Buying a property in Germany
A hands-on introduction for foreigners- legal, tax and fees
Unlike in other countries, such as Denmark and Switzerland, there are no restrictions to foreigners to purchase real estate in Germany. Currently, many foreign purchasers acquire properties in large German cities such as Berlin, Frankfurt and Munich. Clients interested in buying a house or an appartment in Germany are provided in the following with initial guidance on how to proceed when purchasing real estate in Germany.
As an initial remark any and all property purchase contract must be signed before a German notary. In larger cities there is a good chance to find an English speaking notary or an English speaking attorney who represents the purchaser during the purchase process based on a power of attorney. The power of attorney must be certified before a (foreign) notary or a German consular officer Thus, the purchaser must not be present in Germany in order to enter into the purchase contract.
The role of the notary, lawyer and realtor
It is important pointing out that the German notary has an impartial role and is not looking after the purchaser’s best interest. The notary merely ensures that the purchase contract as such is coherent and that both the seller’s interest to not losing legal title prior to receiving the purchase price and the buyer’s interest not making an advance payment without security that he will acquire good title are secured. Therefore it is advisable to retain legal counsel in order to protect the purchaser’s interest. The notar’s fees are non-negotiable as he is bound by statutory law to invoice based on a certain fee table.
Often a realtor is involved. It should be clarified at an early stage what the realtor’s fees are and whether the fees shall be borne by the seller or by the buyer. By statutory law the fees charged by a realtor who has been instructed by the seller are to be split 50:50 between seller and purchaser.
Financing is typically done by one of the many German mortgage banks. No purchase contract should be signed without having finance in place.
Key elements of a German real estate purchase contract
Contractual parties: The seller is not always entered in the land register as the owner, e.g. if he has just inherited the property. If the seller is married, the respective property regime must be observed and, if necessary, the consent of the spouse must be obtained. The acquisition or sale of real estate by a civil law partnership - GbR (Gesellschaft bürgerlichen Rechts) can be legally complex. Once domestic or foreign partnerships or companies are involved, the power of representation of the respective signatory will be carefully reviewed by the notary and the land register.
Object of purchase: The land plot or land plots must be described as precisely as possible in the purchase contract with the respective parcels. This is difficult, for example, if it is a partial area that is still to be surveyed. In addition to the property, the essential components and the so-called accessories are also sold. This includes in particular the buildings, but also certain furniture, machines etc. depending on the circumstances of the individual case. Within certain tax limits, part of the total purchase price can be distributed among accessories sold with the result that the real estate transfer tax can be reduced.
Purchase price: The purchase price is to be paid regularly by transfer of an amount of money. It must either be fixed as an absolute amount or determinable - for example by specifying a price per square metre for an area still to be surveyed. The agreement of partial payments is possible and usual, for example, in property development contracts (condominium purchases). In individual cases, it is possible to settle the purchase price payment via a so-called notary escrow account. However, this causes considerable additional costs and is not necessary in most cases.
Due date, handover and transfer of ownership: There are numerous contractual options that either secure the buyer or seller. For example, a priority notice of conveyance may be agreed upon or the purchase price may not be due until the necessary permits have been obtained or certain encumbrances have been cancelled. As a rule, the seller will be interested in ensuring that the transfer of ownership in the land register does not take place until the purchase price has been paid. Typically, the purchase is entitled to all rental income from the date on which the purchase price has been fully paid.
Encumbrances, public encumbrances: If encumbrances such as land charges or a residential right or usufruct are entered in the land register, the fate of these rights must be regulated in the real estate purchase contract. Both takeover and cancellation are conceivable. The examination always requires the inclusion of the agreement on which the right is based, e.g. the real estate loan agreement for the land charge. If the loan is still partially outstanding, an assumption of contract by the purchaser - with the consent of the bank - could be sensible under certain circumstances.
Defects (defects of quality, defects of title): Particularly important is the regulation of liability for defects of quality or defects of title which become apparent during or after the completion of the real estate purchase. The legal rights of the buyer, namely withdrawal, reduction and/or compensation, can be modified contractually. A material defect may exist, for example, if the property is smaller than agreed, if dry rot or rising damp is evident, if a building permit is not available or if the rental income for a rented property is lower than expected. Defects in title are considered if, for example, the rights of third parties prevent the buyer from unrestricted use, for example if the seller conceals that the house or apartment is rented. The seller will have an interest in disclosing as many defects as possible so that the buyer becomes "bad faith" in this respect, i.e. can no longer invoke these defects after conclusion of the contract. If the seller conceals an essential defect (a classic is the concealment of damp), he is liable because of fraudulent deception and faces reversal of the purchase contract and indemnification. It might even lead to criminal liability.
Miscellaneous: In addition to the main points mentioned above in the real estate purchase contract, numerous other items can and should be regulated. This also includes who bears the land transfer tax and the notary and land register costs. Another practically relevant topic is so-called broker clause which in essence protect the realtor’s interest in getting paid his or her commission. These clauses are to be handled with great caution.
It is important to highlight that for used properties sellers provide only minimal warranties. In contrast, newly built properties, such as condominium are sold with vast warranty rights for the buyer. Particular caution must be applied when acquiring properties which are currently rented out. German tenancy law provides tenants a high degree of protection. However, once the property is acquired the new owner may evict the tenant provided that he or a close relative wishes to use the property.
The purchaser is usually protected by a so called priority notice (Vormerkung). This priority notice protects the buyer from unexpected sales activities, such as selling the property to a different buyer for a higher price.
Taxes, fees and financing
Buying a property triggers real estate transfer tax. Each federal state in Germany applies its own tax rate. The tax rate is between 3.5 and 7 %. Registration as new legal owner of a property may take up to 3 or 4 months in Germany. The purchaser is only registered as legal owner of the property once real estate transfer tax has duly been paid. Real estate deals trigger considerable ancillary costs.
For instance: A condominium in Berlin is purchased at a price of EUR 800,000.00. The purchase price will be transferred via the notary’s escrow account. A broker is involved. A land charge needs to be registered at EUR 600,000.00 face value in order to obtain bank financing.
- Notary fees: approx. EUR 6,664.00
- Land register fees: approx. EUR 3,200.00
- Real estate transfer tax: EUR 48,000.00
- Aggregate transaction costs: EUR 57,864.00
In case a number of properties is acquired or shall be acquired successively, it is advisable in view of tax optimization potential to consider an acquisition via a property holding company (PropCo). If certain preconditions are met, real estate transfer tax can be avoided entirely (RETT-blocker).
Further, a PropCo can facilitate access to bank financing for foreign purchasers which are residents in countries outside the Euro Zone and therefore barred from access to bank financing. In this case, the PropCo itself, a regular German limited liability company, will act as borrower.
Our law firm routinely advises foreign clients from across the globe at the time of acquiring real estate in Germany. In particular, our real estate lawyers advise foreign clients when purchasing up-scale appartments in metropolitan areas across Germany. If required, real estate related tax advice is provided. Our clients appreciate our hassle-free and hand-on advice and instructions throughout the entire purchase process.
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