Introduction to the German real estate system
Every country has its own specific culture, its own laws, regulations and procedures. And so does the German real estate market. To invest successfully, it is important to understand and have a feel for the market.
As there are numerous laws and regulations in play (which are subject to continuous change) our introduction can only give you an overview of important general facts. If you need further information on any specific aspect of the market, please do not hesitate to contact us.
Acquisition and transaction process
In general all properties may be classified as freehold. Only few properties are not freehold as they have a sort of leasehold called erbpacht (hereditary leasehold).
There is no rule or law dictating how real estate should be bought or sold, but as is the case in many countries, real estate business is transacted primarily through real estate agents.
In comparison to the UK or USA, the German market is not particularly transparent. Real estate agents do not yet have a national platform showplacing all available real estate, so all they currently offer is just a limited range of real estate. But as the internet opens up the market the situation is improving and indeed a few internet platforms have been launched which are proving quite useful.
Off-market deals are another option, but do not occur very often, unless you are very lucky.
More often than not there is only one agent involved in the purchase and he is contracted by the vendor. His mandate is to sell the property. The investor/ buyer contacts the agent to get the information he needs. Its not usual for both parties to be represented by agents, unless the deal is sizable.
However, we strongly recommend that you take professional assistance in either buying or selling real estate as laws and regulations can get extremely complex, not only for the international investor, but for Germans too.
Unlike the situation in many countries, most agents in Germany do not really consult and assist the parties, but aim more to arrange an agreement. An agreement, which is in the form of a contract, certified at the office of the notary public, is the basis for the agents fee. The fee, depending on the region (federal state) in Germany, ranges between 36% of the agreed purchase price plus 19% VAT. The fee is paid by the buyer.
In accordance with the German Civil Code, all real estate transactions have to be signed at the office of the notary public. The notary public is a solicitor, who acts on behalf of the government and is authorised to certify deeds.
He prepares the deed between the selling and the buying party and an appointment is arranged at the office of the notary public to complete the transaction. All legal documents are checked. The check includes a check of passports and authorisation documentation (if a person is acting on behalf of a company). The notary public then reads the deed aloud in front of all parties. The deed is signed by the vendor, investor/ buyer and the notary public. The deed is irrevocable.
If one of the parties does not speak German a qualified translator is required to make sure all persons understand the content of the deed.
Important! By signing the deed at the office of the notary public both parties are committed by law to comply with the contract. There is no exchange of contract as all property transactions have to be made at the office of the notary public.
A contract between the selling and buying party with no notary public involved is not binding. Both parties can revoke the contract.
Usually there is no upfront payment of the purchase price, but it is common for the investor/buyer to provide the selling party with confirmation about financing from a recognised bank, etc. but strictly speaking, the contract is secured by the signed deed.
After signing the deed the notary public sends the deed to the official real estate register office (grundbuchamt). The process of registration takes about 4-7 weeks.
Meanwhile the land transfer tax (stamp duty) is due (3.5% of purchase price) within a short time. The official real estate register office will not issue clearance on the legal transfer until this tax has been paid.
Purchase process simplified model
After clearance both parties will be informed that the prerequisite for the legal transfer has been fulfilled, but the investor/ buyer is still not the owner of the property until he has paid the agreed price to the vendor. Only after the vendor has confirmed to the notary public that he has received the agreed price will the legal transfer of ownership be completed.
Usually all transaction costs are paid by the investor/ buyer. These are as follows:
- Real estate agent (incl. VAT) - of purchase price: 3,57 % - 7,14 %
- Land transfer tax/ stamp duty - of purchase price: 3.50 %
- Notary public and land registry - of purchase price: approx. 1.50 %
- Certified translator: approx. € 1,000-2,000
- Legal advise (depending on transaction size): approx. € 1,500-...
Costs of owning a property
The costs of owning a property depend heavily on the agreed provisions of the lease contract and the type of lease. Whereas there are more options for commercial lease contracts, it is not that easy to pass on ancillary expenses to residential tenants as German law tends to favour residential tenants.
However generally speaking, all costs except maintenance, repairs and property management may be passed on to the tenant. Furthermore its up to the investor to accumulate a structural reserve.
The costs of property management vary from €25-35 plus VAT per apartment unit per month. For commercial real estate it can be up to 4% of the total lease.
Important facts for international investors
- No matter what your nationality, anyone can buy German real estate. But owning a property does not invest the right to live and stay in Germany. You still may need to apply for a visitors visa or permanent residency. Regulations and entry requirements should be checked with your embassy.
- Financing can be done by a mortgage bank or any national or international bank like Sparkasse, Volksbank, Hypo-Vereinsbank, etc.
The required deposit depends a lot on the appraisal of the bank the appraisal the bank requires to do. Usually a sound apartment house gets financing of about 60-75%. This means a down-payment of 25-40% is necessary. Besides the appraisal a lot of criterias are checked by the bank and determine the financing level. In any case the investor should expect a procedure and costs of financing like he is probably used to in his own country.
The bank will also require a securitisation of the loan by a land charge, which has to be done by the notary public as well. Additional fees have to be calculated for this procedure.