Buying to let - caution!

Last night's Capital (M6) programme emphasised once again extreme care needed when buying an apartment intended for letting, particularly under recent government tax saving schemes such as the 'loi Scellier'. Under this scheme, monthly repayments of, say, 1200 euros can be reduced to around 400 euros, after taking into account income tax saved and income from rentals, encouraging many French investors to put their money into bricks and mortar.

The programme looked at two examples, a typical commuter town 15 kms from Paris and the city of Bergerac. In the first case, the development turned out to involve hundreds of apartments, located not 10 minutes but nearly 45 from the rail station, in an area of over-supply and lacking public transport. Much the same situation was apparent in Bergerac, where despit the promises of developers, the majority of apartments were un-let - due again to poor location and over supply according to local estate agents interviewed.

Even though the developers promised a guarantee against failure to find a tenant, in practice this lasted for only 12 months. And when desperate owners tried to sell, they found that their apartment was over-priced, and that after one year without tenants (and rental income), the tax advantages were cancelled. One owners found himself paying over a 1000 euros a month for an apartment he did not occupy, which remained un-tenanted and which he could not sell.

Surprisingly, less than half of buyers bother to visit the site or the area where they are being urged to invest an average of 200,000 euros, to check the quality and location of the property, and to find out for themselves whether a rental market actually exists. A government official interviewed admitted that the criteria for selection of projects under the Scellier scheme  were being revised to include an asessment of rental potential, but the new rules would not apply before 2012.

Curiously, France currently has an estimated immediate need for over 1 million new homes.

Signing a 'mandat de recherche' - advisable?

Potential buyers looking for a French property may be offered the option of signing a 'mandat de recherche' (research mandate) by an estate agency, which empowers the agency to search for a property on behalf of the would-be buyer. Is this advisable?

Normally, an estate agency will present the buyer with details of those properties already on his books - for which he has a mandate to sell signed by the vendor - which approximately match the buyer's requirements. In the case of a visit to view the property, the buyer is asked to sign a bon de visite which is a simple acknowledgement that he was introduced to that particular property by the agent. This is largely to prevent an unscrupulous buyer from subsequently attempting to strike a private deal with the owner/vendor which would deprive the agent of his commission, and presumably for a lower price. Agents have been known to sue and successfully win a claim in court for payment of their rightful commission, based on their written agreement (the sales mandate) signed by the vendor.

An agent proposing a mandat de recherche will argue that this enables him to widen his research, including for example approaching private vendors and other 'hidden' sources, and generally work harder to find the sort of property the buyer is seeking. Such a mandat involves payment of a percentage commission, based on the price of the property, in the event of a successful transaction.

Confusion can arise however when for example agent X holding a mandat de recherche concludes a deal with agent Y holding a mandat de vente (sales mandate) from the vendor, under which he too is entitled to a commission in the event of finding a buyer and concluding a sale. Are two lots of commission payable? Should the two agents divide and share the commission? Does signing a mandat de recherche cost the buyer more?

The answer to the last question is probably Yes, and a potential buyer might argue that in offering to find him a property, an agent (who has nothing currently suitable on his books) is doing no more than his normal job, when he contacts colleagues to see if they can propose something suitable. Indeed, many agencies work together in this way by means of formal or informal local groupings. In the event of a transaction occurring, the commission is normally split between the two agencies involved.

The situation is slightly different when a potential buyer, possibly someone who is exceptionally busy or who has special requirements, engages an independent property searcher - one of the new-style chasseurs de bien who have recently made their appearance in France. Many of them are operating under the laws (loi Hoguet) regulating the estate agency sector, and may charge both a fee and a percentage commission for their services. In Britain, several large estate agencies have even opened 'property search' subsidiaries, leading one to question where their independence lies - and whether this type of operation is simply another device to extract more fees from the potential purchaser.

In choosing his approach, a potential buyer can weigh up the cost of using these extra services, against his time availablity, knowledge of the local area and property market, and in the case of France his knowledge of the language and the property buying process.

French interest rates lowest since 1945

According to a report in Monday's Le Figaro, French mortgage interest rates were at their lowest - 3.30% - since 1945 during September 2010. The previous record low occurred towards the end of 2005 when rates were at 3.36% (excluding insurance). The number of mortgages granted by lenders was up 17% in the same month, compared with autumn 2009.

Source - Observatoire Crédit Logement/CSA.

Selling up and moving back

Second homes do not come cheap and the cost of owning and running them are among the reasons why many second-home owners decide to sell up and - if they are foreigners - return home or decide to take their holidays elsewhere than in France.

France has one of the highest levels of second-home ownership, and in the Mediterranean coastal region where I live, around 70% of properties are second homes, occupied for only a few weeks of the year. They comprises mainly studios and apartments in co-ownership buildings, holiday villas sometimes located in a complex with a pool and other facilities, and villas or older house a few kilometres inland.  As a result outside the main holiday season, many properties lie empty and the coastal resorts are deserted from October to the following June.

Some second homes may be owned as part of a family inheritance, due to France's peculiar successions laws which favour keeping acquired property within the family. Second homes also attract capital gains tax if sold within the first 15 years of ownership, although there is 10% per year relief in years 6 to 16 after which there is no CGT to pay - as is the case with your main or principal home. Newer buildings approaching their 15th year and in which owners may have bought apartments off plan at the time of construction may suddenly lose a number of owners simultaneously as they approach the end of the capital gains period. The resulting glut of similar style properties can force prices down and offer attractive bargains to buyers.

Second homes that were originally purchased with a view to family holidays can also lose their appeal, as children grow up and adolescents want to holiday separately from their parents and explore places outside France. A decline in the summer rental market may also provoke sales of second homes, as is happening along the Mediterranean coast. Owners who have failed to upgrade their rental apartment or villa are facing stillf competition from camp sites, many of which have upgraded their facilities, providing modern chalet style accommodation, swimming pools and numerous other attractions for their clients. During the summer, many of these become veritable holiday villages with 5,000 or more residents in place.

Costs of maintaining the second home are also another factor considered by vendors, as the prices of utilities, local taxes and  leisure (especially eating out) have continued to rise, forcing comparisons with the cost and attraction of holiday packages, including villa rentals, outside France.

Second home owners from Britain and Ireland especially who were attracted by convenenient low-costs flighs to nearby airports are now finding many flights reduced or diverted to more distant locations - both in the case of departures and arrivals. With journey times extended to a day or more just to take a short flight, many owners are questioning whether they want the hassle of travelling by air associated with short visits of a week or less. The good news is that areas which can be easily reached by car and increasingly fast TGV trains will attract second home owners disenchanted with low cost airline services.

The French themselves have always favoured locations no more than two hours drive from their main home, and it is generally economic and family considerations that influence the decision to sell. However, research show that the majority of second homes are nonetheless sold by their owners within 10 years of purchase, even during times of relative prosperity. In times of crisis, leisure spending is a major item that can suffer as family budgets are cut back, and the second home may be sold if for example it is not producing revenue from rentals and the costs of buying and running the property are simply too high.

The exceptions are properties intended for eventual occupation in retirement. Owners who thought long term and bought before 2002 have seen the value of their investment rise steadily or hold its value, even during the recent economic crisis. With the comparatively high transaction costs (agency fees, Notaire's fees, registration charges and taxes) associated with buying a property in France, you need to take account of these factors when deciding to sell your second home, or hold onto it in the expectation of better times.

French Property News, September 2010

In this month's issue I describe the first part of my search for a working olive grove in the south of France, on behalf of an English couple planning a new life in their early retirement.

I have also written an article about the subtle art of negotating the price of a French property, when to take advice, doing your research on local prices and above all avoid pitfalls such as expecting that every vendor is prepared to drop the asking price by 10 or 15 per cent as a matter of routine. Above all, I advise against trying to bargain based on your ambition to buy something that you cannot afford - wanting a three-bedroom house for the price of a two-bedroom, for example.

Larger deposits demanded by UK banks

In the wake of the econmic crisis, British banks have started asking mortgage applicants for larger deposits, which according to Rightmove could have an adverse effect on property prices. First-time buyers now need a 25% deposit instead of the traditional 10% common before the crisis. And according to the Council of Mortgage lenders, 80% of first-time buyers aged under 30 need the assistance of their parents to finance their purchase, pushing up the average age for a non-assistd purchase from 33 to 37 years.

In many ways, the British housing market may gradually come to resemble that in France, where buyers purchase essentially with a view to the long term (for occupation or investment) and banks maintain their traditionally cautious lending policies - a loan being based on the borrowers ability to repay, rather than the notional value of the property, with monthly payments not allowed to exceed one-third of income.

The higher cost of transactions, which include agents' fees, Notaire's fees and government taxes and charges, also serve to discourage frequent property purchases with a view to 'trading up' and making a short term profit. Many first-time buyers are in fact older than their British counterparts, and may choose to establish their main home in a rented property (for example in a city centre where the cost of buying is prohibitive) and buy a second home in the countryside in which they will eventually retire.

Commentators on the article* have generally applauded the idea of higher initial deposits, with some suggesting it is time British house buyers get used to the idea of regarding their home as a cash-making asset instead of somewhere they intend to live for a long time.

Source - Philip Aldrick, Daily Telegraph 30 August 2010.

Can journalists 'talk up' property markets?

An astonishing report in the Irish press tells of a goup of overseas property investors who are contemplating suing property journalists, claiming that their upbeat descriptions of variour property investment opportunities abroad caused them to lose money, when property prices subsequently collapsed. Among the markets cited in this context are many former Eastern communist countries that have recently become independent and in some cases joined the European Union, and areas such as Florida, Dubai and the Spanish Costas. Speculative investments became popular during the 1990s and reached a peak in 2002, only to collapse a few years later leaving investors facing heavy losses.

Whatever the outcome of any proposed legal actions, a number of lessons can be learned, among them the need to check and double check any proposed investment opportunity, particularly in newly developing and largely untried areas, and particularly if the prospect is offered of more than average returns from rental income.

Regrettably, property buyers are often dangerously casual about about their investments, as has been witnessed in France during the mini-boom in investment properties destined for rental, under various government tax saving schemes (Robien, Borloo etc). Anecdotal evidence suggests that more than 50% of 'investors' failed to actually visit the area and the property they were buying within France, to verify if the rental levels promised by developers were actually achievable.

What many found to their cost was that many buy-to-let properties had been built in unsuitable locaations, remote from towns and centres of employment, and lacked basic facilities such as nurseries, schools, shops, and public transport - all major deterrents to prospective renters on low incomes, to whom these properties were primarily addressed.

When they finally woke up to the reality of nil or reduced rental income from their investment, many buyers found that their properties were often badly constructed, largely unlettable and in many cases unsaleable. Many have since been heavily discounted and sold, often by the original developers.

Buying French property rarely promises high short-term profits and should only be considered as a long-term investment. Rental income is unlikely ever to contribute more than half of the monthly mortgage repayments, with French banks insisting that loans on based on your ability to repay rather than on the notional value of your investment.