An Essential Guide to Buying and Renting in Colombia
Colombia’s real estate market is hot. While home prices in the U.S. plummeted during the economic crisis in 2006 to 2009, the real estate market weathered the storm unscathed. Between 2010 and 2011, property values leveled off, with values increasing an average of 4.8% to 5.3% nationwide. In 2012 and 2013, home prices soared again, with property values rising by 11% to 12%. According to the latest DANE (Departamento Administrativo Nacional de Estadística), the Colombia department of statistics, new home prices increased 6.6% in 2017 and 7.6% in 2018.
Buying, selling, or renting property doesn’t have to be a confusing process if you know the rules, regulations, and norms for the country (and sometimes the city) where you are planning to do the transaction. Below are some tips about what you should know about real estate in Colombia.
Anyone can be a real estate agent
There is no license requirement to be a real estate agent. Put up a shingle, create a Facebook page, print a few business cards, and you are in business. This means you can find real estate agents who are selling or renting real estate as a part-time side business with next to no experience. However, there also are many, many excellent real estate agents who work privately or for a real estate agency. So, to help improve your odds of connecting with a good agent, look for real estate agents with proven track records and get recommendations from other expats who have purchased property in the area you are looking to buy.
No Multiple List Service
Unfortunately, Colombia does not have a Multiple List Service where you can find all property listings in a given city, town, or area. What that means for you is that the real estate agent you choose will only show you the listings that they have. Also, you will not be able to get statistics, such as days on market or list vs sale price, that you may be used to using to help you with your offer and purchase decision. There are a few websites that do try to consolidate listings from various real estate agents. Fincaraiz.com.co and Encuentra24.com are two of the most popular, but there are no statistics.
You will not have to sign an exclusive agreement with a real estate agent when you are buying, selling or a property. There is no such thing as real estate agent loyalty. As a matter of fact, it is common to see several real estate agent signs on properties for sale or rent. From the owner’s perspective, the first person to find a buyer gets the deal. Co-brokering between real estate agents does happen, but not very often. Especially since the real estate commission is only 3% of sales price. In many cases sharing for only 1.5% commission is not worth the real estate agents time.
Two prices for real estate – but the law is changing
Colombians are accustomed to having a selling price and a price recorded with the municipality. The recorded price is often much lower than what you actually pay for the property. This if often done to reduce the impact of capital gains tax for the seller. While Colombians do it all the time, it isn’t something expats are used to and should be avoided. You would not want to have to absorb the prior owner’s capital gain in yours when you sell the property.
A change in Article 90 of the Tax Statute for 2019 that would require purchasers to register the commercial value of properties will make this issue of two prices go away. This change has already been approved by the Colombian congress and awaiting signature by the President.
Compared with many North American markets, Colombia has low closing costs.
Real estate transactions may vary but here is a good estimate of what you can expect to have for closing costs. A couple of the fees are shared by the buyer and seller.
- Real estate agent fees: 3% of the recorded purchase price, plus 19% VAT, paid by the seller.
- Attorney fees: typically around COP $1 million ($334 USD) for basic work, such as investigating the title and property tax records. Your fee will vary depending on complexity of work needed, and which attorney you choose. Shop around.
- Registration fee: 0.05% to 1% of the registered purchase price, paid by the buyer.
- Sales tax: 1% of the registered purchase price, paid by the seller.
- Notary fees: 0.30% to 0.35% of the registered purchase price, split equally between the seller and buyer.
- Income tax: the notary will also collect 1% of the registered purchase price from the seller for income tax.
- Transfer charges: 0.15% of the registered purchase price, split equally between the seller and buyer.
- Local taxes: 1.05% of the registered purchase price, split equally between the seller and buyer.
Cash is king for foreigners
Colombia has a very sound and conservative banking system. To qualify for any type of loan, a Colombian must have an extensive history of good credit, money in the bank, and a steady income. Financial instruments such as adjustable-rate mortgages, interest-only loans, and second mortgages don’t exist here. Fixed rate loans are the norm.
It is very difficult, if not impossible, for foreigners to take out a mortgage in Colombia. If you do manage to succeed, the bank will require you to make a 30% to 40% down-payment and charge you around 16% interest. Although a few banks now offer 20-year mortgages, most only offer five to 15-year home loans. So, cash is king when buying a property in Colombia if you are a foreigner.
Estrato system
When you look at real estate listings in cities and towns in Colombia, you will likely see a reference to the home or apartment’s estrato, followed by a number. The estrato number refers to a socio-economic scale of one to six (with one being the lowest and six being the highest). This tiered system determines the price you will pay for utilities, property tax, and cable/internet.
Residents living in estratos one through three receive subsidies on their services and taxes, while those living in estratos five and six pay more for their services to provide those subsidies. Usually those living in estrato four dwellings pay the actual usage rate. The trick is to see if you can find a lower estrato building in a higher estrato neighborhood. The estrato system does not exist in rural areas.
Notaries, Lawyers and Escrow
Notaries, lawyers, and escrow function much differently in Colombia than in the U.S. It is important to know the roll of each of these in the real estate purchase/selling process.
Notaries in Colombia have much more clout and importance than in the U.S. This is where all closings happen. Your lawyer will perform the title search and prepare documents, but all purchase and sale transactions occur under the charge of a notary. They will require a paz y salvo (statement of no liens) from the building administration, property tax, and utility companies before executing the transaction. Your lawyer and real estate agent should attend the closing to provide support and answer any questions the notary may have. But, without the notary’s seal, the transaction is not valid.
While very commonplace in the U.S., the idea of using a lawyer to hold money in escrow is completely foreign to Colombians. They would never give money for the lawyer to “hold on to” in case of contingencies.
New Development projects
New construction is going on practically everywhere you look in the larger and mid-sized cities in Colombia. Entering into an agreement to purchase real estate for projects “still on the drawing board” can be worrisome, especially in a country where you may not speak the language as well as you’d like.
Rest assured that the fiduciary system in Colombia has addressed this concern. The fiduciary company which administers the new development project requires enough of the units are pre-sold to cover the entire construction cost (usually 75% to 80% of the number of units) before the contractor can “put a hole in the ground.” This means that the only money at risk is the contractor’s profit. While it is true that on very rare occasions buildings never get completed, the vast majority of projects are completed. So, if you bought “pre-construction”, you will not lose your investment.
Renting out on Airbnb
Thinking about renting out your apartment on Airbnb for a few weeks to earn some quick income while you are traveling? You may want to re-think that idea. In Colombia, Airbnb hosts are now on a level playing field with hotel operators.
In late 2017, the Colombian Ministry of Commerce, Industry and Tourism instituted a policy requiring that anyone renting their property for less than 30 consecutive days must register with the National Tourism Registry (RNT) (website: https://rnt.confecamaras.co/home) and follow all the rules, regulations, and standardized policies that the hotels do. Of course, the hotel industry is thrilled with the decision as they felt that Airbnb and other online platforms have had an unfair advantage.
However, this doesn’t have to be a barrier to owning a property to rent out on a nightly or weekly basis. Some real estate companies have either purchased or built entire apartment buildings for the sole purpose of renting short term. If you buy one of these apartments and use them as your property manager, they include the license and proper documentation in the deal.
Fiadors and how to get around needing one
Traditional Colombian-owned real estate rental agencies require at least one, and sometime two fiadors (cosigners) in order for you to rent an apartment. They want someone to cover the rent in the event you stop paying. Finding someone to act as your cosigner will most likely prove challenging since you won’t know a Colombian who is a homeowner with sufficient income and who is willing to sign for your lease.
There are ways to overcome the fiador requirement:
- A few real estate agencies (often owned by expats) will lease apartments without a fiador, but you will have to pay three to six month’s rent in advance.
- Deal directly with the property owner and bypass the rental agency. You may be able to negotiate better and convince the owner to rent to you without a fiador.
- There are companies that will act as your fiador for a few, which can be as much as one or two month’s rent.
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