortgage and the whole pyramid scheme scheme came flying apart.  If you are from the USA you will find it shocking that in Chile 99% of mortgages are quoted in UF meaning the principal portion of the loan will increase with inflation.  Inflation is generally not a problem in Chile and is currently running at between 3 and 4%.

Title Search

In the USA when one buys a property the closing attorney and the attorney for the title company will conduct a title search. (In the USA the title company provides title insurance which insures again any unforeseen problem with the transaction. For example the deed could be flawed or their could be liens on the property which were not found during the title search. One notorious example of flawed deeds in Chile are the lands where the Mapuche Indians live. Because they had no clear title the government some years ago saw no reason not to sell part of their lands to Spanish investors. It was if the conquistadors had come to Chile twice to upend the natives. There is still a minor revolt going on in that community in the region around Temuco.)

Anyway back to the title search topic for my transaction responsibility fell to the company which held the mortgage on the property: Santander Bank of Chile. People told me Santander Bank was slow but I had not idea they were so slow that it took them 6 months to conclude my transaction. See the next paragraph for a description of exactly how slow they were. (Disclaimer: Bank of Chile and CorpBanco were listed by Global Finance magazine as among the top 5 safest banks in Latin America. These two banks and Santander Chile are listed on the New York Stock Exchange as ADRs and are well-regard by investors. I have bought shares in The Bank of Chile and Santander Bank.   Santander Chile is separate from Santander Spain which recently had to diverge itself of some of its shares in Santander Chile in order to meet capital requirements coming from the European Union. Know also that CorpBanca recently took over Santander Bank of Colombia.)

The Attorney

There are lots of attorneys in Chile and my experience is that almost everyone you knows says they know an attorney you can use. Don’t take their advice. Most of the attorney’s here seem to be starving to death (slight exaggeration) with regards to their income. Before you hire an attorney ask him or her whether he has an office, a secretary, and how many attorneys work there. The first attorney I hired I fired after he incredibly he told me he grew weary of trying to get Santander Bank to comply with the notary’s instructions and suggested I buy another property–he wanted to give up after months of pestering the mortgage department at the bank.  However weary was his ordeal I considered it reckless to want to give up on the transaction.  So after getting rid of him I asked someone who I knew who had a lot of money what attorney he used and this second attorney stepped in and rescued the whole transaction which was on the verge of falling apart. It did not matter that there was a time limit set by the notary. No one could get Santander Bank to speed up the title search process.  Part of the problem was the seller owed money to the bank–it was not much and I offered the bank to pay that debt myself but they said that was not acceptable. Meanwhile I was without title to my apartment and losing more than $1,000 USD per month in interest because my cashier’s check was sitting with the notary and not earning interest for any of the parties involved. In the USA that money would have been deposited into an escrow account and earning interest. Actually in the USA the subject or such interest rarely comes up because a real estate closing there only takes a few days, not a few months.

Closing

The actual closing, if you can call it that, was held in the notary’s office. As I said before there was no promesa in my case–I would call that a big mistake. Still in the closing the money in the form of vale vistas was handed over to the notary who had each of us sign the instructions together with a notarized copy of the vale vistas. The document we signed was simply called “instructions”. The instructions stipulated that the property would be registered with the property clerk’s office, conservador de bienes raices, within 90 days or the money would be returned to the buyer. In my case since the Santander Bank took more than 90 days to sign off on the transaction we had to gather for a third time with the notary (the second time is explained below) to request an extension to these instructions.

Several months after the closing Santander Bank had us gather together again to resign the documents because my password showed my first, middle, and last name while the documents we signed included my mother’s last name. Here in Chile people use two last names: that of their mother and father while in the USA we just use our father’s last name. Anyway the bank wanted the passport to match the closing documents.

Wiring the Money

Beyond the ridiculous situation with my attorney and the delay at the bank there was an event more absurd even which costs me time and money. As a foreigner I had a provisional RUT (sort of like a tax payer ID). The bank BCI let me open a limited type of checking account called a cuenta vista but would not let me open a regular checking account called a cuenta corriente. The ejecutiva (sales person) assured me I could my wire transfer the funds I needed to buy my property in Chile into this account. But when it actually came time to wire the money from the USA to Chile a person superior to that person said  I could not. So incredibly they sent my money BACK TO THE USA. I scrambled to find another bank which would let me open a proper cuenta corriente.  That was BBVA.

One word about wiring instructions. Due to the risk involved in this type of transaction your bank in the USA or Europe or wherever is probably going to want to interview you before they wire a large amount of money out of the country. You should go to the branch there in advance and fill out wiring instructions ahead of time. Also when you money comes to Chile the central bank here will want documentation showing where this money came from. Presumably this is to thwart any kind of criminal activity such as drug money laundering.

Due Diligence

Here is a list of items which my attorney asked from the seller. Apart from these documents actually verifying that the seller had no outstanding tax issues, unpaid debts, or pending legal matters was presumably handled by the bank which held his mortgage:  Santander Bank.

Certificado de deuda de contribuciones–shows that real estate taxes have been paid.

Certificado de deuda de aseo municipal–this shows you have paid the city for garbage collection and owe no back payments.  In an apartment you pay monthly gastos communes and then the apartment takes care of the garbage.

Certificado de la administración del edificio en relación a deuda de gastos comunes del Departamento, la Bodega y Estacionamiento–shows that the seller not arrears in the gastos communes which are paid for the apartment and parking space.

Copia del reglamento de copropiedad–rules of the apartment. These are legal rules and you can be fined for breaking them like making too much noise for example.

Copia de dominio vigente, del Dpto., Bodega y Estacionamiento GP. con litigios (certificado de gravámenes y prohibiciones).– This is where real estate transactions are recorded. So this is the recording of the deed of the current owner.

Copia de la escritura de que origino la compra de los inmuebles por parte del actual dueño–the escriutura is the document in which your property in inscribed with the conservador de bienes raices.  Not sure how this document differs from the one listed immediately above.

Certificado de matrimonio del propietario, en la eventualidad que sea casado–if the owner is married this is the marriage certifiate

Certificado de no expropiación municipal y SERVIU–this shows that your property was not expropiated for example to widen the street. SERVIU is ministery of housing and urban development. Presumably you need to check with both agencies. Know that Santiago is composed of various cities called “communas” or municipalities. For example you could live in “Las Condes” or “Providencia”. Each has its own local government.

Other Expenses

attorney fees–the first attorney I had charged me 300,000 CLP fixed price. The second attorney I hired charged me 500,000 CLP. (I am told that attorneys in Chile charge by the task and not the hour.) The conservador de bienes raices cashed my check just yesterday so I feel confident that this transaction will finally be closed within the month.  Everyone was waiting on Santander to sign the documents with the notary and they finally did that.

conservador de bienes raices–I gave the first attorney 300,000 CLP to register by deed with the clerk’s office. I also paid 175,000 CLP to the second attorney for the same transaction.  Not sure why I paid twice but at this point who cares.  I dare not ask any question which would further delay the transaction.

taxes on real estate commission–the tax on the real estate commission is 19% which is the same as the VAT tax here know as IVA.  There is no transfer or sales tax on the actual purchase of the property.

 

Addendum

 

Finally yesterday on December 21 my property was registered in my name with the conservador de bienes raices.  As I said the whole process took 6 months.

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(6) Readers Comments

  1. It took us 15 months to buy our house….it is also a long story. Fotunatly, we moved in as renter before it was our. You need a good lawyer when you buy a property in Chili.

    • Sophie I am looking at buying property with my Chilean wife. We have the same issue we have to rent first and then buy after a year. I want to get a mortgage on the property as I will not have the full amount to pay the property out right. Is this possible to do as a foreigner?

  2. I’m in the process of purchasing but not happy with my attorney. Can you recommend the one you used?

    Thanks!

  3. I appreciate your insight into buying real estate in Chile. Due to the length of the process it certainly seems prudent the attorneys are not paid per hour. Being a California Real Estate Broker for nearly 30 years, I object to your blanket statements regarding commissions and standards of practice. I can count on one hand the number of times an attorney has been involved in any transactions. While attorneys are used in many areas of the United States, they are not common in residental real estate in the purchase of a home in California.

    Regarding commissions, 5% is far more normal than 6% for residental sales. When I represent Buyer and Seller, I typically charge 4% total for the transaction. For this commission, I perform all of the duties that the real estate agent and the attorney perform. In addition as a Buyer you pay for the Buyers agent directly. In California, the Seller pays the commission as cost of sale. Thus, as a Buyer for all escrow/title and insurance your cost is 1.5% of the purchase price. In Uruguay, the Buyer’s costs are between 9-16% of the purchase price.

  4. Dear Sir
    I have funds which i want to invest in your country, as a property agent, do you have any possible business that can give us profit, let me know
    For details and possible business co-operation, please get back to me only through this email
    Thank You.
    FRED OBI

  5. I might be coming at this from a biased point of view- I am an agent and consultant for international buyers in Chile, just google my name- but this story shows that it’s extremely worthwhile to hire someone who knows exactly how the process works. I’ve bought and sold 8 properties of my own over the last 7 years in Chile and have helped many foreigners do the same. All of the transactions have gone through without a hitch because a) I only work with extremely good lawyers and b) I’m fluent in Spanish, know how Chilean culture works and have a large network of people who get things done for me.

    I can get money into Chile 100% legally in less than 4 hours, at a vastly superior exchange rate to a normal bank. I know when a property is overvalued and I know when a local agent is messing me around. Hiring a consultant like myself is going to cost you some money, without a doubt. But it will also save you money (exchange rate and property value) and a huge amount of stress and hassle of having to do everything yourself. When I have bought overseas (Argentina, Chile and Spain), my first purchase has always been using the services of someone who knows what they’re doing. For peace of mind and reduction of stress, it’s just worth it.

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