Blood on the Streets: Con't
Part 11: My Favorite Contract DebaclesSo you’ve found that perfect place here in Panama. Most of the time, some sort of deposit is required to hold the unit, usually between $1,000 and $10,000. By putting money down before signing, you are basically holding your specific unit and locking in a price. Most developers and real estate agencies that I deal with will hold a unit for 30 days, however some of them like to put added pressure and knock the terms down to four days. Tell them you want 30 or they can shove it. I always suggest that my clients make sure that the deposit money is fully refundable in the event that you decide to back out of the sale. Useful Tip: Get everything in writing (In Spanish): even email stands up in court in Panama. The best place to start is by finding yourself a good lawyer: preferably someone here in Panama who is already familiar with the project, location, or developer with whom you are signing your life away. How do you know you have a good attorney? Connections are huge in Panama, perhaps more so than wit or talent, so I always like to refer my clients to the same three or four lawyers whom I know can get the job done simply because, as it seems, everyone owes these guys a favor or two. While it might seem logical to go for the biggest and the best firm, these guys are often over booked and less able to give you great customer service. I like to recommend my clients the smaller firms because they will find that the personal relationship and commitment is much stronger with these smaller agencies. Prices with the smaller firms are also much lower so it's a win, win. A legally binding contracts must be in Spanish here in Panama, so what you will usually find is a contract in Spanish with a side by side exact English translation attached. If your contract is only in Spanish, someone like me should be able to get you a translated version. If your agent hands you a contract that is only in English, walk away because either there is something fishy going on or you are dealing with rookies. There are almost always two parties involved in the contract, the first being the seller and the second being the buyer. I like to make sure that the party listed as the seller is truly the seller. In the case of purchasing a pre-construction unit from an individual seller ( a resale ), make sure that the property is held in corporation ( or else the seller will be hit with 12% taxes and may try to pass this cost on to you ). Also, find out if there is any materials escalation clause because you as the new buyer will be responsible for this. Also, make sure that the property is actually listed with the government as being held under said corporation ( an easy inquiry by your lawyer ). In the event of a pre-construction promise to purchase contract directly from the developer, make sure that the seller in said contract owns said property or represents the developer in some way. This verification can be handled by your lawyer with a simple inquiry to the Registro Publico. Having come across a number of contracts during my days here, I have come to identify a few red flags. The following are clauses I have encountered, sometimes the hard way, which I believe are of the utmost importance for an agent in Panama to focus on: Materials escalation clause: This is contained in every single pre-construction contract, with the exception of those that are within six months of being completed or in the event of a resale where the previous buyer has negotiated its removal. If you see a materials escalation clause in a contract for a building that is going to be completed within six months, tell the seller you will not sign until it is removed. How much can the cost of materials reasonably go up over six months? This clause is a fact of life and not a dirty trick used by developers to squeeze that extra penny out of you. Actually, it is a dirty trick, but everyone’s doing it, especially in today’s inflationary times. But there are ways to have this clause removed. First of all, know that the maximum possible rise in your price should be 5%. If I see anything more than this, I always make sure it gets capped at 5%. What I usually tell my clients is that because this clause is fairly standard wording, we need to do something that will set you the buyer apart from the pack. What does that mean? One obvious tactic would be to purchase more than one unit. If you are not in a position to purchase multiple units, don’t worry. Another bargaining chip is to put more than the required amount of money down, or at least accelerate the down payment time line (thus showing your interest and seriousness). Most projects require a total of 30% down before the unit is delivered. A typical down payment schedule is the following: - 10% upon signing ( less the deposit monies) - 10% when construction starts - 10% three to six months after the start of construction In the case of a unit that is more than one year into construction, the developer will often ask for the full 30% down upon signing the contract. Some developers are eager to get a sale and will drop the escalation clause just for asking. At the same time, I am always on guard when more money is requested down, seeing as though it can indicate the builder is a) running out of money, b) behind schedule, or c) low on sales. I always recommend my clients keep in mind that developers here are usually in the power seat: they often start buildings with very little down themselves, instead waiting until a certain percentage is sold to begin construction. What does this mean? Low risk on behalf of the developer CAN (but not always does) represent a lack of commitment. This is why, as noted before, I always recommend dealing exclusively with reputable developers. People like me, in the business, know these guys like the back of my hand. But as a new buyer, chances are these names will be new to you. In such case, do find an agent who can give you the green light before you start to fall in love with a unit and it's developer. Maintenance Charges clause: Pretty much worthless. Actually, you can count on the developer holding this maintenance charge ( which is usually a flat fee or a per square meter charge ) for no more than one year after they deliver the building. After one year, the developer’s obligation to manage the property terminates ( and they relinquish liability regarding any defects in construction ). That’s when the professional property management firms step in, and the fees can go up. After the first year, the property administration ( home owners association ) takes bids from private firms and it is up to them to try to find a company that is offering prices at or near the original maintenance fees. That usually doesn’t happen, so budget on paying at least 25-50% more after the first year. That being said, to date there are very few property management firms in Panama, much less quality ones. So take this into account and make sure your agent is giving you proper quotes. Cancellation clauses: Be vary wary if anywhere in the contract you see wording such as: The seller has the option to cancel this contract at any point, at which point all deposit monies will be refunded. I have seen this happen, especially in a market of rising prices where the developer feels like they can break with the original buyer and turn around and sell the same property for doubl. This type of clause is not cool anywhere in the world, but it does happen here in Panama, regularly; perhaps the result of such a new market. As a representative of the buyer, I always make sure that my clients are covered in the event that the project does actually fail. Some developers offer a return on all deposit monies plus an extra 2-6% interest. If I don't see any of this protective wording in the contract, I make sure it gets put in before anyone signs. Non-transferability clause: Some developers include in the wording of their contract a clause that prohibits the buyer from reselling his property. Sometimes this will be "within six months of occupancy", or other times you have to get written approval from the developer. What does that mean? It means that they are going to try to collect commission, which comes directly off of your bottom line, if you try to resell your unit before it is completed. How do I help my clients avoid this clause? Purchase the property under corporation! Not only will this save you money in taxes, but, in this case transferring ownership is merely a matter of passing the bearer stocks of the corporation to a new buyer. In the event that you decide to "flip" the property before occupancy, a typical resale contract will be between two individual parties and is a private affair, so the developer or the government does not need to be involved. Back to Top
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