The high cost of buying overseas

People are increasingly buying property outside their own countries. And while Brits and others are purchasing in Bulgaria, Turkey and Morocco, hoping to repeat the small fortunes they've built at home on rising property prices, there's a thorn in the flesh, according to a new report from Global Property Guide.

That thorn happens to be the high costs associated with buying and selling residential property abroad (or so-called transaction costs). Indeed, in some OECD countries, such as South Korea, Belgium and Italy, these transaction costs are unnecessarily high.

A curiosity is also highlighted - the fact that French legal origin countries, on average, have significantly higher transaction costs (14.2% of property value) than countries with German legal systems (11.5%), or Socialist (7.4%), English (6.5%), or Scandinavian (5.2%) legal origins.

In OECD countries, roundtrip transaction costs are generally below 10%. This is a reasonable amount to pay in taxes and expenses in the buying and selling process, though it should be noted that in some countries, the total is only 3%.

However there are some countries with transaction costs which are unnecessarily high - South Korea having the highest housing transaction cost in the OECD, at 22% of the property's value in Seoul, according to the report.

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Meanwhile, transaction costs in Belgium, Italy, France, Luxembourg and Greece exceed 15% of the property's value.

On the other hand, total costs for purchasing a house in Slovakia, Iceland and Denmark are around 3% or less.

Transaction costs are typically between 5% and 7% in the UK, Norway, New Zealand, Switzerland, Australia, Japan, Sweden, Poland, Ireland, and Canada.

To make the calculations comparable, the Global Property Guide assumed the property purchased is a condominium worth either 250,000 euros for European countries or $250,000 for other countries, and located in the financial or administrative capital. This allows a typical transaction cost figure to be calculated, though in practice transaction costs are a range, depending on many factors.

Transaction cost figures reflect the purchase of old properties, not new (therefore in most cases Value-Added Tax (VAT) is not included). The costs also reflect foreigners' costs, not locals (often very different). Where foreigners must purchase property through companies, the cost of forming and maintaining a company is not included.

Costs included in the term transaction costs are: Registration costs, Legal fees, Real estate agents fees and Transfer taxes.

Property and capital gains taxes are not included, although they must typically be paid before the property is registered. Fees in acquiring the prerequisites for property purchase such as residency permits and company formation are also not included.

Moral of the story? Think before you make that financial leap.

16 August 2007 © Moneyextra.com

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