Guide to Buying Property Abroad – Getting Started

Introduction

The overseas property market has varied dramatically in the last couple of years. The traditional buying territories of Spain, France, Portugal, Italy, Florida and Cyprus are now having to compete with the low prices of Eastern Europe, the investment potential of Dubai, the quality of life of Canada and the low cost of living in Turkey.

People are buying property today in countries that they may not even have heard of five years ago (Cape Verde I hear you cry!), and as a result the overseas property market is perhaps more unpredictable today than ever before.

With everyone so busy trying to spot ‘the next big thing’, it can be extremely difficult to keep track of different laws and taxes – not to mention cultures. The trick to a successful purchase is simple – research, research, research. The following pages aim to give you a general overview of things that you should be looking for when buying abroad but, unfortunately, this is only the first step in a long, long process.

Read as much as you can – on the internet, in magazines and in books – visit exhibitions; take independent legal and financial advice and, most importantly, visit the country in which you are considering purchasing as often as possible – both in and out of season. There is absolutely no replacement for first hand knowledge, so quiz as many people as possible and learn from their mistakes. Finally, make sure that you enjoy the process – you are far less likely to make a mistake if you view it as a pleasure rather than a chore…

Popular Buying Territories

Spain is still the most popular destination for British buyers. It has a great deal going for it, hence the reason that the Costa’s managed to avoid the much publicised crash that was predicted for 2005. Fabulous weather, good facilities and amenities, a wide range of low-cost flights, a reputable healthcare service, a low lost of living and well-established infrastructure all come together to form a timeless package. There is a wide range of property available and, while the average price for a two-bedroom apartment is £175,000, you can expect to pay anything from £50,000 to £1 million depending on what area you look in – with rural properties offering much better value for money than those on the coast.

France is somewhat of a chameleon when it comes to British buyers, as it doesn’t get much publicity, but has maintained a steady position as our second choice. The majority of Brits who buy here tend to be Francophiles, people who admire the culture and want a piece of the French lifestyle for themselves. As a result traditional homes tend to be the most sought after, with buyers not afraid to do a bit of work. Ryanair has also opened up a lot of the country which was previously inaccessible, but be wary of choosing a home simply because of one flight route. Low-cost carriers tend to fly to regional airports, where they can often be the only airline in operation. If the airline was to cancel that route, or indeed to go under entirely, you still need to be able to access your property. Therefore, make sure that a low-cost flight route is an added benefit, rather than your sole mode of travel.

Portugal, and in particular the Algarve, has transformed itself into a Mecca for golfers. The result of this is a plethora of well-maintained developments and manicured resorts – not to mention high property prices. However, with unbeatable weather and no time difference, it seems that this is a price that thousands are willing to pay. A three-bedroom villa averages around £272,000, but expect to pay more the further south you travel. Northern Portugal is currently reinventing itself, and the golf developments there could soon be giving its southern counterpart a run for its money. On the downside, the Portuguese healthcare system has received some bad press – but private treatment is available.

Florida has long been popular with British tourists, and this has transformed well into the holiday home market. The rental opportunities are plenty, with Disney, Epcot, Sea World and Universal Studios all guaranteeing millions of visitors every year. However, if you are planning on renting out your Floridian property make sure it’s in the right zone – rental is restricted in many zones which could put an abrupt end to your investment plans. It is also important to be aware of the visa restrictions – Brits are only allowed into Florida for up to 90 days at a time, despite whether or not they own local real estate.

Dubai has been one of the decade’s property success stories, with the emirate building at an astonishing rate. You name it, and they are planning to build it. From island developments moulded into the shape of the world, to underwater hotels and revolving apartment blocks, Dubai is clearly ahead of its game. However, such a new market doesn’t come without its teething trouble, and in this instance it is the question of freehold property. In March freehold title was finally granted to those who have bought from the emirate’s three main developers (Nakheel, Emaar and Dubai Properties), but the finer details are yet to be released – and there is no sign of when this will be.

What sort of buyer are you?

There are generally four types of overseas property buyer:

1) Investors

2) Holiday-homers

3) Émigrés

4) Retirees

Increasingly, people are beginning to fill more than one of these categories. For example, somebody may purchase a holiday home with a view to retiring there permanently in the future; somebody else may purchase a property primarily as an investment, but plan to use it for holidays too; or a buyer may be emigrating lock, stock and barrel simply because they have retired.

Before you decided on a type of property, and indeed a destination, it is important to decide which of these, or combination of these, categories explains you the best. If you’re an investor then capital growth, rental returns and tax incentives are what you should be concentrating on. Holiday-homers should be considering flight times, facilities and amenities, weather and local culture. Meanwhile, retirees priorities will be established infrastructure, healthcare, visa issues and cost of living. Émigrés should take into account all of these factors.

Once you have established which type of buyer you are, you will find the searching process far easier – and much more successful – as you will only be targeting property types and destinations that suit your specific criteria. It’s important to stick to your guns here, as it’s unlikely that your priorities are going to change once you get on the plane – don’t allow yourself to be swayed away from what you initially set out to achieve.

Estate agents – what to look for

It’s very important to remember that while estate agents are ultimately assisting you in your property search, they are paid by the seller – be this a large developer or an individual vendor. It is therefore necessary to register with as many agents as possible, because no matter how good they are, they can only sell you what they currently have on their books.

A good estate agent will insist that you visit the property at least twice – and at different times of day. Just because you are buying abroad, don’t think that every property is going to be peaceful – or even get the sun. If one of these factors is important to you then tell your agent – and don’t be fobbed off with anything else.

It’s important that your estate agent speaks the local language – especially if you don’t. If they only speak English then the likelihood is that they are only dealing with British, and Irish, sellers – and this could considerably limit your choice of available properties.

Quiz your agent about the local market, and find out how long they have been selling there. If they have been established in the area for a while then this is a good sign, they will have better contacts, have more market knowledge and, most importantly, are more likely to stick around should the market turn sour.

If you are still in doubt about an agent’s credibility, then opt for a firm that is registered with an internationally recognised governing body, such as FOPDAC (Federation of Overseas Property Developers, Agents and Consultants) or AIPP (The Association of International Property Professionals).

Developers – what to look for

When buying a new-build property it is essential that you feel happy with your developer. No matter how conscientious your builder, it is inevitable that some problems are going to arise – what counts is how well the developer deals with them.

Where possible, visit developments that have already been completed by the same firm – and speak to people living there. This will be a good gage of the quality of service that you are likely to receive. If you can view a completed property then even better, as this will show you what kind of finish you can expect.

Make sure that your developer offers a “snagging list service”, whereby you visit your property and make a note of any alterations that you would like made before you complete on the purchase. This is a good time to check that everything is functioning as it should be – you don’t want to wait until the day you move in to realise that the shower doesn’t work. Also ascertain what kind of after sales service you can expect – will they fix your broken oven ten months after completion, or are you on your own once you have received the keys?

Ultimately, make sure that your solicitor (an independent solicitor that is – not one recommended by the developer) receives a bank guarantee from the developer. This covers your deposit if, for any reason, the development never gets built.

New-build versus resale

The decision to buy a new-build property over a resale one lies with what you are going to use it for. If investment is the name of the game then new-build could be a good way to go, as you may get healthy capital appreciation before the first brick has even been laid – meaning that you have effectively made money before you have had to part with the full asking price.

However, if you are buying the property for your own use, then the decision may be slightly harder. Not everyone is willing to wait a couple of years before they can move into their dream home, in which case a resale property is likely to appeal. If you are buying in an established market, such as Spain or Portugal, then resale homes often command the prime positions – so if you are after a front-line abode resale could again be the answer.

However, new-build properties come with the developers guarantee, so should anything go wrong in the first couple of years then you will automatically be covered. Also, should you get in early enough, new-build homes offer you the choice of the fixtures and fittings, often at no extra cost – meaning that you have a property you can simply move straight into.

Most new-builds also offer completed facilities, such as a swimming pool, which could be a make or break decision for some – especially if you are planning on renting the property out. Yet another string to the new-build bow as far as this is concerned is that many developers offer full rental management services, making for a hassle-free investment.

Costs

The costs of buying property vary tremendously from country to country. As a very basic rule of thumb you should allocate around ten per cent of the purchase price. This will be broken down into some, if not all, of the following categories:

Legal fees

Notary fees

Land registry fees

Stamp duty/transfer tax

Structural survey

Mortgage arrangement/administration fees

Depending on where you buy, you may also need to budget for residency visas.

Unfortunately, selling property isn’t a cheap process either. The following costs are likely to be incurred when you come to sell:

Capital gains tax

Estate agents fees

Legal fees

It is also important to bear in mind the annual costs that a property can incur. These include local (council) taxes, rates, utilities and general maintenance payments. If you are renting your property out you may also be liable for tax on any profits – both in your country of purchase and in the UK. Deciding where you should register as being tax resident (either in the UK or abroad) will also alter your financial situation.

It is important that you research what the exact breakdown of these costs will be for your particular destination before you commit to anything. It’s also recommended that you speak to a financial expert, as they may well be able to save you money in the long run.

Legal

It cannot be stated firmly enough that you need to get good, independent, legal advice before you proceed with any property purchase – especially if that purchase is overseas. Just as you wouldn’t dream of buying a home in the UK without consulting a solicitor, neither must you when buying abroad.

Many people seem to think that since their agent/developer seems so friendly they can use the legal representation recommended by the seller – or none at all. The question you must ask yourself is this: Would you make the same move at home? The answer will undoubtedly be “no”.

Many ‘holiday home from hell’ stories have rocked the dream of buying abroad, and ultimately many of these can be blamed on nothing other than the purchaser not taking legal advice. Tales range from people signing legal documents in Portuguese – when they were buying a property in Spain, to someone buying a home in Turkey – that had already been sold to eight other couples (all of which had paid a deposit).

While the legal process varies dramatically from country to country, if you stick to the basic principle of ‘Would I do this at home?’ you should be on the right path. A solicitor may increase your initial outlay but they could save you thousands in the long run – not to mention securing your views, parking spot or right to use the swimming pool.

Mortgages

Getting a mortgage to finance your overseas purchase depends on which country you are buying in, as some places offer a far wider choice than others. If you are dealing with Europe then there is generally a good range available, however the most important question that you should ask yourself is whether you really want to raise the finance in a foreign currency.

For many people, buying a property abroad is a carefully calculated financial decision, and one that leaves little room for exchange rate fluctuations. If you are planning to rent out the property in the local currency then it may be better to get a local mortgage – this way you eliminate the risk of any fluctuations. However, if you are planning on paying the mortgage yourself, and you earn in sterling, then getting the finance at home is probably the wisest decision.

Of course, removing the risk also removes your chances of gain should the currency markets move in the other direction. A good way to cover yourself completely is to divide the cost of your property into thirds. If you were then to pay cash for one third (perhaps by releasing equity in your UK home), get a sterling mortgage for the second third and a local mortgage for the final third, then the two mortgages would cancel themselves out should the markets move dramatically.

Whichever route you decide to follow, it is imperative that you shop around just as you would for a British mortgage. Bear in mind that interest rates are often higher on buy-to-let mortgages than they are on your primary residence. Also be wary of the time factor, you may not want to have your capital tied into a mortgage for a long period of time.

Currency

If you consider how much money can be lost in exchange rates when you simply go on holiday, imagine how much you stand to lose when changing hundreds of thousands of pounds. And what if the exchange rate alters dramatically in the time it takes for your red tape to go through? Suddenly, the property you secured three months previously could have £10,000 added to its price. And if that’s not enough to scare you off, have you considered how much an international bank transfer costs for moving such large sums?

The way to avoiding paying such money for nothing lies in independent currency brokers. These firms specialise in the currency markets and could, quite literally, be worth their weight in gold when it comes to saving you money.

They generally do this in two ways, firstly by using their expertise to predict the market and, secondly, by fixing rates in advance of your property completion date. This means that if you’ve worked out that your Floridian home is going to cost £120,000 by today’s rates, and you cannot risk the price rising due to exchange rate fluctuations, then you can simply order your dollars for the future at today’s rates.

Of course this could backfire, as the rate could go down as well as up, meaning that by securing your dollars you have actually lost money. Therefore the sensible thing to do, and what most currency specialists would advise, is to buy half now and half nearer the time of exchange of contracts – this way you have cancelled out any risk.

Leaseback

Guaranteed rental returns are an attractive proposition for anyone buying a home overseas who isn’t going to live there permanently. However, it is important that you differentiate between a developer simply ‘guaranteeing’ these returns, and a government backed leaseback scheme.

Leaseback has long been popular in France, and the scheme is now becoming increasingly common in Spain. Traditionally, properties are located in coastal and mountain resorts, and are let out on a weekly basis to holiday-makers. In France, the attraction for buyers however is not necessarily the promised rental, but the 19.6 per cent VAT that they are able to reclaim from the French government – provided that they own the property in question for a minimum of nine years. However, in order to avoid capital gains tax in addition to the 19.6 per cent tax rebate, owners must hang onto the property for 20 years.

There are other benefits to leaseback other than financial. Owners are allowed a certain amount of personal usage without it affecting their rental income, this is usually around two to four weeks per year, and the property will be fully managed and maintained by the developer – making this a hassle-free investment.

The guaranteed rental returns vary from development to development, but be aware that the figures tend to be around the four per cent mark. Leaseback is by no means a get rich quick scheme, it is aimed at those after a long term investment – which is more likely to benefit the local economy.

Schemes and Incentives

There are many schemes and incentives in today’s international property market to encourage even the most cautious of buyers. Timeshare is of course the most common of these, but times have moved on since then.

The idea of buying two weeks in the sun, in the same property, year after year, has attracted many buyers. However, unfortunately timeshare has gained a bad reputation despite its obvious advantages. Depending on which developer you bought from, the traditional two weeks evolved into simply ‘owning a fortnight’, meaning that, if you so wished, you could switch your sun break for a skiing, mountain-biking or golfing holiday. Ultimately, you were entitled to a two-week break – and the destination was your choice.

Today, fractional ownership seems to be a far more popular option for British buyers. While it removes the option to holiday in different destinations it has another, far more fashionable perk – capital growth. What timeshare and fractional ownership have in common is rental returns (you were always able to rent a timeshare out). However, no matter how much your share of a property increased due to capital growth in a timeshare scheme, your rate of return was always the same.

Meanwhile, fractional ownership does exactly what it says on the tin – you own a fraction of a property. This is usually broken down into quarters, but other denominations are available. As a result, you are therefore entitled to the same fraction of capital growth and rental returns as your investment allows – making this a great, modern, way to get on the overseas property ladder.

And finally...

The motto here is simple – don’t do anything you wouldn’t do at home. This includes signing contracts you can’t read, not getting a survey, not consulting a solicitor, not buying a property in an area you have never been to and, above all, not giving a ten per cent deposit to a stranger you’ve just met in a bar who claims that his brother has the perfect house for you.

While such statements may sound laughable, they are all true stories relating to British buyers abroad. Do your research and get good, independent, legal and financial advice before you sign anything. If you follow these basic principles then you are less likely to get caught out. So, don’t leave your brain on the plane, and happy house hunting!