Imagine that you and some people have a common goal, like buying a property. And you decide to form a group, where each person each month deposits a certain amount to form a fund.
Periodically, one or more participants are selected by lottery or bid and use part of this capital to acquire the good or service. This is the basic definition of a consortium, also called self-financing.
In addition to the participants, this system involves an administrator, who is responsible for the formation and organization of the consortium group, as well as fund management and credit allocation.
To understand everything that involves the consortium system, we have prepared this complete guide. Check out!
How does the consortium group work
You can join a consortium group that has not yet been established or one that is ongoing. In this second option, there are two ways to hire: buying a vacant share or a current consortium member.
Vacant quota: is a quota that has not yet been sold. Therefore, it is acquired directly from the administrator. As the group is in progress, the consortium member has to pay the installments already paid by the other participants.
The debt can be charged at the time of adhesion or diluted in the installments falling due.
Quota transfer: is the assignment of the contract to another person, upon approval by the administrator. The sale is made directly by the consortium member, who can delegate to a seller or the administrator itself.
It is possible to transfer the contract to a covered or unencumbered quota. In this case, the consortium member contemplated transfers its contract to the interested party, and the latter assumes all the rights and obligations established therein.
They are meetings of the participants to deal with matters of common interest. There are two types of general meetings: ordinary and extraordinary.
During the ordinary meeting, the awards are made, by drawing lots and bidding, and the accountability by the administrator (amounts collected, income from financial investments, number of consortium members already contemplated and to be contemplated, among other information). The periodicity is established in the contract, and may be monthly, quarterly or semiannual, in person or not.
The consortium group is effectively constituted on the date of the first ordinary meeting, when opening procedures are carried out: proof of economic and financial viability, election of representatives, among other points established by the Central Bank.
Extraordinary General Assembly
It is an extraordinary event held whenever any matter of interest to the group needs to be submitted to the vote of the participants, such as an extension of the group’s term or replacement of the asset referenced in the contract (for example, vehicles and machinery whose manufacture is discontinued), among others.
Forms of contemplation
You may have heard someone say that they were “drawn” in the pool or that they “put a bid”. These are the two ways of contemplating the letter of credit.
The draw takes place with periodicity determined in the contract and the administrator defines how the dynamic will be, which can be based on the results of the drawing of the federal lottery or even with rotating globes.
But there are other ways to increase the chances of acquiring the good or service, through bidding. In this case, the participant can anticipate some installments of the consortium. There are two types:
The administrator accepts any amount or percentage offered by the consortium. The consortium member who makes the highest offer wins. In case of a tie, a draw is held to determine the winner.
A value or percentage already determined in the contract is stipulated. If more than one person bids the fixed bid, the tie is drawn by lot.
Bid payment can be made with the participant’s own funds or discounted the value of the letter of credit, which is known as embedded bidding.
The advantage of the built-in bidding is that you do not need to have the money on hand, however, the participant must be aware that the letter of credit will decrease, as a part of the amount will be used to pay the bid. If not awarded, the card will remain intact and there is no need to pay the bid.
When is the consortium appointed?
In the consortium, you pay the installments, but you don’t have the good or service right away. So, the consortium is recommended for those who are in no hurry and can expect to be contemplated. Otherwise, financing is the most suitable option.
To finance a property, you must pay a down payment to the financial institution. Those who do not have this money may consider the consortium a good solution.
If you have the money to bid competitively, such as 50% of the pool value, for example, you have a good chance of getting a letter of credit quickly. It’s something to look at.
Unlike real estate financing, the consortium does not charge interest on the installments. In general, the cost involves a monthly administration fee stipulated at the signing of the contract and is based on a fixed percentage – ranging from 15 to 23% – of the value of the letter of credit, which will be divided into each installment of the consortium.
In addition, an annual adjustment is applied by the INCC (National Construction Cost Index) , and there may be other charges established in the contract, as an addition to a reserve fund – for coverage of default and other group expenses, insurance and tax accession.
Consortium vs. Financing Comparison
As an illustration, let’s consider a credit in the amount of R$ 300,000.00 with a repayment term of 15 years (180 months).
In real estate financing, with an average interest rate of 7% + TR (currently it is zero), initial value of R$2,936.67, using the SAC Table with decreasing installments, we have the total amount paid of R$538,600.60.
Using the same parameter for the real estate consortium, let’s consider 17% of rates, with installments that grow annually due to adjustments, with the initial value being R$1,839.92 and the annual adjustment by INCC at 7%, we arrive at the total value paid of BRL 560,824.45.
While interest rates on financing remain low, mainly influenced by the drop in the Selic rate, the INCC is showing an increase. So, as it is a variable rate of adjustment of installments, it can become the great villain of the consortium.
A simulation you do today with the bank could change considerably in the next month. It is also important to note that the administration fee varies not only by institution, but also by terms and credit amount.