On Buying Real Estate in Germany
Steps to take when buying
Depending on the size of the investment a thorough research should be undertaken as of the location, first of all. The price needs to be verified thoroughly, preferably with a surveyor or estimator. Expenses for this value estimation are usually borne by the party buying the Real Estate. It is no must though.
Most important is to have the house inspected carefully, if not by oneself, then by a knowledgeable person in the area. This can be a broker or someone who knows what points to look for.
Another point is the study of the annual meetings of all apartment owners in the house. The importance of these minutes cannot be overstressed. Any and all problems relating to the house community and the house itself which may incur future costs will be discussed in these meetings and will be reflected in the annual meeting report which needs to be done by the management company responsible for holding these meetings.
Any rental contracts are to be examined. The actual rental situation has to be examined carefully. Especially so-called non-payers amongst the tenants have to be verified. Non-payment rates can be as high as 20-25% sometimes in bad areas.
Any renovations or repairs of damages need to be checked into. The ground sometimes is wet and the house needs to be dried out in the cellar area which can become expensive. The roof should be checked by an expert or a good eye before buying.
Age of the heating system is a very important point. Lots of restrictions and new laws have been passed over the last years. New standards have been set that must be met until 2005. It might be necessary to renew the whole heating system by then if it is older than ten years.
Next, the actual resale value needs to be estimated. Could that property be sold well again and for what price? What would be the possible ways and channels to sell the Real Estate again?
This being answered, the calculations of the living space (in square meters) and of other areas presented on paper should be verified at the actual location.
All factors being well aligned, the financing needs to be secured. In Germany we request the buyer to present a so-called irrevocable acceptance of loan financing by a good bank before going to sign the notary contract or if he has the cash deposit, to bring proof of the existing funds.
Then the Deed of Purchase and any accompanying papers (like the official declaration of partition <Teilungserklärung>) should be checked into thoroughly. If you are not German-speaking it is better to have a professional translation done first of all even if that might cost some extra bucks.
The notary public date for signing the Deed is being agreed upon. At this meeting the Notary Public will read the Deed aloud for both parties, with any needed translator present. After making any changes or additions the Deed is being signed by both parties and the notary public. This contract is irrevocable, it cannot like a usual purchase be revoked within the next two weeks! What is written here is the agreed-upon purchase and all conditions thereof, like the day of payment, the day of handover to the new owner, any needed repairs or other actions to be done by the seller, any other specifications as needed.
It is the Notary Public who will perform the next actions needed like any and all applications in the so-called Grundbuch – the land title register, without which no sale of property can be done.
At the notary date the Real Estate agent’s or broker’s commission has to be paid. This ranges between 3, 5% and abt. 6% of the buying price, including VAT, depending on the federal country where one is buying in Germany.
Between two to four weeks after the buying contract was signed the purchase tax on Real Estate needs to be paid. This is exactly 3, 5% of the buying price stated in the contract. This tax must be paid within short time when requested as otherwise the tax office will not issue the clearance certificate – an important paper for transferring the possession from the seller to the buyer. Without that paper, that transfer is not possible!
Within the same period of time the fee for the notary and registration fees have to be paid. All in all they comprise about 2.0 to 2.3 % of the buying price of the Real Estate.
The terms of the contract can be very variable. That is why a contract needs to be checked by someone experienced in sales of Real Estate in Germany. There are many legal obligations but also legal finesses which can be to the advantage or disadvantage of the person buying.
At the notary public date all persons that are buyers have to be present, and show their legal papers (valid passports!). If a company is buying, the person(s) signing the contract need to bring their legalization papers from the company (authorization and an excerpt from the Chamber of Commerce entries showing the authorization status) plus passport. The contract needs to be personally signed after the notary public has read it aloud. It is legal procedure that the notary public reads the buying contract out loud. If the buyer does not understand German language, it will then be read in English by a qualified translator.
It is the task of the notary public to ensure that all parties understand what they sign in the end. Any questions that come up need to be answered.
German Real Estate financing can be done either with mortgage banks or with any usual bank or financing institute (Sparkasse, Volksbank, Insurance Company, Bausparkasse). Financing usually is done for about 60-70% of the buying price by mortgage loan. Anything above that up to 100% of the buying price needs to be secured either by additional securities like insurance (with actually that exact value) or other financial securities that have to be deposited at the financing bank. It can sometimes be done based on the income of the person or company alone buying but that case is very rare as of today.
Financing foreigners not resident in Germany and not earning their money in Germany is possible under certain circumstances but cannot be expected to exceed 60% of the buying price.
Financing should be secured before any contract of purchase is signed. Sometimes one can sign a reservation which holds good for an agreed-upon period of time, enough time to get the financing secured. However, the only binding document is the purchase deed.
FAQs for Germany Real Estate
Do I have to be German resident in order to buy in Germany?
No. Anybody can buy in Germany who has a valid passport and the purchase funds that will be needed. Owning a property in Germany does not give one a right to immigrate to the country. This point is vital to know. We had the case of a person who already owned an apartment in Berlin and had a deposit of about half a million USD at a German bank in Germany, and wanted to buy from that money another apartment in Frankfurt. She asked for a visitor’s visa for that reason and got her application declined. The German embassy in her country (somewhere in Asia) said: The risk is you buy an apartment and then stay in Germany and we do not want that. All her assertions that she wanted to buy this apartment for investment only and the apartment was already rented out which we told the embassy were fruitless.
So if you intend to buy property in Germany in order to live here, make sure first to get a Visa for being a permanent resident in the country.
What are the costs accompanying buying property in Germany?
In Germany, the buyer has to carry the following costs and fees:
1. Purchase Tax (“Grunderwerbsteuer”): 3.5% of the buying price. Due about four weeks after the notary deed has been signed by buyer and seller.
2. Notary fees. These are about 1.2 – 1.5% of the buying price, plus any fees for a needed translation of the deed. As they can vary strongly recommended to check especially the translation fees in advance. We have seen differences from 300 EUR to 3000 EUR for the same type of work.
3. Agent fee. The buying fee for agents in Germany varies from Federal country to Federal country slightly. In most federal countries it is 5-6% plus the VAT of 19%.
4. Registration fees, these add up to about 0.8-1.2%.
5. If financing is needed, there might also be fees from the bank side for the mortgage, plus any additional notary and registration fees for that mortgage. Any mortgage needs to be secured in the land registry (Grundbuch) and that can only be done by a notary public.
So the total fees on top of the purchase price are about 10-12%.
How long will it take until I own the house?
From the moment of signing the notary deed until receiving the land title register confirmation several weeks can pass. This however has no bearing on when you can take over the house as your own: this is usually the moment when the buying price is paid in full to the seller. That date is agreed upon in the purchase deed.
What are the costs accompanying owning property in Germany?
The costs that are to be paid are property tax – this is different from town to town but very small (between 150 Euro and 300 Euro usually for an apartment per year, a bit more for a single-house; it depends on the size of the property ground).
Then the building reserve fund which is mandatory when owning an apartments as part of a community; it is usually about 0.75 to 1.5 Euro per sqm living area per month;
Garbage disposal, water, common house electricity, housekeeping, maintenance of the heating system etc. are additional costs which sum up to about 0.5-2 Euro per sqm and month. All of these have to be paid by the tenant if apartment or house is rented out. Even the property owning tax normally needs to be refunded by the tenant to the owner or should be made part of the normal utilities prepayments.
Who takes care of the property when I am not in Germany?
Any house can be given into the care of a property management. On apartments this is mandatory as of today when these belong to a partitioned apartment house. Cost for property management is about 25,- to 35,- Euro per month for an apartment. Rental management is separate from general house management and can be transferred to an agency for a fee that is agreed upon by both parties.
Who would assist in selling the property once I want to do this?
At any given point, when you decide to sell the house or apartment again, you can give it to a Real Estate broker or also offer it freely on the market. There are no rules or laws saying that you must go via a broker. There are no shared listings in Germany where all brokers would offer their houses; this is a pretty individual market! It has the advantage that anyone has the chance to get his house on the market. Usually you put the house into local newspapers on the weekends and also would offer it on related websites.
What are the tax implications during the rental period?
We are not tax advisors and in any single instance the tax issues should be studied and explored carefully. Certainly as a private person you have to pay tax on the rental income. The amount goes on a sliding scale which starts around 25% and goes up to 42%, to which the so-called “Soli” of 5.5% has to be added. That means an extra tax based on the tax you pay, which is meant for the rebuilding of the eastern part of Germany. It is considered by many people to be unnecessary but the German government did not change that so far. Depreciation, interest and advertising or management expenses can be deducted. Depreciation is usually 2% per year, based on the purchase costs minus value of the ground, as this is not depreciable.
Any private person who is receiving rental income in Germany, even if not living here, must fill in and sign his annual “Steuererklärung für beschränkt Steuerpflichtige”, which is a special tax declaration sheet for people who are not paying their normal income tax in Germany. The effects this has upon your tax duties in your home country have to be checked there with a competent advisor.
If a foreign company non-resident in Germany purchases and rents out property, the tax issues are slightly different, but for that you must consult a tax advisor.
What tax to I have to pay when selling the property?
Currently, the regulation is such that if you sell before ten years after the purchase date, the profit is taxed. Again, this follows the sliding scale rule. But watch it: there is a nice hook built in, because the depreciation claimed in that period is voided or added to the sales profit. That applies only to property which was rented out. Owner-used property usually can be sold without tax on the profit after two years.
After the ten years holding period the profit is tax-free as per the current regulations for private persons – not for companies. There have been discussions since 3 years to change these regulations and various proposals have been made. But up to now – end of 2006 – no change has passed as law.
There is another tax-trap that you must know about. There is a rule that if you sell more than three properties within five years you are considered a commercial property dealer. The consequence being that you have to pay commercial tax! And your profit is not tax-free even if the ten years holding period is over. Take the example of a multiple dwelling which you purchased as one unit and want to subdivide and sell as several units after ten years. Selling off more than three units out of that house makes you a tax payer on commercial tax which is about 25%.
All this is without any warranty of correctness or being complete. The best advice is really to hire a professional who is familiar with the tax laws in both countries, the one you live in and Germany.