Over 400,000 UK households own a property abroad and 2,385 British citizens emigrated last week.
More than 60% of these have not carried out adequate research before buying property abroad. If you are considering buying abroad there are 10 basic mistakes to avoid.
1. Not using an independent lawyer
Don't sign a contract before seeking legal advice and do not use the legal firm recommended by the agent or vendor. Not using a good independent lawyer could be the most costly mistake you make.
Do use an independent lawyer who will represent you and you only. Use a legal firm which understands local and international law and are English-speaking. Whilst you should be aware of legal fees at the outset, this is not an area where you should cut corners. A good lawyer will make sure the land on which your new property sits is paid for and nobody else has a claim over it. They can check the agents and developers are safe to deal with and provide information on local planning rules if you are looking to make alterations to the property.
2. Buying before doing your research
Don't pay a deposit before seeing a property, or impulse buy whilst on your holidays. A reputable developer will need payments in stages during the build. You should ensure a contract is in place and the final price agreed in advance.
Do research the area in which you are looking to buy. What is it like in different seasons; what are the local services and infrastructure like? The quality of weather and services are key to a good rental market. You should look at house prices over a period of time to see what the local market is doing and compare the price you are paying against recent sales. You should also look at what the locals are paying for houses round the corner.
3. Not budgeting
Don't ignore the importance of budgeting in advance. If you don't you might miss a buying opportunity, but even worse, get caught owing more than you bargained for.
Do consider local taxes and professional fees. If you are taking out a mortgage you should look to have a provisional mortgage offer in place first. You should consider the on-going cost. These include living expenses, taxes, travelling to and from the UK and any financing costs.
4. Ignoring exchange rate movements when buying
Don't assume exchange rates won't affect the cost of your property between agreeing the price and paying the final installment. In the UK the cost of a property is fixed as there is no exchange rate. If you are buying an overseas property in a foreign currency, the cost to you is not fixed. A 1% movement in an exchange rate can happen in a day. Over weeks, months and years the cost to you could become significantly more than you had budgeted for.
Do consider fixing the exchange rate at the time of agreeing the purchase. Speak to a foreign exchange specialist such as Hargreaves Lansdown. They will explain the different types of foreign exchange contract to help you decide which is best for you. In providing a specialised service, they could save you up to 3% of the value of your property when compared to high-street banks. Most currency brokers will allow you to fix the exchange rate for up to two years ahead and even for a flexible time period.
5. Not using professional agents and developers
Don't just take their word for it.
Do ask for references, read their terms of business, ask questions about the company you are dealing with and look at their track record - how long have they been in business? Make sure you have in writing the service they will provide before you pay them. Deal with reputable agents and developers and use the services of an independent lawyer to check who you are dealing with.
6. Not having an exit plan
Don't be misled by advertisements showing 10% guaranteed rental yields, or promising huge capital returns over a short period. If it seems too good to be true, it almost certainly is.
Do consider the downside of your investment. Huge potential rewards will invariably come at significant risk.
Do make sure you have an exit plan. If the investment doesn't go as planned, how long would it take to sell and how much would it cost? What are the fees and what are the taxes? What are the penalty clauses on your mortgage? Do make sure you know what happens in the event of your death. What are the local laws of succession? Your UK will might not always cover your property abroad and you should consider making a will in each country - this is another reason to have an independent lawyer with knowledge of the law at home and abroad.
7. Tax is often taxing for a Brit abroad
Don't ignore taxes when buying, selling, from rental income, or in the event of your death. You need to consider taxes in the UK and overseas depending on your personal circumstances. Don't forget that tax laws can change; especially with many countries looking to boost their coffers and tackle their sovereign debt.
Do remember you might have an income and capital gains tax liability on an overseas property. You need to factor this into to your rental yield and profitability calculations.
Do take tax advice from a reputable company as the overseas taxes will vary depending on the location. You might need to pay: property tax, VAT, capital gains and income tax and even inheritance tax. Many countries will have double taxation agreements with the UK, but you should check this before you buy; if you don't it could be a costly mistake and complicated for those you leave behind.
8. Location, location, location
Don't underestimate the value of researching the location.
Do visit during different times of the year. What developments are planned in the area? Is there room for price growth or are you potentially buying at the top? Look at the basics such as demand and supply - are new developments shooting up without a steady stream of buyers? It will help to look at websites to see how long properties are being promoted before they are sold. Advertising hoardings claiming 'only two apartments left' might look like properties are moving fast, but it paints a different picture if the same sign was there a year ago.
9. The longer-term impact of exchange rates
Don't forget to plan for adverse exchange rate movements over time. This could have a big impact on your long-term plans. The impact is greatest for those using UK-based funds to both purchase their property and for living expenses, yet intend to return to the UK eventually.
Do consider that your property could fall in value in sterling terms if the exchange rate moves against you. Exchange rate movements can affect rental yields if the income is being paid back to the UK. If you are relying on sterling-based funds to support your on-going living expenses abroad, you should again consider the impact of exchange rates. Many Britons who have retired in the euro zone have seen their UK pension income eroded by the weakening pound relative to the euro. You should consider how a 20% fall in the exchange rate would affect your standard of living. Over the last decade sterling/euro has been above €1.50 and fallen to near parity. This is a fall of over 30% and the pound has fallen further against other currencies. The percentage you use should depend on your attitude to risk.
10. Leaving your common sense at home
Don't forget that buying abroad involves more research than buying in the UK. Don't jump in and end up with a 'home from hell'.