Buyers Guide for Germany

Why Germany?

It's no secret that the German economy was in the doldrums for some time after reunification and, as a result, its property market suffered. For the British buyer, however, this means that a plentiful supply of housing is available at affordable prices. Add into the mix the fact that Germany is a nation of renters (only 43 per cent of Germans own their own home), and the investment potential of this European nation suddenly looks very promising. In fact, you only have to look at how much global investment companies are spending in Germany to realise its full potential - for example, in 2004 the Forbes Investment Group bought 80,000 properties for an impressive £2.3 billion. The result of such spending means that house prices in Germany are on the rise once again, after dropping 6.8 per cent between 1994 and 2004, albeit not at an unprecedented rate. For a long-term investment, however, this bodes well, as a steady economic recovery tends to be a solid one.

Buying resale properties - The process in Germany

The purchase process in Germany is not too different to that in the UK, apart from the presence of a notary. Once a property has been decided upon a local lawyer or translator should be employed to help with all dealings / translations.

Reservation agreement

It is not common in Germany to sign a reservation agreement when you are buying a property from a private person. It would be possible to negotiate it with some sellers but please note that this agreement is not binding in Germany (only notarised contracts are binding). For this reasons you normally arrange a meeting with a notary (to sign the purchase contract) shortly after you decided to buy a property (approx. 10-14 days).

1. We will receive all the documents (incl. partition deed, protocol of the yearly owners meeting, accounting for the building from the house manager etc.) to the flat and the building from the seller/ house manager. Then we will forward these to the notary and to your instructed solicitor. Review of the paperwork.

2. Draft of the purchase contract and set the date for the notary's meeting:

A notary is impartial to the buyer and seller and is responsible for the tasks (title/land registry checks, preparing purchase contracts and ensuring fair contract conditions, etc). You and your solicitor will receive a draft of the contract before concluding the notarial act. Review of the contract.

Set the date - Now it is time to set the date for signature of the Deed. At the Notary, all buyers must be present, and show their legal papers (valid passports); alternatively, another party with a power-of-attorney can represent you. If the buyer is a company, the person(s) signing the contract need to bring their legal papers from the company (authorization and an excerpt from the Chamber of Commerce entries showing the authorization status) plus passport.

3. Sign the papers

At this meeting the Notary Public will read the Deed aloud for both parties. After making any changes or additions the Deed is signed by both parties and the Notary Public. This contract is irrevocable. It includes information such as the agreed-upon purchase and all conditions thereof, the day of payment, the day of handover to the new owner, any needed repairs or other actions to be completed by the seller, and any other specifications as needed. After signature, the Notary Public will perform application in the so-called "Grundbuch" (the land title register), without which no sale of property can be completed. Here are different steps to consider:

First, the priority notice (Vormerkung) is registered. Now, buyer is secured that nobody else can acquire property validly against him. Thus, buyer now may pay the purchase price to the seller without running any risk.
After payment, the notary has the transfer of ownership registered in the land register (Grundbuch). The registration entails the transfer of the property.

Translation if the buyer doesn't speak fluent German:

An official translator could be instructed to translate the contract at the notary's meeting or
We choose a notary who speaks fluent English (most common and cheapest practice) or
Your instructed solicitor has power of attorney or
You know someone (e.g. a friend) who speaks fluent German and English and this person comes with you and translates the contract (no costs)

Transfer of the purchase price:

The buyer may pay the purchase price to a notary's trust account or straight to the sellers account: Both ways are common in Germany.

If you work with a notary's trust account you pay the money on the date, which is agreed in the purchase contract. The notary will hold the money in the account till purchase conditions (priority notice in the land register…) are fulfilled and then the notary will automatically transfer the purchase price to the sellers account.

If you transfer the money straight to the seller you pay only the purchase price after you received a written notice from the notary. That means if the legal conditions are not fulfilled till the agreed date of payment you have to hold the money on your account till you receive the written notice from the notary. The seller informs the notary after he received the purchase price on his account.

Benefit of a notary's trust account: You take over the flat incl. all benefits (e.g. rental income) and burdens (e.g. monthly running costs) to the agreed date of the purchase contract.

Pay the Fees

Between two to four weeks after the buying contract is signed, the purchase tax must be paid. This is between 3.5% and 4.5% of the buying price stated in the contract. This tax must be paid on time; otherwise the tax office will not issue the clearance certificate - an important paper for transferring the possession from the seller to the buyer. Within the same period of time the fee for the notary and registration must be paid. The terms of the contract can be very variable, which is why the contract needs to be reviewed carefully.

Finance for purchasing a property in Germany

Finance the property - The buyer doesn't need to present a so-called "irrevocable acceptance" of loan financing before signing the Notary contract. Please note: For your own security the promise of the loan should be in place before you sign the purchase contract if you don't have the full amount in cash available.

Qualification for a mortgage can vary from bank to bank. Qualification is dependant on the net rental income for the property you purchase, in addition to your own financial circumstances, recoverability of the property etc.

In general, mortgage financing usually can be arranged up to about 60% of the purchase price (in very rare cases up to 80%).

There are a large amount of banks and Sparkassen (savings banks) in Germany. The biggest banks are Deutsche Bank, Commerzbank and Dresdner Bank.

When applying for a mortgage it is important that you have specific documentation to support your application and prove that you are eligible for a mortgage. The required documentation is necessary, but may vary depending on the lender and the type of mortgage you are applying for.

Documents needed for loan:

Who are you?

Proof of identification (passport, driving licence, etc.)
Proof of your home address (electricity bill, phone bill, etc.)

What is your financial situation?

Original recommendation letter from your bank
Income tax papers from last three years
Last three months bank statements
Proof of actual assets (real estate, stock, etc.)

Your current loan situation:

Starting & final dates
Initial amount borrowed and outstanding balance
Annual repayment

What is your employment situation?

If you are company employed:

Employment letter
Last three salary slips, bonus statement, etc.
If other source of income, proof of it

If you are self employed:

Last three years balance sheet
Letter from your accountant, certifying your income
Any documents that certify that you own the business
If other source of income, proof of it

Are you purchasing with your spouse?

Marriage Certificate. All documents must be sent by both husband and wife if you are purchasing together.

Note: After their initial perusal of your documents, the financial institution may request further documentation for proof of various aspects of real estate investing in Germany.

Any mortgage needs to be secured in the Land Register and that can only be done by a Notary.

Interest rates for mortgages are ranging between 5 percent and 6 percent, depending to some degree on the duration of the financing plan. Rate of repayment is normally between 1% and 2%.

Fixed rate loans are the most common, with mortgages available up to 30 years - provided that you will have repaid the loan before you reach retirement age.

Our partner banks, the Deutsche Bank and Dresdner Bank, offer mortgages if the property is in a good condition as well as already tenanted. The net rental income has to cover the interest rate and rate of repayment or if there is a gap between income and interest rate / rate of repayment then you have to make sure that this gap-amount (for the current year) is placed as security on your German bank account.

Deutsche Bank and Dresdner Bank also offer mortgages for vacant flats if the property is located in a good area and if you want to rent it out after you purchased the flat.

Please note: If you want to use the flat for yourself the banks will not lend you money while you are resident abroad and you also have your income abroad.

Despite such low interest rates and high deposits, Germany currently has the highest average mortgage repayments in the European Union. Therefore, if you are considering buying in Germany, it may be more economical to raise finance in the UK - perhaps by remortgaging an existing property since UK lenders will not provide a mortgage against a German property. However you decide to finance your purchase, ensure that you have it all in place before you submit an offer.

Fees and taxes when buying a property in Germany

When buying a German home you will need to budget around six to eight per cent of the purchase price in order to cover associated fees and taxes. This is broken down into:

Transfer tax (stamp duty) 3.5% - 4.5% (depending on state; since 1 Jan 2007 it's 4.5% in Berlin)

Notary and land registry approx. 1.5%-2% (it exists an official and fixed scale of charges and fees) plus approx. 0.25% for a notary trust account (if desired; not compulsory)

Other associated costs:

Translator and/or lawyer approx. 0.5%-2% (depends on your required services and the purchase price)

Bank fees approx 1%-1.5%

For resale properties the purchaser has to pay an agent's commission; differ from state to state. Berlin 7.14% incl. VAT (6% plus 19% VAT)

Annual Property Tax is charged in Germany by the local municipality to cover local services and will be rated from 2007 on a level similar to the current market value of the property. The tax is levied on the assessed value of the property using the basic federal rate of 0.35%. The amount of which is further multiplied by 'multipliers' to calculate for the final tax due. This multiplier varies by municipality but the average multiplier for residential properties is 1.5%.

Capital Gains Tax

There is currently no capital gains tax after a holding period of ten years for real estate if held as private wealth. If you want to sell the property before this period, capital gains are taxable at the same rates as personal income (sliding scale). There are plans in place to introduce a fixed rate for capital gains tax of 20% in the coming years. This applies only to property which was rented out. Owner-used property can usually be sold without tax on the profit.

There is another very important clause to note. Should an investor sell more than three properties within 5 years, they are considered a commercial property dealer and the property is treated as 'real estate acquired for resale'. They will then have to pay commercial tax, treated with higher tax rates of around 25% (standard rate of tax for a company).

Please note: The capital gains tax law is part of the current tax-reform in Germany.

Legal issues when buying a property in Germany

There are no restrictions for British nationals buying in Germany, however if you wish to stay for longer than three months you will need to apply for a residence permit. This can be obtained from the local Foreign Nationals authority at the local town hall or area administration centre, and once obtained is valid for five years.

Investment potential in Germany

... a good investment in Germany means that you have to choose the right location. The residential property market is divided at district level, in regions with a market attractiveness which is either average, below average or above average.

Berlin is considered the city with the lowest property prices in Europe - in fact, they are currently around a tenth of those in London. Therefore experts believe that prices in Germany can only go one way, and that's up. Investing in Germany however is seen as a long-term investment in regard to capital growth, as this is pegged to the somewhat fragile economy.

If you are hoping to make solid rental returns, however, then it's a different story. Thanks to the German penchant for renting, yields in the larger cities reach in average four to six per cent. This is a good return on a relatively low investment, and it's unlikely that you will ever have a vacant property for long - provided that you are offering good quality, affordable accommodation. Note: Residential properties with current rental yields between eight and ten per cent are situated very often in bad micro locations where the property values are expecting to fall further on. The resale of these properties is very difficult.

Be aware however that, due to the lack of locals entering the property market, it could take some time to sell your German home - a problem that could cause financial difficulty if you needed to release equity in a hurry.

Rents

Can landlord and tenant freely agree rents in Germany?

Rents and rent increases can be freely negotiated and agreed upon. However the landlord can be fined if, in a time of limited housing accommodation, he demands rent in excess of 20% above the rent charged for comparable premises.

The contract may contain:

Graduated rent increase clauses, or
Indexation clauses

But the rent must remain unchanged for at least a year. The tenant must be informed, in writing, when an index-linked increase is due.

Where no indexation clause is included, a landlord may require the tenant to accept a rent increase to the rent level customary in an area, provided that the last increase of rent took place at least 15 months prior to the date when the increase is to take place. As a general rule, this type of rent increase is limited to 20% over three years. According to the law of Obligations 558, the landlord must state reasons for the rate increase, viz, expert opinion, three 'sample' rents charged for comparable properties, or show a so-called 'qualified rent table' (qualifizierter Mietenspiegel) or rental database - a statistical measure of rents issued by the local authorities and approved by landlord and tenant associations. The tenant has two months to accede to the demand; if he refuses, the landlord can sue.

Deposits

The security deposit must not exceed three monthly rental payments. It must be paid directly into a savings account with interest common for such savings accounts, and with a three-month termination period.

What rights do landlords and tenants have in Germany, especially as to duration of contract, and eviction?

A tenancy agreement may be concluded for a 'limited' or 'unlimited' period.

Unlimited contracts. These are the dominant, normal form of contract.

Limited contracts. Contracts can only be limited for very good reason e.g. that the landlord will, at the end of the contract, need his property for himself or his family or renovations will be done at expiration. There is no maximum period for 'limited' agreements, but they are in theory not renewable (a proviso intended to protect tenants). Any contract that lasts more than a year must be in writing.

Germany has two forms of notice:

'Ordinary' notice, only applicable to unlimited contracts;
'Immediate notice' which must be based on a specific reason, normally the breach of an important contractual duty by the other party, e.g., non-grant of use, or default of payment of rent. In this case the contract terminates with immediate effect.

The landlord can only give 'ordinary notice' if:

The tenant is manifestly in breach of contract;
The landlord needs the premises for himself or his family;
The lease contract prevents the landlord from making an economically justifiable use of the premises.

The tenant can object to the notice, and demand continuation, if termination of the lease would give rise to hardship for himself or his family that would be unjustified, even in the light of the landlord's legitimate interests.

The notice period for 'ordinary notice' can be between three to nine months (if the tenant has lived long in the premises).

The tenant does not need justification to give notice. He must generally give three months notice.

What are the costs?

This will depend on the provisions of the rental contract agreed with the tenant. For residential properties, all costs except property management, maintenance and repairs can generally be passed onto the tenant.

Costs for property management are typically 20-35 Euro per unit per month. Rental management is a separate service from property (house) management and can be provided by the same or another company (as house management). The fee for rental management is generally 25-35 Euro per apartment per month.

Then the building reserve fund which is mandatory when owning an apartment as part of a community; it is usually about 0.50 to 1.5 Euro per m² living area per month.

Garbage disposal, water, common house electricity, housekeeping, maintenance of the heating system etc. are additional costs. 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.

Popular locations to invest in Germany

If you are planning on renting your property out, the best bet is to consider a city home as many Germans move to the urban centres in pursuit of work. Berlin offers great value for money and, as home ownership figures are as low as 12 per cent, finding a tenant shouldn't be too difficult. After experiencing a staggering drop in housing prices since the early 90s, Berlin's property market is springing back to life. No other property market in Europe offers such undervalued property prices and a solid rental market. The timing now is excellent and it is no surprise the market has recently been receiving great attention from global investors and property funds.

Homes in Munich are the most expensive in the country, with prices averaging around £6,500 per square metre. In addition to Berlin, interesting cities for investment are Hamburg, Frankfurt, Cologne, Düsseldorf and Hannover but also Dresden and Leipzig in the so-called Neue Bundesländer (New Federal Countries) are all worth watching.

Hamburg's living and housing standards are particularly high. Hamburg has the biggest average living space of all major cities in the world. Its real estate market boasts a comparatively high degree of stability, mainly because of its closed nature as a city-state.

Without question, Frankfurt is always part of the top real estate locations in Germany. It is so green in Frankfurt! Those who live in the residential areas in the heart of the city enjoy an almost countryside peace and quiet in the streets with tall trees and colorful front gardens and yet are in the city centre within minutes. The stable property market offers also in the future very good investment opportunities.

Dresden embodies one of the most beautiful European townscapes. The baroque City wins more and more in popularity. Increasing population figures reflect the trend in Dresden. Exclusive villas with a view over the Elbe, renovated apartments in older or even historical buildings, houses with gardens, former farmsteads or new built apartments in one of Dresden's high-rise estates - there are homes to suit every taste and pocket. Rental and sales prices are rising. In average an apartment cost in an Old Building approx. 2,430 € per m² and new built approx. 2,220 € per m² - trend rising.

Leipzig - The upcoming City: Leipzig is the traditional and now revitalised centre of commerce at the crossroads of two of Europe's main axes of transport and development. The city has a key bridging function between Western and Eastern Europe. Leipzig has about 12,500 "Jugendstil Buildings" (the German answer to art noveau) - more than almost anywhere in Germany. Investments in redeveloped old buildings could be an interesting option.

Visas, residency and work permits

As an EU member you are entitled to work in Germany without a work permit. As an employee you will be required to work a 36 to 40 hour week, but there is a minimum of 25 days annual holiday entitlement - and it's not uncommon for this figure to come in at around 30 days. In addition, workers receive nine bank holidays per year.

Salaries in East Germany tend to be 25 per cent lower than in the west, but as a whole wages in Germany tend to be higher than elsewhere in Europe. Benefits are also good, with many firms paying an additional 13th month's salary at Christmas.

Social security scheme: Contributions to pension insurance (19.90%), unemployment insurance (4.20%), health insurance (average 14.70%) and care insurance (1.70%) are paid half by the employer and half by the employee, the companies accident insurance is paid only by the employer. For calculation of the monthly contribution to pension insurance, unemployment insurance, health insurance and care insurance special ceiling amounts apply. This means that contributions are only calculated up to a maximum amount, exceeding earnings will remain free of social security contribution. Contributions are deducted directly from your salary. If you are self-employed you pay the contributions yourself.

Transport

Getting to Germany is easy with a range of low-cost carriers such as easy Jet, KLM and Ryanair all flying there on a frequent basis. Internal flights are also available, but the most popular form of transport once in the country is road, with all of the major cities linked by the Autobahn. While there is no official speed limit for these motorways, a maximum speed of 130 kilometres per hour is generally acceptable. In the cities themselves, traffic congestion can be a problem, and speed limits are 50 kilometres per hour.

You are entitled to drive in Germany on your British licence for an unlimited time, but there are some minor differences in road laws. For example, drivers must carry warning triangles at all times, and the maximum level of alcohol allowed in the system is 50 milligrams per 100 millilitres of blood. The public transport system is better in the West, but most cities offer a comprehensive service. The train service is reasonably priced and reliable, but connections in rural areas can leave something to be desired.

Health and education

Education in Germany is free, and is compulsory for children from the ages of six to 18. The academic standard is very high, and as a result many expatriate parents send their children to local schools. Having said that, there is a large choice of international schools available, with the major cities of Frankfurt, Munich, Hamburg, Berlin and Düsseldorf all boasting one. There is also a prep school in Bonn which is run by the British Embassy - fees for all of these, however, vary so it's important to do your research.

Medical treatment is of a high standard, with Germany having the highest ratio of hospital beds to population in the EU. Treatment costs for workers are covered by social security insurance, but you will have to pay for special dental work and prescription medicines. If you are not covered by the German social security scheme it is essential that you take out private health insurance - although your European Health Insurance Card may entitle you to a refund.

And don't forget

Buying a property in Germany suits two types of purchaser - those who are moving to the country and those after a long-term investment. Should the government decide to push this nation of renters into a home ownership culture, then owners of German property would be in an excellent situation to capitalize on the supply/ demand ratio.