By incorporation or by administration, what’s the difference ?
31 July 2020
During a real estate project, a crucial question arises: should I buy on plan ?
In this series of 3 articles, WhereInRio helps you to see more clearly the specificities of a pre construction purchase. Today we are interested in the technical details of a pre construction purchase.
AS A REMINDER
In the case of a project by incorporation, it is the company in charge of the project that also takes care of the work. In other words, the builder manages the project from A to Z - from the purchase of the land to the sale of the apartment - deriving its income from the final sale of the apartments.
In the case of a project by administration, a service provider hired by a real estate fund is in charge of the administration of the project. In other words, in the case of a project by administration, the builder is not the owner of the land.
So as a buyer, what does this change for you?
CAN I FINANCE MY PURCHASE REGARDLESS OF THE TYPE OF PROJECT?
Yes! And that is the advantage of such a property! There are two forms of financing:
- Short-term financing is available for any type of project
In this case, the total value of the apartment must be paid throughout the construction and the lump sum must be paid at the latest when the keys are handed over. For this purpose, the builder establishes an excel tab stipulating the terms of payment (X monthly payment of X R$ for X months). The monthly payments appear in the compromise of sale and are updated every month by a national or regional construction index (INCC or CUB value*), it depends on the builder. This form of financing is possible for any type of project.
- Long-term financing is only possible for incorporated projects.
This means paying 30% to 40% of the property throughout the construction in monthly payment (as in the case of short term financing), then taking out a loan to pay the remaining amount. In this case, if you are not Brazilian, you will not be able to borrow in Brazil. As a reminder, it is very complicated to obtain a loan in your country to acquire a property in Brazil, we strongly advise you to go for the "short financing" option. Be careful, this possibility is only accessible for projects by incorporation.
CUB AND INCC, WHAT'S THE DIFFERENCE?
In a few words, these two indices are calculated from the inflation of construction costs (are taken into account in the calculation: raw materials, materials and labour). In a country like Brazil with inflation well controlled by the central bank, this will have very little impact.
The INCC - Índice Nacional da Construção Civil - is a national index used in projects by incorporation. The history of this index shows a strong downward trend, about 4% in the last 3 years and only 1.4% for the first half of 2020. https://www.melhorcambio.com/i... CUB - Custo Unitario Basico - works on the same principle except that it is a regional value per m². Like the INCC, it is around 4% per year, in Rio de Janeiro with a strong downward trend. For example, in June 2020 the variation was +0.19%.
In both cases, these indexes are not applied to what has been paid at the time of the down payment nor to what remains to be paid in the case of long financing!
DOES THE TAX ON THE TRANSFER OF PROPERTY (ITBI) DIFFER?
Yes, the rule is different since the owner of the land is not the same.
In the case of a project by incorporation, the rule remains the same as in the case of a purchase of a second-hand property and therefore the property transfer tax is applied to the market value of the property, i.e. the purchase price.
Conversely, in the case of a project by administration, this tax is calculated on a portion of the land and is therefore lower. In this case, the builder communicates a global legal value including the ITBI as well as the various legal formalities (notarial deed...) in order to know the total value of your purchase.
ARE THE DEADLINES DIFFERENT ACCORDING TO THE TYPE OF PROJECT ?
The deadlines are different and depend mainly on the speed at which the units are sold.
In the case of a project by administration, construction begins once all the units are sold. It usually takes 3 to 4 years from the time of your purchase before you can enjoy the property. Even if you buy the very first unit of a project, the very attractive price guarantees a quick sale of the property and therefore a delivery close to the announced date.
In the case of a project by incorporation, the deadlines are often shorter. Indeed, the work starts more quickly (generally when 50% of the units have been sold) and allows for shorter delivery times (about 2 years from your purchase).
AND IS THE PRICE NEGOTIABLE?
Yes and no!
In general, projects by administration are deemed to be "at cost" and therefore there is little room for price negotiation. Projects by incorporation, on the other hand, are generally more flexible.
Even if the price itself is not negotiable, you still have a lot of room for manoeuvre on the modification of plans, raw materials... Buying new is not just about price, it is above all, about customizing your property for a turnkey solution without any hassle!
In any case, what will allow you to negotiate the price of this type of good concern rather than the down payment at the time of purchase. The higher your down payment is, the greater the room for manoeuvre will be too.
HOW AM I COVERED IN CASE OF BANKRUPTCY OF THE DEVELOPER?
First of all, we work with the best builders in Rio and this risk is extremely minimal! However, there is no such thing as zero risk and it is always good to know what protects you.
In the case of a project by administration, there is a full or partial refund of what has been paid. All these conditions are clearly indicated in the sales agreement and our advisor will be able to give all the information according to the project you will choose.
In the case of a project by incorporation, the property is protected by the law of "patrimony by appropriation" which guarantees the delivery of the property in all cases. The work would be taken over by another builder following the specifications already established at the time of your compromise of sale.
SO WHAT IS BEST FOR ME?
That will depend on your project! The two main questions that arise are:
- Do you want a new property soon enough?
- Can you finance this property in equity before delivery?
Here is a summary table to help you see more clearly
|BY ADMINISTRATION||BY INCORPORATION|
|LAND||The land is owned by a real estate fund, not by the builder||The land is owned by the builder itself|
|FUNDING||Short term funding : everything has to be paid at the delivery||Short term or long term funding|
|ACTUALIZATION OF MONTHLY PAYMENT||INCC or CUB depending on the builder||INCC or CUB depending on the builder|
|GOVERNMENTAL TAXES (ITBI)||3% of a piece of the value land||3% of venale value of the property|
|BEGGING OF WORKS||Once everything has been sold||When a certain quote of units are sold|
|DELIVERY DELAY||Between 3 and 4 years after launch||Between 2 and 3 years after launch|
|PRICE||Known as “at cost price”, few negotiation margin||A bit more negotiation margin|
|IN CASE OF BANKRUPTCY OF THE BUILDER||Partial or total refund, depending on the contract||Protected by “heritage by appropriation” law. Even if the builder is bankrupt, another one will finish the building.|
WhereInRio offers you a quality personalized accompaniment for your project thanks to more than 14 years of experience on the Brazilian real estate market. Our international and multilingual team will advise you and direct you to qualified and trusted professionals in order to meet your expectations and acquire the property of your dreams (bilingual lawyers, architects, etc.). Whether it is a personal purchase or an investment to rent, we offer all the necessary services for your project (research and purchase of a property, assessment of your rental potential, property management).
More information on this topic :
> Why invest in pre-construction sales in Rio de Janeiro ?
> How to buy a pre construction property in Rio de Janeiro ?
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> How to get a Golden Visa in Brazil by investing in real estate ?
> 4 Good reasons to invest in real estate in Rio de Janeiro
> Covid 19 & Buying real instate in Rio de Janeiro
The best pre construction purchase in Zona Sul, Rio de Janeiro
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3 or 4 bedrooms : Nove
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