Chile Forum

Now that this property deal has been secured, I thought I would share this story to dramatically illustrate to anyone considering Pucon, Southern Chile as a place to buy real estate and why it is such a bad idea.

For years we have been telling clients to stay away from Pucon. There are various posts on the Chile Forum and All Southern Chile about my general views on Pucon, and reasons to stay away. In short, the Pucon real estate market is one of the dirtiest in Chile. In fact, it is possibly the dirtiest period. We have never seen a market anywhere else in Chile where people behave the way they do in Pucon.

Among many other things, real estate agents will poach each others properties, don't know the sellers, find buyers and then find the seller. Properties tend to be owned by Chileans from Santiago, and are bought and sold mostly in Santiago. People buy properties in the Spring, and dump them back on the market the next winter because they can not afford to make the payments. Because of the quick buck environment and the mostly summer home situation, developers in Santiago often build fast very low quality homes that can not be lived in the winter. This has been going on for years, to the point there is an oversupply. Properties are often bought, subdivided, sold, and subdivided again by speculators from Santiago driving down the values. Those are just a few of more common problems.

Well, we finally had a client that insisted on buying a particular property in Pucon and we felt we could not throw the client to the wolves. So, we handled the purchase. It ultimately turned out to be a very good deal for the client, but it involved almost everything we envisioned could possibly go wrong and then some in the Pucon property market. I am not going to give any names at this point, but I might come back and post them at a later date in regards to some of the real estate agents and agencies (one of the largest in Chile) that attempted to blackmail our clients, among many other things.

It started with a client that found a house on their own to rent around Pucon with an option to buy on it. The owners where very upfront in respect to the fact they wanted to sell the place (just not that they had to sell it). The house had a market value of about 100 to 150 million pesos (about $200,000 to $300,000) US. So, the client rented the place and fell in love with it.

So, we where asked to open negotiations for the purchase. The sellers where originally asking around 120 million pesos. The sellers where from Santiago. They had two real estate agents involved. One was from Pucon and one was from Santiago that the seller had hired to rent and help sell the place.

So, we negotiated the price down to about 110 million, at which point we started talking about issues of financing and details about how to handle the logistics of the transfer. Now, at this point the client insisted that he did not need us to do a title search, and in this case we agreed because the client's bank was going to conduct the title search. Typically in Chile if you are getting a bank loan, the bank does the title search to protect themselves. Nothing unusual about that, and one of the rare cases where we would not recommend that we conduct a title search to a client before buying. The banks' legal departments are serious about protecting the bank. The problem in this case was, the purchase had not progressed yet to a point where the bank would conduct a title search before we discovered serious problems with the ownership.

Well, in the course of negotiating it became obvious that we needed to talk directly with the seller's bank. He had a mortgage outstanding of around 75 million pesos. We contacted the bank to see about how they wanted to handle the transfer, since the mortgage needs to be paid off or the bank needs to authorize the sale as they own most of the property.

It was at that point we discovered that not only was the owner behind in his payments, but he was so far behind the bank was within about a week of foreclosing. To this point, neither the seller, the real estate agent in Pucon, nor the real estate agent in Santiago had ever mentioned the fact that the house was in such an advanced state of foreclosure. This is even more disturbing considering the client was living in the house, and had a 12 month rental contract.

So, armed with this new information we went back to negotiate with the seller. The seller continued to insist there was no problem, but we finally convinced him after many hours and faced with overwhelming evidence that our client was the only person in Chile that wanted that house right now, had the money right now, and was in a position to buy right now before the bank took the house.

We managed to negotiate the price down to around 90 million pesos. The only reason we where even still negotiating with the seller at this point was that the seller has the right in Chile to pay the loan off, and guarantee the purchase rather than taking our chances in a public auction. The client did not want to take the chance of loosing the house. The seller however dragged his feet so long during that negotiation insisting that there was still nothing wrong, that the bank foreclosed. So, off to court we go to chase the auction of the house.

This is where it gets interesting. The house is set to be auctioned. We get a call from the real estate agent in Santiago, who tells us that if our client does not pay him his commission on the sale of around 4 million pesos, he is going to bring an investor to bid against him at auction. This real estate agent is the same one along with the agent that rented the house in Pucon during the whole process, knew the house was in danger of being foreclosed but said nothing to us or our client. We simply said good luck with that.

We knew there where no other buyers, because the house went to an initial quick auction the same week and no one showed up, and the bank made the initial bid. We simply monitored that first auction, while waiting on our client's financing to clear. The house was then slated for a second auction, at lower price and with a longer publication period. It however was slated to go to auction the day before the 18th holiday started. Which means almost no one in Chile is going to muster up that kind of cash just before such a long holiday, unless they are really really serious, on such short notice, just to mess with our client. We where already three weeks ahead of anyone else in terms of knowing what the situation was. They would be bidding blind.

The client was able to pick up the house ultimately for just under 60 million pesos, and no one else bid.

At this point, as we are clearing the various paperwork and it comes to light that not only was the bank about to take the house, but the IRS also. Seems the owner had lied about paying his property tax. He offhandedly mentioned at one point that he owed a couple months. Turns out he owed the IRS almost a years worth of taxes (couple million pesos). If the bank had not auctioned the property, the IRS would have done it. Just banks tend to be a bit quicker on the foreclosure trigger.

Well, this is far from a typical situation in real estate in Chile, except that it is Pucon. Pucon is a shark infested real estate market, perhaps more so than any place in Santiago or the central region. The market tends to be far more speculative by Chileans, as it is a marginal vacation area for the lower economic class of Chile. People who for the most part have sufficient credit to be dangerous, but the properties are not that important to them. They will let them go, rather than endanger their house in Santiago for instance. The real estate agents are for the most part geared towards preying on that market of lower middle class in Santiago because Pucon is viewed by many as a status symbol of their new financial means. The real money in Chile has vacation houses in other places.

So, moral to this story is that Pucon is one of the few places in Chile we would strongly strongly recommend every foreigner stay way away from unless they are absolutely sure they are willing to take on the risk, and carefully investigate everything you are told, and everything that appears to be going on. Verify, verify, verify.

The worst thing is that the prices are not that good either. It might be worth it if say there where some really great deals, but there are not many up there because of the pressure from Santiago Chileans. There is very little profit margin in turning over a property there over say 5 years.

Well, thought I would share this one.

I might add on the related subject of auctions, beware. There are a lot of good deals on real estate at auctions in Chile, but you are going to need help.

They are not something you can just walk in to with a bunch of cash. You need serious legal assistance to bid at an auction in Chile, be successful, and not loose your deposit in the process. Just because a property goes to auction, also does not mean there are not other obligations such as mortgages, taxes, leans, or other title problems. You are just paying to assume any existing problems. So, the properties need to be seriously investigated, and you need to know all the history and players involved in the process. Even if you win, there is a lot of red tape that needs to be cleared correctly after the fact, or you can end up with nothing. Don't just hire any lawyer off the street to handle them.

The only reason we can do them is because my wife has been involved in thousands of them. She use to work in a court room in Santiago.

Thanks for sharing - (extremely) valuable insight.

Thank you. Quite a saga.

We knew there where no other buyers, because the house went to an initial quick auction the same week and no one showed up, and the bank made the initial bid.

Can you elaborate on what is happening here, please?

admin wrote:This is even more disturbing considering the client was living in the house, and had a 12 month rental contract.

This stood out for me as our landlords sometimes still receive mail here and we got given a letter from their bank and could clearly see they were about a million pesos behind in repayments.. so I am wondering in the event that the bank was to foreclose on them... what are our rights?..

First, the quick auction.

Often in the court auction system banks will bring a property to auction almost immediately for the full debt. One they do this to test the waters, but more importantly borrowers that have just been lazy will get off their duff and make the payment at the eleventh hour. Messing with these is often a waist of time. They are normally poorly advertised, and happen within in a week or so. It is also the last chance for the seller to exercise there rights to clear the debt right up to the last second. If the debt is relatively small, the owners typically come in and take care of it. Often not many deals at this point.

yea, there is a way to secure a lease or rental contract. Like other contracts involving a property you can register it as a marginal notation on the title at the registry. A marginal notation normally does not cost very much. The contract goes with the property, just like for instance a easement would. If however the contract say allows for 60 days notice by either party to break the contract, it does not buy you much time. Still, the bank or the next owner must honor it until it runs its course. The transfer and stuff might take a month or longer, even under the best circumstances, then they have to notify you once they are the clear owner, and so on. You could potentially run through an entire year contract before really being evicted.

Two thing to do:
1. Run a credit check through DICOM on the land lord before you rent.
2. Register the rental contract on the title.
3. Get out.

Honestly, if there are those kinds of problems around (simply being a bit behind is normal in Chile), there are likely others you are not seeing. If you start seeing things like IRS agents or other debt collectors hanging around evaluating the property, time to move. You don't want collectors seizing your stuff under the mistaken impression it belongs to the owner. You can get it back, just better not to get caught in the storm when you see really dark rain clouds. Again, Chileans are so late with their payments even the companies send their bills late. Foreclosure and debt proceedings generally are bureaucratically noisy affair. There will be signs.

yea, the whole thing was a really silly example of Santiago idea of doing buisness. Even after we found out, if the owner had just simply excepted our 90 million offer he would have walked away with 20 million or so. If the real estate agents hadn't covered it up from the start, they would have gotten their commissions. The bank would have gotten their full money. Our client would have gotten the house. Had they all been very upfront with us, our client would have moved faster to put the money together and they likely all would have gotten much more.

If I read correctly, your client ended up saving at least 30M pesos from what he was ready to pay, and paid half of the initial asking price, while the lying and blackmailing Chileans ended up not making a dime. Well, isn't that a perfect outcome? Foreigners get a bargain, and in the process Chile gets to become a cleaner, more transparent environment to transact property. This should help towards more honest practices and benefit the vast majority of Chileans (so it's not like "we" are preying on "them"). What's not to like? It can happen one transaction at a time, can't it?

To clean up markets, first cheaters and liars need to lose.

It came out to about a 60 million savings over the original asking price of around 120 million, not including the real estate commissions of around another 4 million or so. Yea, there was a lot more in legal fees involved because of the increase in red tape involved in such a bureaucratic circus, but overall it still was not that much more than a regular purchase.

Here is the thing I don't get about many of these buisness practices. Setting aside the right or wrong, legal or illegal issue for a second, it just a big opportunity missed. It would seem the obvious and smart buisness move in a market that is saturated with unprofessional, dishonest competitors would be to differentiate yourself by being honest, transparent, and professional. In theory, it should work the other way around. When the market is saturated with honest, transparent, and professional real estate people, then people tend to act unethically on the fringe of the market to gain an advantage. Not in Pucon. It is a logical head scratcher to be sure.

admin wrote:Here is the thing I don't get about many of these buisness practices. Setting aside the right or wrong, legal or illegal issue for a second, it just a big opportunity missed. It would seem the obvious and smart buisness move in a market that is saturated with unprofessional, dishonest competitors would be to differentiate yourself by being honest, transparent, and professional. In theory, it should work the other way around. When the market is saturated with honest, transparent, and professional real estate people, then people tend to act unethically on the fringe of the market to gain an advantage. Not in Pucon. It is a logical head scratcher to be sure.

I dont know if its all that hard to understand.. I mean of course it makes no sense to us.. but to the average Chilean its probably natural.. they have this silly notion that if they rip you off they are somehow smarter than you.. and perhaps thats the case with these so called business practices.. they probably would rather try and stiff you for 120million rather than get 90million and walk away with 20million... I find that Chileans will generally go chasing after the golden goose but leave ALL the golden eggs lying around for someone else to pick it up .. which represents great business opportunities for those that have entrepreneurial inclinations..