Postcard from the Riviera 2

Posted by admin in Property Investment, Property Letters | September 7th 2007

How to Invest in Property in France.

I don’t speak French! And anyway, how would I finance it?

The process explained, step by step:

1.    Identification of the property.
2.    Offer and Agreement. Negotiations are generally short and agreement is often reached through the agent in a day or less. Protracted negotiations are considered as unsavoury and not encouraged. The furniture can sometimes form part of the negotiation (if it warrants it) – it often suits the seller not to have to move, store or dispose of bulky furniture so bargains can be had.
3.    A sale agreement – the “compromis de vente” is compiled by the agent. It follows strict rules and is designed to protect the buyer more than the seller. It covers special conditions that may have been agreed to, as well as standard conditions relating to deeds searches to be performed by the Notary, and physical checks for termites, asbestos, etc. This document is normally in French and should a legal translation be required, the cost would be around €300.
4.    The buyer or his representative signs the “compromis de vente” and the agent then takes it to the seller.
5.    Once both have signed the buyer has 7 days during which he may pull out of the agreement for any reason. The seller does not have that privilege. He is legally bound and can not renege – so no British style “gezumping” is possible. After 7 days the agreement is binding except if the buyer fails in his application for credit, in which case the agreement becomes void and the disappointed buyer is refunded his deposit (see 7) in full. If he withdraws for any other reason he risks forfeiting his deposit or part thereof (seller’s discretion, although he would have to prove in court that he has been financially prejudiced – not an easy option.)
6.    A Notary is appointed. The agent will help. Every property transaction in France takes place through notaries who are highly trained and esteemed. They must ensure that every legal requirement is met and that the rights of every party are protected.
7.    Transfer of deposit. The buyer must, on signing the “compromis de vente” transfer 10% of the purchase price to the holding account of his notary. It will form part of his payment on signing day.
8.    The buyer must apply for credit if he requires it. The application should take a month, and in France the primary criterion for granting credit is the applicant’s income at home. His ability to repay his loan rather than his assets per se is examined.
9.    The notary must commission all the required physical checks (asbestos, termites, etc.) and must complete the deeds checks.
10.    The lending bank will make a loan offer. It must be signed by the buyer but only after a compulsory 11 day “cool off” period. Once the offer has been formally accepted the notary can set a date for signing.
11.    Funds. The notary will communicate the amount of funds required from the buyer, being:
•    Purchase price
•    Plus notary’s and transfer fees
•    Less deposit originally lodged
•    Less the amount of any loan granted
These funds must be transferred to the notary’s holding account before transfer.
12.    Transfer. On the appointed day the parties and their notaries meet, and with some ceremony (which may include reading of every document in full and in French!) cheques are exchanged, and the keys and property change hands. If the buyer is not present the notary represents him with his power of attorney. This is a very good idea where non-French speaking buyers is concerned, because otherwise the notary is obliged to hire a very expensive court-appointed translator and the proceedings take three times as long.

The standard mortgage:

o    The Interest Rate for a standard mortgage at the moment is approximately 4 to 5% and adjusts upward or downward only once per year, on the anniversary of the loan. The rate is fixed to the European Central Bank rate.
o    Loans can be taken out over periods up to 20 years although 15 years or less is usually recommended for people who will turn 70 before the end of the loan period.
o    Adjustments in interest rates normally do not affect the monthly repayment; instead the term of the loan is extended or reduced.
o    Life insurance at a rate of approximately 0.30% is built into the interest rate quoted. Applicants who will be over 70 at the end of their loan will be offered a “senior contract” and insurance is calculated individually.

The Interest Only Option:

o    This is not available from all lending banks in France but suits many borrowers better than the standard mortgage; particularly there are no death duties on the investment which secures the loan. Furthermore, for the same loan, monthly repayments are generally up to 30% less. It may be necessary to “shop around” as one major lender for example will no longer accept investments from outside the E.U. With the fear of money laundering the rules change without warning.
o    This option has the bank paying for the property in full and the borrower repaying only the monthly interest on that loan. The borrower is required to put an amount on investment with the bank under a life insurance plan, with a guaranteed minimum return, calculated to ensure that the borrower’s asset at the end of the loan period will cover the loan entirely.
o    There is no legal limit to the amount that the borrower can invest (above the amount required to secure his loan), and withdrawals are allowed with only 48 hours of notice. Effectively the investment account is an “offshore account” because for non-residents there are no taxes or death duties whatsoever.

Additional Information

o    It is possible to borrow and invest in individual’s names, joint names, or as a company set up for the purpose of the investment. The perfect vehicle for this in France is a tailor made SCI, (Societe Civil Immobilier). It needs a minimum of two shareholders and any division of shares, and has estate planning and capital gains advantages.
o    South Africans can apply for a 70% mortgage. Residence is defined by where the applicant earns his income and pays his taxes, not by what passport he carries.

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