Overseas residential property-buyers beware! When you buy in Europe, you can pay up to 25% of the purchase price in round-trip costs, i.e., legal and other fees.

Punitively high round-trip transaction costs are incurred in Russia (25%), Bulgaria (24.9%), Italy (17%), France (16.3%), and Greece (15.5%) (i.e., the total cost of buying and selling a property, including all taxes and fees). Purchasers of new property often incur even higher costs, with additional VAT of 20% payable in some countries, according to a report released this week by the Global Property Guide.

Very high transaction costs in Europe

Residential investments in Europe incur punitively high roundtrip transaction costs in many countries, exceeding 15% in several cases. Purchasers of new properties often incur even higher costs.

In Russia and Bulgaria, transaction costs can reach around 25% of the property value for a typical transaction of a resale property. On the other hand, property buyers will be relieved to know that transaction costs are very low in Estonia, Slovakia and Lithuania, typically below 4%. Transaction costs in the UK are near the bottom of the scale at around 5%.

These are some of the findings of a landmark study of transaction costs in 37 countries in Europe, published this week by the Global Property Guide. As the study notes, previous research on European transaction costs covered very few countries, so an over-all picture was difficult to establish.

The study considers all transaction costs involved in the property sale-purchase process, including registration and notary fees, legal fees, real estate agents’ commissions, and sales and transfer taxes such as VAT.

To analyze transaction costs, the study looks at a ‘typical case’, adopting the assumptions that: 1. The property is purchased by an EU-national, not resident in the country where he/she is buying 2. Is worth €250,000 3. Is paid in cash 4. Is a condominium located in a major city 5. Was used by the seller as his principal residence for the past ten years

Interestingly, roundtrip transaction costs in countries with French legal systems are generally higher compared to other countries; these French legal origin countries include Monaco (19.7%), Belgium (17.9%), Italy (17%), France (16.3%), Luxembourg (15.7%) and Greece (15.5%). In several countries with French legal systems, the use of lawyers is mandatory, with fees set by law. Sales and transfer taxes are also more common in French legal system countries. The study disputes earlier findings that southern Europe has Europe’s highest transaction costs. This impression was created by studies concentrating on selected southern countries with French legal systems.

Buyers of new residential property are in for a shock, because additional taxes are charged on newly constructed or renovated properties (which are often hidden in the sale price).

Monaco imposes 20.6% VAT (instead of 6.5% registration tax) on new properties, bringing total costs to 33.75%. In France, transaction costs for new properties are around 31%, because of the 19.6% VAT levied in lieu of registration fees.

Real estate agents’ fees are highest in Scandinavian countries. However, this is because the agent guides buyers throughout the property registration process. The use of lawyers in Scandinavia is common but not required.

Since the stock market crashes of a few years ago, more and more investors have looked to real-estate for their futures. The only problem is for the average mid income investor, its difficult to come up with enough collateral for that second purchase. Another worry is making the monthly payments if it does not rent as easily as expected.

The home markets of the USA and the EU have long been too expensive for most second home investors, but with the advent of EU expansion, the new markets of the central and eastern European countries are opening to outside investment. Cities such as Prague, Budapest, and Kracow are fantastic centres of culture and historic architecture. They are now experiencing a property boom the like of which has never been seen before.

Properties in Budapest, Hungary’s beautiful capital have seen a steady increase of 20-25% capital growth over the past 5 years, and prices are still 25-30% of the cost of similar western european options. rental opportunities are very good, with returns of up to 12% per annum. Thats a huge $6000p/a per $50,000 investment. With home mortgage markets running interest rates at up to 30%, the local population either need cash, or cannot buy their own homes. This is all due to change with the advent of the single currency, the Euro. When these countries meet the criteria for full EU membership, they will also have a fixed currency, and standardised EU interest rates, currently at under 3%. Mortgages will then be affordable, and prices are expected to skyrocket. Overseas buyers can avail of EU mortgages at 3-6%.

How then are the prices increasing at 20-25% per annum? There are two main reasons, eastern European ex-pats working in the west and saving for their homes. A vast influx of wealth generated in the western EU is going into the fashionable districts in Budapest. When Hungarians overseas can purchase their dream apartment in their capital city for €80,000 or $102,000, they can get loans in their country of work and pay these prices off within 4 years. The second source of income is from overseas property speculators. Estate agents are forecasting 45% of all transactions this year are with overseas buyers.

Now is the time to invest, when they sign up to the Euro, it will be too late.