By Carlos Graffigna, Contributing Reporter
RIO DE JANEIRO – According to statistics by ABAC – Associação Brasileira de Administradoras de Consórcios (Brazilian Association of Consortiums Administrators), the Consorcios is utilized in almost one third of real estate transactions.
A “Consorcio” as a closed pool of participants making monthly installments over a set period of time in order to fund the purchase of a designated good, in this case real estate, through monthly drawings in which there are one or more beneficiaries. A typical Consorcios might involve 300 participants, contributing over 60 months.
There are several objectives for Consorcios; they can finance different types of assets from cars to tourist packages to commercial equipment, although constituting one with the sole purpose of creating a money pool is prohibited by Brazil’s Central Bank. Consorcios are a popular choice to finance real estate because there are no interest payments, only an Administration fee which changes depending on the institution, for example, Caixa Economica and HSBC both use 18 percent as their normal fee.
The Administrator serves three main functions. First, allocate and evaluate the participants, which would basically imply selection of individuals with certain level of income or savings. There are no restrictions regarding nationality or additional requirements for foreigners. If the Administrator is a bank and you have an account at their institution, requirements are basically nonexistent and monthly installments will be debited automatically from the account.
The second task attributed to Administrators deals directly with the process of monthly payments and communication with each participant regarding the state of business.
Finally, the Administrator is in charge of pursuing late payments, apply penalty fees or even process repossessions. The property will always serve as guarantee until all installments have been entered.
Regarding the legal and operating structure of Consorcios, they are similar to a Mutual Fund and even though attendance to monthly meetings hosted by the Administrator are not a requirement, 70 percent of participants are needed at the initial meeting. Also, at this first gathering, there are a group of individuals elected to represent the participants.
There is one lucky winner each month, additionally there are one or two more Letters of Credit available each month for participants who not only pay their normal installment but whom also bid additional funds in order to concur for the extra benefits.
Even though there is a great degree of luck in the process, the Consorcio guarantees you will get a Letter of Credit for the purchase of the property within the period of the contract. For the monthly drawling, each participant receives an identification number; this number is matched against the National Lottery to determine a monthly winner in order to keep impartiality.
One more benefit, Consorcios are tax-favored saving and borrowing instruments, so they are not assessed any taxes related to account activity like deposits and withdrawals. With all these benefits it would be difficult not to recommend Consorcios as a viable and low cost alternative for purchasing real estate, although there are two important considerations which need to be analyzed.
The first one is to conduct due diligence on the institution offering the product. Along with all the background information you can gather, check the legal status of the entity in Central Bank’s data base.
Secondly, consider the time frame in which you need the property, if you are capable of waiting the full length of the Consorcio’s contract, then you are probably about to make a good investment.
If for different reasons you might need the property within a short period of time, then you may want to consider another more immediate vehicle for purchase. Getting into a Consorcio and having to withdraw before the due dates can be costly, even though you will get your investment back, it might take some time and a few penalty fees.