By John J.A. Burke
So you’re on the Internet cruising some sites on France. And you see an ad for an incredible flat in Paris or a medieval house in Avignon. You say to yourself, “I’d like to own that.” It would be cool. And you’re dreaming of walking the Paris streets at night, sitting in the cafés drinking café au lait and reading Le Monde. Totally hip. How do you make this dream a reality? Well, first you need the money. But let’s assume you’ve got the cash to buy the city flat or village house. Second, you’ve got to go to France and find property you like. That’s easy. Then what? Of course, this dream, like all others, gets a reality-check. The reality of maneuvering through a foreign legal system, paying taxes and dealing with lawyers. It’s a downer; but you have to do it if you want to keep the dream alive. Unless you’re fluent in French and have studied law at the Sorbonne, you may be in for a shock.
This can be nasty even for French speakers because obscure legal terms are unlikely to be understood. Let’s face it, the average American does not understand the English language documents in a standard house closing. The bottom line: the legal system of France is totally different from ours. France has a civil law system based on codes; the United States has a common law system based on English practices. Nevertheless, there are reassuring similarities between the legal practices of France and the United States when it comes to buying a house. These similarities center around the stages of the process, obtaining financing and the legal formalities. Though the formalities are similar, the devil is in the details. Let’s assume you’re buying a flat or house. The following are the basic steps for buying property in France.
Finding the Property
Probably, you will use the services of an agent immobilier (real estate agent) specializing in properties in the region where you intend to buy. As in the States, the agent will show you a selection of properties in your price range and lead you through the phases of the sale. The agents are generally under contract by the sellers of property, and ordinarily the seller pays their commission which ranges from 4% to 10% of the purchase price of the property. If the buyer pays the agent’s commission, this fact should be made clear at the beginning of the transaction.
Inspecting the Property
This is pretty obvious stuff. It is the buyer’s responsibility to inspect and, if necessary, hire a geometer to survey the property. The condition of the roof, masonry and basic systems should be thoroughly inspected. The buyer can hire an expert to do this. New Housing comes with a guarantee against hidden defects. For old housing, hidden defects are guaranteed only by professional sellers.
The notaire is the legal expert in the process who makes certain that the transaction complies with the formalities of French law and that all documents are filed correctly so that the title is transferred from seller to buyer. The notaire does not represent the seller or the buyer, but owes his or her principal obligation to the State. Here lies a central difference between French and American practices regarding a closing of real estate. A closing in the States is treated like an adversary proceeding where each party -seller, buyer and bank- has separate counsel. Each party is responsible for understanding the terms of the deal and no lawyer acts for the State. This is not true in France, though if you want you can retain the services of a separate notaire.
Promesse de Vente
This is a preliminary contract involving the sale of property in France. It is key. The promesse is a promise by the seller to sell the property, to a particular buyer at an agreed price. The buyer does not promise to buy the property, but rather purchases an option to buy the property within the option period specified in the contract. This period is usually two or three months. The buyer pays a deposit of 5% to 10% of the purchase price to purchase the option. This money is held in escrow by the notaire. In return, the seller takes the property off the market and reserves it for the buyer for the duration of the option. At the end of the option period, the buyer may exercise the right to buy and pay the balance of the purchase price to the seller. When the buyer opts to buy the property, the buyer is obligated to buy it. If the buyer elects not to buy the property, the seller takes the deposit as damages for lost opportunity costs. However, in some cases, the buyer can get the deposit back.
Compromis de Vente
This is also a preliminary contract involving the sale of property in France. It is much more serious than the promesse. The compromis is a bilateral contract, that is, it is two sided. The seller agrees to sell the property and the buyer agrees to buy it. The compromis is not to be taken lightly by the buyer. It engages the buyer to purchase the property. The degree of risk and level of legal obligation is more substantial than that of the promesse. According to Stephane Gendrel of France Houses, “any breach of this agreement entitles the other party to claim damages.” These damages may exceed the deposit depending on terms of the contract and the facts of the case. The formality in the US is slightly different. In most cases, buyer and seller enter into a contract of sale. This contract may be contingent on the happening of several events, like the obtaining of financing. But generally we don’t use so many types of preliminary contracts before getting to the actual sale. If the contingent clauses are met, the contract becomes final.
The contract, whether the promesse or compromis, can contain a clause stating that the buyer is going to finance the purchase price by, for example, borrowing money from a bank. This is called a clause suspensive, says Mr. Gendrel. It is really important. If the buyer cannot obtain financing, the deal is off. It is, Mr. Gendrel says, as if the contract never existed. This is important because it limits the buyer risk of losing money or paying damages. So, for example, if you sign a promesse and it contains a clause suspensive, and you fail to get the bank loan, you get your deposit back. This clause suspensive is similar to the standard contingency clause in the American contract of sale. If the buyer fails to obtain a loan, the deposit held in escrow is returned to the buyer, and the seller puts the property back on the market.
Other Contingency Clauses
There are several contingency clauses, other than financing, that can be put in either the promesse or compromis to allow the buyer to get out of the contract and get the deposit back. The sale price must be adequate to pay off existing mortgages on the property. Otherwise the buyer could not get good title. Administrative claims also must not exist that impede the buyer’s ownership of the property. The land survey must confirm the exact area the buyer intends to buy.
Acte de Vente
This is the final sales contract transferring title to the property from seller to buyer. At this time, the balance of the purchase price is paid. The buyer also assumes the risk of loss and insurance costs of the property. The notaire also registers the name of the buyer as owner of the property.
The notaire’s fee, which is fixed by law and paid by the buyer, is 5% of the purchase price (tax included) up to 175,000 FF and 2% of the price exceeding this sum. In addition, the is also a stamp duty to pay of around 500 FF to pay for the filing of the deed and other documents. These fees are a substantial hit. For example, if you buy a house in France for 1 million FF, that’s less than $200,000, you’re going to pay 50,000 FF to the notaire. That’s about $4,700. By contrast, if you bought property of equivalent value in the US you’d pay a lawyer about $800 to do the closing. Even if you paid the fees of the bank’s attorney you’d come nowhere near this notaire’s fee.
A non-resident owner of a second home may have to pay a capital gains tax on resale of the property. A capital gain is the difference between the proceeds of the sale and the total of the following: purchase price, 10% of that price, legal costs and agent’s commission. The rate of this tax is 33.3% but diminishes according to the length of the time the property is held by the owner. There is no tax after 32 years. A non-resident also may have to pay income taxes if income is received from leasing the property. Local taxes vary regionally and are based on the property’s theoretical rental value. There are two types of local taxes: the Tax d’Habitation and the Tax Fonciere. The tax d’habitation is payable by the person who occupies the property, and the tax fonciere is payable by the owner of the property.
Giving away your property by will is limited by French inheritance law. Unlike the US, where you can dispose freely of property by will, in France legal heirs have rights to the property that can not be cut off by private contract. This is a complicated subject and requires the opinion of an expert. If, after all this you’re still willing to go forward, then just take a deep breath and jump in. It’s worth it. France Houses is a good place to find information on buying property in France and is located at www.ghs.fr/franceh. Other useful sites are Internet French Property at www.french-property.co.uk.
John J. A. Burke
502 Pitney Place Morris Township, NJ 07960