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Online Property Auction

In recent years, the Colombian real estate market has evolved with technology, creating new ways to access and interact with it. A clear example of this in Colombia, is the emergence and popularity of real estate auctions on the internet. These auctions have become more common, allowing buyers to acquire properties for prices that can be up to 50% lower than commercial ones. However, the acquisition of real estate does not cease to be a process that requires several precautions, legal reviews, background checks and completion of formalities, in order to protect the parties involved. Taking this into account, it is worth asking which are the risks faced by buyers and sellers who decide to use online real state auctions as the means to sell or buy their properties:

Once the offer is accepted in the auction, ¿Does a promise of purchase exist between the parties?

Although these websites connect two parties interested in the sale and acquisitions of a determined real estate, the fact that these operations are subject to registry must be considered. Due to this formal requirement, the mere agreement of the parties involved is not enough to be considered as the contract itself. Besides this, it is necessary to establish whether the elements negotiated and agreed upon through these websites comply with the legal requirements for the existence of a binding promise of sale. These requirements are listed in article 1611 of the Colombian Civil Code, and are the following: 1)The existence of a written contract (it is understood that there is digital evidence of everything agreed in the website), 2) That the contract is not about a prohibited topic or activity under the Colombian Legal Framework, 3) The inclusion of condition or due date for the execution of the contract, 4)That the binding promise contains all the terms and conditions required for the contract.  If the listed requirements are not met, there would not exist a binding promise of sale between the parties involved. There would only exist a written consent of the intention of the parties to celebrate the mentioned contract. Taking this into account, a significant risk, derived from the uncertainty regarding the binding force of these agreements, is identified. This risk does not apply to judicial auction. Considering this, the signing of a binding promise of sale is required in order to oblige the parties involved.

Conducting a property check

One of the major risks identified in these operations, is the need to verify if the seller actually holds the domain of the property on sale, as well as verifying the existence of any mortgage. This risk is traditionally solved with a domain check on the property. Having mentioned this, it is necessary to highlight the risk mentioned in this type of online transactions. There is not enough clarity regarding who is responsible for conducting the domain check of the property auctioned online, which could generate a “falsa tradición” (Type of registry that occurs when the seller of a property is not the real owner. Does not transfer domain over the asset), substantially affecting the users of these websites. This risk does not apply to judicial auction. Considering this, our recommendation is to realize a domain check of the asset, before signing any binding promise of sale. Another possibility could be including in the binding promise, as a condition for the signing, the realization of a domain check of the property.

Vendor background check

Unfortunately, in both traditional and virtual purchases, there will always exist the risk of the seller or one of the previous owners of the property being involved in money laundering and financing of terrorism activities. This risk is usually reduced, or eliminated, by conducting a background check of the selling party, as well as a background check of all previous owners. On the studied auctions, the fulfillment of a background check on the vendors is not completely clear. This creates risks of “extinction of dominion” (Sanction through which the domain over an asset is terminated by the government, due to an illegal use or destination of it) over the properties sold, affecting the users of this websites.  The mentioned risk would not apply to a judicial auction.

The above are some of the identified risks on this type of transactions, which are worth taking into account and verifying with the selected website page before purchasing a property under this modality. In our opinion, online real estate auctions are an interesting new way to acquire property, but still require of traditional measures in order to protect the parties involved.

Authors

Portrait ofJacques Simhon, LL.M.
Jacques Simhon, LL.M.
Partner
Bogotá
Daniel Duque
Ricardo José Díaz