Two best alternatives to a full down payment when buying properties in Chile

Disclaimer: This article is translated from Las dos mejores opciones para pagar el pie de una futura propiedad written by Francisco Rocha, CEO of Propital.  

The common practice of buying a property is to put a down payment and pay the rest via a bank loan.

Many people follow this path, saving money for the down payment through long term deposits and conservative mutual funds, which are considered safe but offer low returns. 

However, a growingly popular practice is to purchase an off-the-plan or under-construction property and pay the down payment in installments in order to reduce the possibility of over indebtedness.

In the best scenario, and if the investor has good saving capacity, this alternative solution includes saving money while the project is under construction and finishing the payment when or before the day of property delivery.  

In this way, the down payment is separate from mortgage.

Acquiring off-the-plan or under-construction properties are both attractive investment options due to their high profitabilities. These purchase methods are more convenient than depositing monthly in your savings account, long term deposit account and mutual fund, since it is an investment in UF and subject to the capital gain of construction.

Buying an under-construction property

In Chile, buying a home that is under construction is called buying in green (Comprar en Verde in Spanish). The property is not yet finished nor does it have the definitive reception granted by the corresponding municipality.

Since not all the people have enough savings, buying in green offers great flexibility in down payment. Since the construction is to be completed, buyers are given time to save money and pay in installments.

Thus, the investor pays the down payment until the property is built and ready to be delivered, which usually ranges between 12 and 30 months.

The benefits of buying in green include:

• Acquire capital gains to buy cheap properties in a good neighborhood. Buying in green ends up a round business for real estate investors who want cheaper investments in a more expensive neighborhood and then lease or sell them at a higher price.
• As an anticipated purchase, it gives the future owner more freedom to choose what apartment he wants to buy. He is free to compare locations, connectivity and neighborhood conditions.
• Pilot rooms are usually available towards the end of construction. Buyers can get ideas of how the building is made and negotiate adjustments or modifications .

However, buying in green also has its downsides:

• Time. The property is not available immediately. Buying in green implies waiting for months to years, although from an economic point of view it usually turns out much better than buying established property.
• It is important to know that the delivery date often changes by days, weeks and even months. It all depends on the work conditions and efficiency, and sometimes even budgetary problems.
• A blind purchase. You cannot see what is being paid, as there are no show rooms available at the time of signing.
• Although it is not common that this occurs, the final result may vary. There may be discrepancies between what is sold and the reality of the property, such as common areas: warehouses, barbecue areas, swimming pools or parking lots.
• To avoid bad scenarios, it is better to save the plans and specifications obtained at the moment of purchase. If differences happen upon property delivery, it is recommended to resolve the issue directly (or through a representative) with the realtor before going to court.

Buying an off-the-plan property

Buying properties in white (Comprar en Blanco in Spanish) means buying off-the-plan, when the project already has a building permission or land adequacy, but the excavations have not yet begun.

That is to say, not only is an apartment or house bought before its construction is finished; but the papers are signed before the project even starts.

The real estate offers a promise of an approximate time when the new project will be available. The investor only knows the plans and details on paper that show how the building will be conformed.

The delivery takes two years or more. However, the price at this stage is much lower than in-green and established ones.

• Economic. The price is lower and grants easiness in down payment which can be fragmented into installments until the delivery deadline.
• Flexibility. When buying in white the client has the possibility to choose the preferred locations of the property, such as distribution, parking and warehouse.

One important thing to keep in mind when buying under this modality is that, since it is a purchase even earlier than its green stage, both the economic advantages and the disadvantages are more intensified. To avoid big surprises, it is most recommended to choose a reliable realtor that offers you the best price.

What happens when I don’t have enough savings?

Not all people have enough savings to cover down payments, or they are not yet qualified for bank loans. Then it becomes necessary to consider other alternatives to save and generate interest over time.

To achieve this, there is a valid option to invest for the down payment: invest in mutual funds.

It consists of a slightly more risky investment approach. This type of investment does not guarantees income, since there is a risk that the investments may not return as much as expected.

Mutual funds are the sum of money given by individuals and legal entities to a corporation or administrator regulated by the Commission for the Financial Market (CMF).

The management company then invests the money in different types of financial tools, such as public offerings and commodities, with the purpose of obtaining a profit that will be distributed among all those who made a contribution.

Investors must know that investing the money to an administrator is a risk that must be borne by each contributor of the chosen mutual fund.

However, the interesting thing about mutual fund is that it is possible to request data on its historical performance in order to compare with other funds of the same type and in equal periods of time, or with other savings and investment alternatives.

In this way you can make a better decision and avoid future risks.

If the risk exceeds the tolerance of the investor, the investor can request a full or partial return of the investment adjusted by the fund’s profitability, which will be paid in a period no greater than what the internal regulations of the fund require, which can not be more than 10 days after the withdrawal request has been made.

Conclusion

Buying in white or green will always be the best option, for the possibility of paying in interest-free installments.

Pay full amount upfront only if paying in installments involves high interest.

Both full cash and in installments are attractive investment options due to their potential profitability, and are better than monthly deposits in a long term deposit account, a mutual fund or a savings account.

However, the funds count as a valid investment alternative, with a low but liquid return.