Real Estate 101:
Everything you need to know about buying property in Ecuador
As a foreigner in Ecuador you can purchase property using your passport as ID with the 90 day visa that is automatically stamped in your passport at the airport. When purchasing in Cuenca you have the same ownership rights as an Ecuadorian and will pay the same low rates for closing costs and property taxes that the locals pay. On average closing costs are less than half the U.S. average and property taxes are less than a tenth of the U.S. average.
Who Pays What?
The seller pays the Real Estate commission (typically 3%), Capital Gains Taxes, and legal fees if they choose to hire a lawyer to represent them. If the seller is not fluent in Spanish then they must pay for a translator to go with them to the notary office. If it is a rural property that does not yet have a survey done in the required format then it is the seller's responsibility to arrange for and pay for that survey.
The buyer pays legal fees for the preparation of all papers to be signed, notary fees, the title registration fee, a translator if not fluent in Spanish and a transfer tax of about 1% of the declared value.
Once you have settled on a property and the price and terms have been agreed on then a title search should be performed to verify ownership and confirm that the property is free of any liens or encumbrances.
Although Ecuador's Real Estate market is unorganized in the sense that the only MLS system has poor adoption and comparative sale values are not available to the public, it is well organized when it comes to legal aspects. In any given area there is one central registry office that handles the registration of all titles, mortgages, liens, and judgments for properties in that area. Cuenca's property registry office, for example, is the sole place where things related to properties in Cuenca and rural properties and towns within about a half hour drive of Cuenca are registered. Because they have all the records in that one office they are able to tell you definitively what the legal status is for any of the properties in their jurisdiction. It takes 10 business days to get the title search report.
Normally in Ecuador earnest money is paid directly to the seller by the buyer. Escrow is a foreign concept that has not yet caught on here. It is rare for a seller, even if a fellow expat, to be willing to take his or her property off of the market and reserve it for a buyer while waiting for the purchase paperwork to be prepared and for the title search to be completed. Without earnest money the purchase is not locked in and the seller could accept a higher offer from another buyer. Also it is common for Ecuadorians to buy without doing any due diligence so the seller could also sell to someone willing to go to closing right away.
Our recommendation for how to deal with the earnest money will vary depending on the exact situation as there are many things to be considered regarding the nature of the transaction and the people and personalities involved. The goal is to minimize the amount of the earnest money and when practicable have it be handled by a third party rather than the seller. The earnest money must be enough to cover the seller's capital gains taxes because those taxes have to be paid at the municipality of Cuenca before the title deed can be signed over and the seller has no way to get a refund for any capital gains taxes paid in the unlikely event that the buyer backs out of the purchase at the last minute.
One way to deal with earnest money is to have a certified bank check made out to the seller. The check can then be held by a third party acting as escrow agent. The third party could be a lawyer, Real Estate agent, or anybody who is trusted by both the buyer and the seller. That person must then handle the check according to what the buyer and seller have agreed on beforehand in writing. Since it is a certified bank check it cannot be canceled so the buyer knows the funds are guaranteed and since it is made out to the seller the escrow agent does not have access to the funds. Using a lawyer or law firm to hold the earnest money is a valid option but due to problems others have had in the past we recommend doing things in a way in which the third party who is acting as escrow agent does not have access to the funds.
In Ecuador escrows, called Fideicomisos, are a service that is normally provided by banks for multi-million dollar construction deals. Due to the high setup costs and long setup times it is not feasible to use an Ecuadorian escrow for individual property purchases.
In transactions when both buyer and seller are foreigners from the same country there may be an affordable escrow option in that country that would work even though the property is overseas. In the event that an escrow were to be used then buyer would be responsible for covering the cost of the escrow services.
There is a type of standard legal contract in Ecuador that has the full force of the law behind it and is used to ensure both buyer and seller comply with their obligations. It is often used in complicated or drawn out transactions involving multiple payments or delayed delivery of the property. (See the section Promesa de Compraventa for details)
Title insurance is available in Ecuador through foreign insurance companies such as First American title. In the case of First American Title they have a couple lawyers in Cuenca who are pre-approved by them to write title opinions. Those title opinion reports are based off of the title search reports provided by the property registry.
The status with any given property is provided with a title search so no future judgments against the previous owner can effect you once you transfer the property into your name. Most people choose to "self-insure" rather than purchasing title insurance. The real value of the title insurance process is that it confirms that the title is insurable. Once it is proven that the title is insurable then anything you pay for title insurance is pure profit for the insurance company.
Financing / Mortgages
Unfortunately there are not any viable financing options in Ecuador for foreigners when it comes to purchasing property. If you were to go around to local banks and ask about mortgage rates you would find that on average interest rates were around 12% and that a minimum down-payment of 30% down is required. In reality banks only loan 70% of the value they know for sure they could get for the property if someone defaulted on the loan and they had to sell it off quickly. The reality therefore is that it takes a 30-40 percent down payment to purchase a property with financing. Because of the way Ecuador calculates credit ratings a newly-arriving foreigner could never qualify for a loan. Ecuador's Social Security program offers loans at 8% interest and low or sometimes no down payment but foreigners don't meet the requirements for those loans either. As a result of the difficulty of obtaining financing the majority of all properties in Ecuador are purchased with cash.
In some cases sellers will carry financing for a few months but in Ecuador your purchasing power is pretty much restricted to what you can put together within 3-6 months. Rent-to-own is not an option.
The upside of the lack of good financing options is a more stable Real Estate market. Since property values are based on the actual purchasing power of buyers rather than on the ability of banks to expand the money supply, Ecuador is not subject to the extreme boom and bust Real Estate cycles that many foreign buyers are accustomed to.
Tax Assessed Value VS. Declared Value VS. Actual Value
In Ecuador every property has a tax assessed value which can change every year. The current tax assessed value of a property is the lowest price that can be recorded in the deed. The declared value is the value recorded in the deed. The actual sales value is what one actually pays for the property. Note: If the tax assessed value does not meet the investment visa minimum ($25,000 plus $500) for your spouse and each dependant then the property cannot qualify you for an investment visa.
If you were to purchase a new apartment from a builder without any upgrades then the price in the deed, the tax assessed value, and actual value you pay may all be the same. With older properties and even many new ones there will often be a significant discrepancy between the tax assessed value and the actual value. For historical and cultural reasons tax assessed values are usually much lower than real property values often around 1/3 to 1/2 of the actual value for properties in Cuenca. With rural properties the discrepancies are even greater.
While it is technically the seller who is responsible for the capital gains taxes it is not fair to expect them to pay thousands of dollars of capital gains tax for the last several owners before them who all under-reported their sales amounts. Also the seller must pay the capital gains taxes before the notary will even allow you to sign the deed. Ideally declared values would match with actual values and we are doing everything within reason to move things in that direction while avoiding any huge jumps that would result in exorbitant tax penalties. In instances where the same owner has had the property for many years there is no capital gains tax and the declared value can be the actual value without any problems other than higher notary and registration fees. Also if the sellers are considered senior citizens (tercera edad) they can apply for a 90% exemption on the capital gains tax and can create another viable way to declare the value at the actual value without incurring erroneous fees other than aforementioned higher notary and registration fees.
Purchase Agreement (Promesa de Compraventa)
The Promesa de compraventa is a preliminary contract that becomes part of the public record. It is often used with complicated or drawn-out transactions involving multiple payments, delayed payment or delayed delivery of the property. There are two issues with Promesas de Compraventa that cause people to tend to avoid using them whenever practicable. The first is simply the cost, with a $150,000 purchase the notary fees are $840 including VAT (2017 rates) plus whatever your lawyer charges to prepare the document.
When there is a Promesa de Compraventa then the amount declared in the Promesa needs to be the amount specified in the title deed. The difference between the value declared when the seller originally purchased the property (normally identical to that year's tax assessed value) and the declared value of the sale is what the capital gains taxes are based off of. Large discrepancies inevitably result in large capital gains taxes.
In most transactions in which the buyer can get the money together within a few weeks and the seller can turn over the property to the buyer within a few weeks people can get by with an private(non-notarized) written agreement and a small amount of earnest money until the title search has been completed and the deed is ready to be transferred.
Like Promesas de Compraventa, private purchase contracts should contain the same fine-grained detail when it comes to the description of the property, what's included, what's not included, payment date(s) and form(s) of payment, who pays for what, deadlines, etc. In addition to the aforementioned thing included Promesas de Compraventa also contain a penalty clause in case of non-compliance by any party and private contracts often make mention of the declared value. Both these types of contracts can be three-party contracts in which the person acting as escrow agent also signs.
Title Deed (Compraventa)
The purchase contract is a definitive statement that says that a purchase has been completed i.e. that the seller has received the money and the buyer has received the property. Upon signing of the Compraventa the buyer normally hands over a certified check for the amount owed for the property and the buyer turns over a set of keys. It is common for the buyer to verify the condition and contents of the property just before going to the notary and for the seller to inspect the check just before signing. If the seller is renting back the property they are selling from the new owner that fact may be mentioned in the Compraventa but the Comparaventa cannot be a substitute for a separate rental contract.
In the event of a wire transfer sometimes a notary will agree to not release the Compraventa until after receipt of the funds has been confirmed by the seller. In such a case everybody signs and then the papers are held till receipt of funds is confirmed. It is possible to open a bank account in Ecuador with your passport and then wire down the funds and get the bank to issue a certified check made out to the seller which you or the person representing you can hand over in person at closing. After being signed in front of the notary the Compraventa must be registered at the property registry office. Only then does the Compraventa become the title deed.
Note: This article was written in July of 2017 so it may have information that conflicts with older, out-of-date articles that are still online.