Are you thinking of buying a house or apartment but don’t have any experience in the real estate business? We’ve put together a list of answers to all the big questions that we keep hearing in our work – from what you should consider in the preliminary stages to financing to a compact description of how the buying process works.
Why is it worth buying property?
Germany has some of the lowest home ownership rates in the Western world. In 2018, 47.5% of German households stated that they owned a house or some form of real estate. Until ten years ago this was not a big problem – rental prices were stable and low, in large parts of Germany demand was met by adequate supply. However, the situation has completely changed over the last few years. Due to a lack of other profitable investment options, more and more private and institutional investors are choosing to invest their money in property.
This means there are more good reasons than ever before to get on the property ladder:
- Retirement provision: Prepare for retirement by owning a property that is fully paid off by the time you retire – whether you use it yourself or as a capital investment that generates additional income, thus providing a welcome cushion on top of your statutory pension.
- Historically low interest rates: Never before have more preferential rates been available for financing real estate investments.
- Planning security: No one can terminate your rental agreement and force you to move out.
- High quality of life: You can design your home exactly the way you want to have it – without having to ask your landlord about every tiny detail.
- Government subsidies: There are numerous support programmes – particularly for families – to help make it easier to purchase residential property.
What do I need to consider before buying?
For most people, buying real estate is one of the biggest decisions of their lives. Which is why, if you want to use the property for yourself, you should be aware of the key milestones you envisage in your future. Of course, no one can accurately predict the future. But once the decision has been made, every change (more space, less space, moving to another town) will cost a lot of time and energy. You should therefore be able to answer the following questions for yourself:
- Do you know exactly what type of property you are looking for (house or apartment, period property or new build)?
- Do you know exactly where you want to live (city or countryside, town centre or outskirts)?
- How far are you willing/can you afford to commute?
- Are you clear about your available budget?
- Can you estimate how much you are reliably able to pay each month?
- Is it likely that the amount of space you need might change significantly one way or the other in the next few years for family reasons?
How can I find the right property for me?
The best way to find the perfect property for you is through an estate agent such as Pentagon Immobilien. We have a number of options available for you: you can use our networks and partnerships with estate agents, take advantage of our expertise and many years of experience to help with your property search or you might choose one of the properties that we already have in our portfolio, subdividing a property where necessary.
We are there for you every step of the way, from initial enquiries to signing your contract of sale and even after that with our own property management team and all the services they provide.
What are “closing costs”?
When purchasing a property, your budget needs to not only cover the actual sale price, but also a number of other fees, which are often referred to together as ‘closing costs’. These can quickly add up to 10% of the property price. They include the broker’s commission and real estate transfer tax. While the latter is currently set at a mandatory rate of 3.5% in Saxony – one of the lowest rates in Germany – commission fees range from 3.5% to 6% plus sales tax.
Other additional costs that need to be factored into your budget include notary fees and the creation of a land charge for financing. These typically equate to around 1% of the property’s sale price.
How long does the whole buying process take?
As a general rule, it usually takes around six months from the first viewing of a property to handing over the keys. It can also happen much faster, but you should definitely plan for it to take four months – even if you and the seller quickly come to an agreement, the administrative processes still take some time.
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How does the buying process work?
- Plan your budget: Check how much real estate you can realistically afford to buy. You can use our finance calculator (available only in German) to get an initial overview. Make sure that you factor in the additional costs described above. When you plan your monthly budget, remember that when you own the property that you live in, you will no longer have to pay rent every month, but you will have to pay property maintenance fees. This is your contribution to the costs of operating, managing and maintaining common areas of the property.
- Arrange bank appointments: The next step is to arrange appointments with several different banks to obtain financing quotes. You can read more about financing options below. Wait until you have found the right property and are clear about your financial requirements before completing any financing arrangements.
- Arranging viewing(s): Arrange with your estate agency to view several properties that you are interested in and which suit your needs. Take this opportunity to ask any questions that might be important to you, e.g. about the building materials or planned modernisations, rights of way, the other members of the house community, the local neighbourhood, the district and available media services.
In some cases, the estate agency may require you to sign a confirmation of commission prior to viewing a property. Essentially, this means that you are thus committed to paying the agent the agreed commission fees, should the process result in a contract of sale.
- Pay an advance or sign a preliminary contract: If you are interested in a property, you can sign a preliminary agreement with your estate agent or reserve the property for a certain amount of time. This means that the property cannot be offered to anyone else during this time. A preliminary agreement is more binding and already includes the key details that will later also be covered in the final contract of sale which will be certified by a notary.
Before signing a preliminary agreement, you should make sure that you can take a look at a number of important documents, which your estate agent will usually provide you with:
- Copy of the land register entry (to check existing burdens, leaseholds, rights of way)
- Excerpt of cadastral map
- Insurance documents for residential and commercial properties
- Floor plans
- Preliminary building permit (only for properties that can be built upon)
- Building permit, if available (important for buildings built before 1990)
- Declaration of subdivision (for residential properties)
- Minutes from the last owners’ meeting (for residential properties; this will provide you with valuable information about the financial situation and reserves as well as the owners’ future plans)
- Attend the notary appointment: Once you have secured your financing arrangements, the change of ownership is made official when both parties sign the contract of sale in the presence of a notary. The notary will draw up a draft contract based on the preliminary documentation provided by you (or your estate agent) and the seller and will send this to you no later than two weeks before your appointment. It is recommended that you get this document checked by a solicitor. During this meeting, the contract will be read out loud by the notary. At this point, you still have the opportunity to request changes. Upon signing the contract, you commit to pay the agreed selling price within the agreed period of time.
After this, the notary will register a notice of conveyance, which is a type of reservation in the land register. You are not formally recognised as the property owner until all the conditions of the contract have been met (e.g. payment of purchase price, broker’s commission and real estate transfer tax, removal of defects where applicable) and the ownership has been successfully transferred in the land register. Likewise, the keys cannot be handed over until the seller has received payment of the purchase price – until that time, the previous owner is still liable for any damages that may be caused by you.
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What types of financing are available?
Choosing the right financing model for you is one of the most important decisions you will make when purchasing real estate. The total amount that you will need to finance your purchase will be made up of your own capital and borrowed funds. In order to minimise the amount you need to borrow, you should be able to supply 20-30% of the total costs from your own means. This will put you in a strong position when it comes to negotiating with your loan provider.
You can negotiate your interest rate, repayment conditions and the amount of monthly payments due on an individual basis with your bank. The most typical arrangement is an annuity-based repayment mortgage. This means that you pay the same amount throughout the duration of the loan, even though the amount of interest falls as the remaining loan balance is paid off. In other words, your monthly repayments remain the same, but the proportion of interest and capital repayment will change over time. At the beginning, a large part of the repayment will go towards interest and only a smaller part towards capital, but these proportions will eventually become inverted. Interest rates are usually fixed for a period of ten years, after which you have the possibility to renegotiate.
TIP: Always get several different offers to compare rates and conditions. Even as little as half a percentage point can make a difference equating to a five-figure sum over a long period of time.
You can also make use of our networks when it comes to financing matters and obtain quotes through our specialists who work with several different banks.