Please see a chapter from “The Essential Guide to Land Investment in Brazil for 2015 and Beyond” – kindly donated to this blog by Brazilian real estate consultant and author Mike Smith. Scroll down to the bottom of the post for Mike´s full contact details and social media links.
Avoiding Common Mistakes when Investing in Brazilian Real Estate
Brazil is a challenging but ultimately very rewarding country to do business in. But things can go wrong. Investors will try to take short cuts by failing to have paperwork checked thoroughly and miss out on basic procedures, checks that can prove very costly and stressful in the long run so let me just tell you about some of the things I have seen that can go wrong with property investment in Brazil.
First and foremost, documentation,you need to check that the land you are buying has all the required paperwork,straight off..the land should have a public deed that is registered in the local notary office, in the name of the person / company you are buying from.
The property also needs to be registered with the local municipality and the land dimensions.location, owner need to match up between the two departments.
This is absolutely fundamental in ensuring that you have a safe and prosperous investment. If the documents to the property are faulty in anyway,any subsequent development will be put in jeapordy and you stand the chance of losing your money.
If you go ahead and purchase the land because it seems like a great deal and have not carried out these checks it could prove to be a very costly mistake right at the get go.
For example many of the properties in this region do not have ownership rights but rights of possession, or ‘posse”. This means that the property does not exist legally / publicly but was purchased with a private agreement between buyer and seller and passed on through the generations. If you enter into this type of purchase you open yourself up to potential land disputes as anyone can come along and claim that they have a purchasing agreement for the same property. You cannot legally build on this type of land and therefore are unable to sell. There is a process (usucapião) where you can apply for legal title to the property after a certain amount of years but this route can be agonizingly slow taking years to finalize by which time you’ll have missed out on market growth and potential profit.
I would therefore advise you straight off to only consider purchasing property that has the correct paperwork. This period of due diligence may take a week or so to establish with a good lawyer or licensed real estate agent. They can do a thorough check on additional aspects of the property, tax liens, existing legal suits.
Next comes planning permission
I would advise you to get an architect involved pre-purchase to put a project together for the parcel based on the local building codes of the municipality aligned with your investment model and then get a basic consultation with the local planning department and the relevant environmental agency to check if it is viable.
This will give peace of mind and prevent any nasty suprises further into planning, construction phases.
So you’re going to buy a property that is legally registered with a definite blueprint of what can be built on it, according your specifications.
You also need to establish the topographical status of the land. One of my fellow investors purchased a large area of land in the interior of the state and licensed a project for 300 homes. It was only when they started to lay the house foundations that they discovered the solid rock under the top soil. This meant they had to drill deeper foundations and added over 1 million dollars to construction costs.
Alternatively land that is below sea level can appear to be perfectly fine for development purposes during the summer months but turns into a lagoon as soon as the rains come. This means additional costs as you need to dump truckloads of dirt to level up. Make sure you have an engineer look at the lay of the land so you can at least factor these realities into your development budget.
When you buy land here please ensure that you secure it with a perimeter fence or wall depending on your development plans. There are cases where local residents have invaded open land areas, built shacks and claimed ownership.This can prove a headache as you will probably need to file a legal suit to get them evicted and this can be a long drawn out process. If the land is clearly marked it sends a message to any would be opportunists so make sure you establish your ownership of the property and secure it.
Going into partnership. This is a problem that often arises. A foreign investor comes to Brazil, strikes up friendship with a local Brazilian / foreign resident and decides to go into business together. The friend speaks Portuguese fluently and seems to know their way around so it makes sense to have this kind of local know how and support but with no capital or a disproportionate amount. This can be a blessing but is more often a fatal mistake. Once the friend becomes a company partner with equity in your business they have a part controlling share and should the friendship sour you could have a major problem extracting this person from the company.
Make sure that you run a check on anyone you are going into business with as a partner. It is fairly easy to research through social media channels and by finding out if the partner has had experience with property investment and perhaps some references from people you can gently reach out to.
It’s very important to find out this type of information as best you can before entrusting company equity and decision making powers to the potential partner.
Overstretching your resources. Don’t go too big too soon.
This applies to all the development investment options mentioned in the previous chapters. With the subdivision, break up the project and develop in phases, for the gated community, try to minimize your initial development costs, build one showroom and get your orders in off plan before proceeding with the more costly infrastructure and with social homes, try to make make sure you are not dependent on the funds due from the last batch of homes to complete the next batch otherwise you run the risk of defaulting.
The development needs to be of a manageable size that you can afford so you are not overstretched. There is always the possibility that you won’t be able to sell all of your plots / homes in the anticipated time so it is prudent to have a capital reserve to account for any delays / downturns in sales.
Last but not least is the need to delegate..don’t try to do everything yourself.There are big opportunities here but the business is challenging especially if your Portuguese skills are not up to scratch. This is a team effort so you need to employ the right professionals to get the job done.
When you are purchasing the land you’ll need a real estate agent to guide you through the process,for the project you need an architect, a lawyer to oversee paperwork, an accountant to run the books, possibly an administrator to organize the operation and a builder to deliver the infrastructure and homes. This structure is fundamental to doing good business here.
You can sub-contract this team of professionals or hire full-time depending on the size of your investment operations here.
I know of other investors who want to be more hands on and start getting involved in buying, delivering building materials or attempting to train the labour force, try to take on the due diligence when purchasing property.This is all well and good if you specialize in one of these business aspects and can add genuine value and improve efficiency. However more often than not micro-managing turns into mini-migranes! It creates problems for the investor as you can become frustrated by the Brazilian methods and general work culture. Pick the right team and then leave it up to the professionals to do their job and supervise operations.The job will get done alot more smoothly and you will able to sleep at night and make money in the process.
If you follow the guideline set out in this chapter and avoid the common mistakes that investors make you will have a much better chance of profiting from your investment and multiplying your returns.
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