5 Advantages and Risks of the Real Estate Consortium in Brazil

Real estate consortiums are a type of property acquisition that has gained ground in Brazil as a more economical alternative to traditional financing. However, as with any investment, there are advantages and risks to be considered. In this comprehensive guide, we will explore how real estate consortiums work, their advantages, and also the risks that participants may face when adopting this strategy.

How does the Real Estate Consortium work?

A real estate consortium operates in a similar way to other types of consortium. A group of people with the objective of acquiring properties come together, contributing monthly to a common fund. Each month, the value of the installments paid by all participants is used to allow at least one of them to acquire their property.

The total value of the property is divided by the duration of the group, which is defined in advance. This means that each participant pays a fraction of this amount each month. In addition, the consortium offers opportunities for contemplation, either through regular draws or through bids.

Raffles and Bids

On specific occasions, the consortium administrator holds draws to determine which participant will receive a letter of credit for the amount established at the beginning of the consortium. In addition, participants have the option of bidding, that is, offering an advance payment. In general, the highest bidder is the winner and receives the letter of credit.

For example, if a participant in a real estate consortium group decides to pay off 50% of the debt and no other bid is higher, that participant will be awarded the letter of credit.

Real Estate Consortium Costs

Unlike other forms of financing, real estate consortiums do not involve paying interest to the financial institution. However, consortium members must bear other costs, such as:

Administration Fee

The administration fee is a monthly charge for managing the consortium. It is essential to understand the total cost of the operation, including all these expenses, before joining a consortium.

Safe

Many consortia require participants to take out insurance, which can add an additional cost to the operation.

Reserve Fund

In some cases, there is a reserve fund that serves as a type of “savings” to cover any contingencies of the consortium group.

These costs, when added together, generally represent more than 20% of the property value. It is important to consider these expenses when evaluating the viability of the consortium.

Use of FGTS in Real Estate Consortium

The Severance Pay Guarantee Fund (FGTS) can be used in several ways in a real estate consortium, making it a flexible option:

1. When placing a Bid

FGTS funds can be used to bid on the consortium. This allows the participant to increase their chances of being selected.

2. To Supplement the Letter of Credit

The FGTS can be used to supplement the value of the letter of credit, making it possible to purchase a more expensive property than originally planned.

3. To Amortize or Settle the Outstanding Balance

After contemplation and acquisition of the property, the FGTS can be used to pay off part of the outstanding balance or even settle the entire debt.

4. To Pay Part of the Installments

The FGTS can be used to deduct up to 80% from the total value of the consortium installments, as long as certain criteria are met. This helps to ease the payment of monthly installments.

Who is a Real Estate Consortium Worthwhile for?

Real estate consortiums are more suitable for some types of people, while for others they may not be the best choice. Check out who this option may be advantageous for:

1. For Those Who Are Not in a Hurry to Buy a Property

Consortiums are good for those who are not in a rush to buy a property. People who are saving to buy their own home in the future, investors who plan to buy a second property to rent out, or those who want to give their children a home after college can benefit from this approach.

However, it is important to note that these people do not necessarily need to opt for a consortium to save money. It is also possible to accumulate money gradually, investing the resources until it is possible to make the purchase.

2. For Those Who Can Bid Competitively

Those who can bid significantly, such as 50% of the consortium value, have a chance of being selected before the draw. If successful, they can buy the property, rent it out and use the income to pay off the next installments. However, there is no guarantee of success, as it depends on the competition within the consortium group.

Furthermore, when bidding and advancing the letter of credit, the participant must be aware that he/she will need to pay an administration fee proportional to the amount received.

3. For Those Who Want to Keep Their Capital Untouched

Even for those who have the money to buy a property outright, a consortium can be attractive. This is because, by participating in a consortium, the participant can keep their money invested in a financial institution, earning interest. When they are selected, they can buy the property, rent it out and use the rent money to pay off the monthly installments of the consortium, without touching the accumulated capital.

Advantages and Disadvantages of Real Estate Consortium

Real estate consortiums have several advantages, making them an attractive choice for many. However, there are also disadvantages to consider.

Advantages:

1. Absence of Interest: Unlike traditional financing, there is no interest paid to the financial institution, making it more economical in the long term.
2. Use of FGTS: The resources of the FGTS can be used in different ways in the consortium, providing flexibility.
3. Financial Planning: The consortium allows for long-term planning, ideal for those who are in no rush.

Disadvantages:

1. Draw Dependence: Contemplation in the consortium occurs through a draw, which can take time, depending on the duration of the group.
2. Price Increase Risks: Property prices can rise significantly over time, and the letter of credit adjustment may not be enough to acquire the desired property.

How to Create a Real Estate Consortium

If you are considering participating in a real estate consortium, follow these steps:

1. Financial Assessment

Assess whether the monthly installments of the real estate consortium fit into your budget. Financial experts recommend that no more than 30% of your monthly income be committed to paying debts of all types, to avoid defaulting.

2. Selection of the Administrator

Make sure you choose a consortium administrator authorized by the Central Bank. Also check the complaints rankings to make an informed choice.

3. Fee and Cost Research

Conduct detailed research into the management fees of different consortia. A seemingly small difference in fee can represent significant savings in the long run.

4. Understand the Contract Details

Read the consortium contract carefully, understanding the monthly installments, the correction of the letter of credit and other important details.

5. Participation in a Group

You don't necessarily have to join a real estate consortium group at the beginning. If a participant drops out, you can buy their share, often at a discount.

6. Exit Alternatives

Learn about the exit alternatives available in the consortium, such as reducing installments, selling the share or waiting for consideration. Each option has different financial implications.

Beware of Unrealistic Offers

It is important to be aware of offers that seem too good to be true. Scammers may promise quick consideration or easy low bids, but these promises are often from companies that are not authorized to administer consortia. There are no guarantees of success in consortia, and transparency is essential.

Conclusion

Real estate consortiums in Brazil offer an interesting alternative for acquiring properties, especially for those who want to save on interest and have time on their side. However, it is essential to carefully evaluate the costs, advantages and risks involved before joining a consortium. The choice between consortium and financing should be based on your financial needs and property goals.

Read too: Understanding how the Travel Consortium works