Those who follow Resumo Imobiliário know I’m a great enthusiast. Unlike other sites with dubious sources, this one publish reliable and transparent information. For a long time I work in real estate. During those years I developed, built, bought, sold. Anyway, I took part in the proceedings of a logical sequence of real estate structuring. After years of dedication, I became a commentator of what I saw. I am convinced of my words because of what I experienced and learned. Some conclusions emanate hopeful feelings, others not at all. But the important thing is that we, thinking heads, do not stop ever to think about the best way of our life and work.
Attesting a trend or convergence analysis of empirical data demand discipline and neutral opinion. Judging is risky because it can directly affect the fate of my readers, leading them to tread paths that were not chosen on their own. In my writings, rather than simply commenting banal daily news, I try to clarify dynamic conclusions, showing the readers the different nuances of the market, so they can choose the right position to follow in terms of their own will.
Addressing the main subject of this article, on 27 April 2016, the development sector signed the first agreement that regulates the penalty fee in case of cancellation of sales, called dissolutions. The regulation is part of an agreement which deals with rules of purchasing off-plan properties. The new rule provides for the fixed fine of up to 10% of the property price, and full signal loss and up to 20% of the other amounts paid by the buyer. After the dissolution, the developer should have six months to return the amounts to be reimbursed, unless the unit resale occurs in short time.
With all my love for this profession, and respect to those who struggle in this market, I sadly inform that is too late. The volume of dissolution was so great that the consequences have become hopeless in the present situation.
But who created the dissolution? Who is to blame?
We are the creators of it. We’ve done it. With all the greed we posess, we became responsable for this moment.
The beginning of it all was the unquenchable thirst to earn, earn again and earn again. Our market has been structured on sales of amateur foundations of pre-construction purchases, which, incidentally, are indeed bold and questionable.
Analyzing the real estate business, selling off-plan properties is a purely brazilian way of growing. Some markets may even offer such way of purchasing , but in very limited number. In other countries, the developer is provided with funding, and only after building the enterprise, the companies begin to sell their properties. In Brazil, we invent our own model: people bought from the drawings and then became co-investors of the contract with the banks. Without guarantees, developers continued selling pre-construction properties for years. Nobody realized that the idea was potencially weak.
I remember a meeting I had in 2011 in my hometown, Rio de Janeiro. Without naming names, they were great developers, entrepreneurs, builders and realtors: VIP of the real estate business. I had a presentation of about 15 minutes, with 12 minutes dedicated to the high dangerousness of leverage in real estate sales charts of pre-construction purchases, and its consequences through a possible dissolution of crisis. With few exceptions, many laughed at me. No one believed that a small developer had the keys in his hands. Finally that group heard the truth about the market. At one point someone shouted: “take this guy off there, and then send him to school.” Humbly, I left that meeting and continued my life following my professional rules, not leaving me shaken by words or phrases.
11 months ago, on May 28, 2015, I devoted an article to the question of dissolution. That day, I warned everyone about the power of dissolution, illustrating all its history: from the beginning to the possible consequences, but not forgetting about alternatives and solutions.
10 months ago, on June 16, 2015, I had already warned about the dilemmas of the real estate market in the next decade. On one part of the text, I noted that “recently the real estate market faces the above problems [dissolutions and insustainability of providing funding]. These are new themes and never before faced in the Brazilian real estate market. The continued growth depends exclusively on the broad discussion of news models and concepts of working. Literally, we lived a perfect decade when providing funding was easy and the dissolutions were rare. But now we are in the middle of a perfect storm which encompasses economic, political and bureaucratic problems that highlight the faced dilemmas. “
Considering the past decade, the “investor” has become a property buyer with a single purpose: real estate speculation. The purchase transaction was aimed not only to be profitable, but especially to cause fast fluctuations on prices. This “investor” acquired the property without any knowledge of the real estate. Moved by an attractive sales chart (around 20% to 30% of property value to be paid during the construction time), the “investor” acquired several properties in a short time. It was a known figure in real estate some years ago.
Evebody earned! For brokers and real estates, the result was instant and positive in the short term, since the sale was held and the full commission received by the parties. For some developers, those “bad sales” have meant a fake growing on their balance sheets, as the properties were identified as sold to its shareholders. However, the result was disastrous for the sector.
Over time, the problems have deepened. The seamless operation of developing, which would be the transfer of all customers who have chosen to finance the balance due to financial institutions, collapsed.
After the dissolution, the loan taken from the bank continues on behalf of the developer. That’s the problem that nobody wanted to face, but the nightmares came true. So if the buyer gives up purchasing before transferring its debt to the bank, the developer has to assume the full amount that was taken loan from the financial institution for the construction of that unit. The immobilized developer can’t finish the expected cycle. Can you imagine it in thousands of causes? Can you imagine dissolutions verging 60% to 80% of an enterprise? It is happening right now in Brazil.
Unfortunately, in a few months we will see the result. It will be a humiliating and ridiculous event that will be remembered forever in our corporate history: the bankruptcy of hundreds of developers. Unlike the old bubbles that directly affected those who invested in it, this bubble will extinguish a period of a rampant speculation, and many unprepared developers as well.
Welcome to the brazilian bubble of dissolutions.
