When buying a French property, make sure you factor in any additional costs, advises financial expert Jo Cowling
Purchasing a property as a first-time buyer is always a daunting prospect, and the situation is generally no different for non-residents purchasing in France for the first time.
You may have read about the recent case of the Russian oligarch who committed to the purchase of a luxury villa in the south-east of France, for the world record-breaking price of €360m. The buyer was subsequently reported to have tried to pull out of the transaction, due to concerns about the worldwide economic troubles and his own financial issues. As he had signed a sales agreement this U-turn reportedly cost the billionaire his 10% deposit, which the mathematicians among you will realise works out at a cool €36m.
Just as is the case in the UK, there is an established process by which all buyers must abide when purchasing a property in France. The French process is much more biased towards protecting the purchaser than is the case in the UK, although once everything is in place and you are nearing completion, there will be penalties if you decide to withdraw.
Here we will look at each stage of the buying process to outline the costs and commitments involved, and highlight a few things you should be aware of in order to keep your personal risk to a minimum.
When a property is sold in the UK, the vendor is responsible for paying the estate agent’s charges, which may vary from 1% to 2.5% of the purchase price, depending on the agency involved.
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In contrast, agency fees in France are most commonly the responsibility of the buyer and, in the majority of cases, will be included in the property’s asking price.
Agency fees in France are also a lot higher than in the UK, generally the equivalent of around 5% of the property value. Although this may seem expensive for British buyers, this fee structure is fairly consistent across all of the most popular overseas holiday home destinations, and in some areas, especially for less expensive properties, this percentage can be even higher.
When you are budgeting for your dream French purchase, it is essential that you establish whether the agency fees are included in the purchase price of the properties being considered.
At this stage, it is also worth noting that French mortgages do not always cover the agency fees. Often the LTVs (loan-to-value ratios) offered by lenders are based on the property’s net purchase price, excluding any agency and notaire’s fees applicable, so do make sure that you establish this at the start.
This leads us conveniently onto another supplementary charge that you definitely need to bear in mind: notaire’s fees.
Notaires are effectively government employees who are responsible for looking after the legal aspects of completing a property purchase in France. A large proportion of the fee they will charge you is set by the French government and is non-negotiable. These fees cover the registration of the deed of the sale, in addition to that of the mortgage deed when applicable. They also cover the notaire’s administration fees and the French equivalent of stamp duty and other taxes.
The charge for registering the deed of sale will vary depending on the type of property being purchased, for example, whether it is a new-build or resale, while the registration of a mortgage will tend to equate to another 1% to 1.5% of the loan amount. Do ask your notaire for an idea of how much this will add up to as early as possible, to avoid a nasty surprise towards the end of the process!
With regards to the process of arranging a mortgage, notaire’s fees are financed under specific circumstances. French banks may be able to finance these expenses if you are purchasing a leaseback property, for example, or if you are refinancing an existing loan. However, as a rule of thumb you should plan to cover all of the notaire’s charges with your own existing savings.
The financial restrictions imposed by all of these additional fees may oblige you to negotiate with the vendor to secure a competitive purchase price. The flexibility you have to negotiate may depend on whether the vendor is French or a non-resident; if they are British, there is a good chance that they may be selling up to move back to the UK. Given how strong the euro is against sterling currently, they may accept a quick sale at a lower price in order to take advantage of the exchange rate when transferring the funds across the Channel.
Once you have agreed the purchase price, the notaire will draw up the sales contract or compromis de vente (or the agency may use a standard agreement). Once this is signed, you will be obliged to respect a seven-day cooling-off period, after which between two and three months will pass before you sign the final acte de vente. There is always some flexibility with regards to the date of completion, provided that both parties are happy to compromise.
On signing the compromis, a non-refundable deposit of around 10% of the purchase price becomes payable and will be lodged with the notaire until after completion. This may also be negotiable with the vendor and is sometimes agreed at 5%. After the seven-day cooling-off period, the deposit will be lost if the buyer decides to pull out. On the other hand, if the vendor were to back out of the sale at any time, they would have to pay 10% of the price as compensation to the buyer.
If you are looking to complete the purchase using a French mortgage, it is important to highlight that you can add an additional clause to the compromis that protects you should a mortgage offer not be forthcoming. This is called the clause suspensive d’obtention de pr�t. It essentially allows you to withdraw from the transaction without penalty if, having submitted an application, you are refused a mortgage from a French lender.
This provides you with an added level of security should you be unable to secure finance, but it is always a good idea to start the mortgage process as early as possible to avoid having to make use of this clause. There is generally a deadline stipulated on the sales agreement as to when this has to be done.
On occasion, vendors may be cautious about committing to a transaction where a clause suspensive is inserted, as it suggests an element of uncertainty on the side of the purchaser. With this in mind, it is worthwhile considering using the services of a French mortgage broker. Not only will they be in a position to assess the financial strength of your mortgage application and highlight any potential areas of concern in advance, but they will also be able to provide you with an agreement in principle from a lender.
Once you have the security of an agreement in principle, it will put you in a strong position with potential vendors who will have evidence that the funds will be in place to complete the purchase without delay.
The clause suspensive will not, however, let you withdraw from the transaction for any reason other than the mortgage not being approved – so it should not be considered a get out of jail card’ that allows you to back out of the deal at will.
As is always the case, it is worth knowing how things differ in France when compared with what you may be used to in your home market. Consulting experts who understand the ins and outs of the process may well be worthwhile, as while it may not save you €36 million, the risk of losing a 10% deposit on any purchase is reason enough to cover all bases.
Jo Cowling is a French mortgage adviser at International Private FinanceTel: 020 7484 4600www.internationalprivatefinance.com