PROPERTY INVESTMENT IN FRANCE – THE PROCESS EXPLAINED.

Posted by admin in Property Investment, The Companies, The South of France | December 31st 2004

January 2005.

The processes and procedures below have been used successfully to achieve over 30 purchases of property in the Cote d’Azur over the last 3 years.

NOTES:

o All purchasers have been foreign. (S.A., Zimbabwe, Britain)
o Most have obtained credit from a major French lending institution.
o All have established a current account with a major French commercial bank.
o Most have not been to France for the transfer, and many have not been to France at all, even to view their investment, everything having been done in their absence.
o Many acquisitions have required extensive renovations, and again, it is not necessary for the buyer to be in France to organize it, unless he wants to be.
o The process from identification of the investment to transfer takes about two months if credit is not required, and three months if a credit application is processed. However delays for one reason or another are fairly common, and normally have to do with the credit application.
o Agents’ commission in France is not fixed by law, but normally is around 6% of the purchase price and is always included in the purchase price. i.e. the seller pays the agent’s commission.
o Notary’s fees and transfer fees and taxes combined amount to approximately 7% of purchase price (approximate because they are calculated on a sliding scale, 7% being top rate, and bottom rate about 6%)
o It is possible to borrow and invest in individual’s names, joint names, partnerships, or as a company set up for the purpose of the investment. The perfect vehicle for this in France is the SCI, (Societe Civil Immobiliere), which can be set up by the notary at minimal cost. It needs a minimum of two shareholders and any division of shares (99% and 1% is acceptable, or 50, 50) and can have estate planning and capital gains advantages.
o European Community, United States and Canadian residents may apply for up to 80% mortgage. All other countries’ residents can get 50%, and exceptionally and only in certain circumstances may be able to apply for up to 60%.
o Residence is defined by where the applicant earns his income and pays his taxes, not unfortunately by what passport he carries.

THE BOTTOM LINE – FINANCING OPTIONS:
(All of the information provided below derives from one bank who are among the top in the country, and have been found to be most helpful, bi-lingual, and competitive. Other banks may have different rates, options and conditions.)

The standard mortgage (variable rate).
o Interest Rate for a standard mortgage at the moment is 3.1% and adjusts upward or downward only once per year. The rate is firmly fixed to the ECB (European Central Bank) rate.
o Loans can be taken out over periods up to 20 years.
o Adjustments in interest rates upward or down do not affect the monthly repayment amount agreed at the beginning of the loan (this is most helpful for budgeting obviously). What alters is the term of the loan, which may be extended or reduced.
o Life insurance (0.30%) is compulsory and is built into the interest rate quoted.
o Exception – applicants who will be 70 years old or more at the end of their loan will be offered a “senior contract” and insurance is charged separately and calculated individually.

The standard mortgage (fixed rate).
o If an applicant opts for a fixed interest loan the rate is currently fixed at 4.8%. This option would seem to have few advantages in the European environment.

Capped options.
There are various options and different permutations available, but perhaps the most useful allows the borrower:-
o Interest at 3.5% fixed for 2 years, with fixed monthly repayments for 9 years.
o Interest rate may vary from the 3rd to the 9th year, and after year 9 the duration of the loan may be adjusted to reflect the increase or decrease, and/or monthly repayments may be adjusted upwards, only once, by up to 9% (e.g. from 1000€ per month to 1090€ maximum).
o The loan may only be extended by a maximum of 23 months providing it is a 15 year loan or less. Therefore the loan can only ever last for 16 years and 11 months. No more. (If it is a 20 year loan it may be extended by 56 months which makes it unattractive to ask for 20 years)
o If rates decrease, the duration of the loan is shortened without a cap. Therefore there is no bottom cap.

The interest only option.
o Interest rate for this product is currently at 3.35%
o This option is for a 100% mortgage, with a deposit on investment in a life insurance policy returning 4.5 to 5.5% p.a.
Advantages include
o Lower monthly repayments
o 100% of the interest can be deducted from rental income for income tax purposes
o The avoidance of French wealth tax (which kicks in at 720 000€ net worth)
o Avoidance of inheritance tax in the event of the death of one of the borrowers.

STEP BY STEP – FROM CHOOSING YOUR PROPERTY TO TRANSFER:

1. Identification of the property.
2. Offer. There is often room for some negotiation of the price, although those negotiations are generally short and sweet with offer, counter proposal and agreement usually being effected through the agent in a day or less. Protracted negotiations are considered as unsavory and not encouraged. In some cases furniture (the leaving of) forms part of the negotiation, if the furnishing suits the property and the taste of the buyer. Bear in mind that it often suits the seller not to have to arrange to move and perhaps store or otherwise dispose of bulky furniture.
3. Agreement is reached through the agent.
4. A sale agreement is compiled by the agent. This is a “compromis de vente”. It is a fairly standard format document designed to protect the buyer more than the seller. It covers all the special conditions that may have been agreed to, as well as standard conditions relating to deeds searches to be performed by the Notary, termite and bug checks, asbestos, lead, etc. It is not normal practice to have a structural survey done (as is normal in the UK). If the buyer wants one he has to pay for it.
5. The buyer signs the “compromis” or his representative does on his behalf. The agent then takes it to the seller.
6. 7 Days. Once both parties have signed the buyer has 7 days in which to reconsider and may pull out of the agreement for any reason at all. The seller does not have that privilege. Once he signs he is legally bound and can not renege for any reason. NO British style “gezumping” is possible. Once the 7 days has passed the agreement is binding on both parties except for one circumstance. If the buyer fails in his application for credit the agreement is void, and he must be refunded his deposit (see 8) in full by the notary. If he pulls out for any other reason he risks forfeiting his deposit (seller’s discretion).
7. A Notary is appointed. (The seller will have his own). Every property transaction in France takes place through notaries. They are highly trained and very highly esteemed. It is their responsibility to ensure that every legal requirement is met and that the rights of every party are properly protected.
8. Transfer of deposit. The buyer must immediately transfer 10% of the purchase price to the holding account of his notary. It will form part of his payment on signing day.
9. Application for credit. The buyer applies for credit if he is not paying cash. Credit application should take a month, and in France the only criterion for issuing of credit is the applicant’s income at home. His ability to repay monthly from his salary, earnings from investments, dividend earnings, etc. rather than his assets per se is examined. (Unlike the UK)
10. The notary must commission all the required physical checks (asbestos, termites, etc.) and must complete the deeds checks.
11. Loan offer. The lending bank will make an offer of a loan. (The notary receives a copy). The loan offer if accepted must be signed by the buyer and then a compulsory 12 day “cool off” period starts. After 12 days the notary can begin to set a date for signing with the seller’s notary.
12. Funds. The notary will communicate to the buyer the amount of funds that are required from the buyer, being
Purchase price
Plus 7% notary’s and transfer fees
Less deposit originally lodged
These funds must be transferred to the notary’s holding account (the same as the deposit) before transfer.
13. Transfer. On the appointed day the buyer’s notary meets with the seller’s representative and notary and with some ceremony which includes reading of every document in full and in French, cheques are written and exchanged, and the keys and property change hands. If the buyer is not present the notary represents him with his power of attorney.

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