Buying Property Abroad: The Highs, The Lows, The Benefits, The Fun And The Profits
I remember about twenty years ago a friend of mine telling me that his burning ambition was to drive across Tuscany, in an open top Ferrari, with Vivaldi’s ‘Four Seasons’ blasting out on the stereo. Looking back, I can see now he is a person of great foresight, judging by the number of Brits who have bought a little piece of Italy and made at least part of this dream come true for themselves.
It may be a contrarian thing to do, to consider buying property in Italy in these uncertain economic times, but I have a feeling that if the country falls out of the euro (and it may well do) and re-adopts the lira, then devaluation will throw up some amazing bargains, and it is better to be prepared.
They say that going to Italy is a dangerous thing to do, because you cannot help but fall in love with the country, the people and the way of life, and no matter where you visit afterwards you’ll always feel the pull to return. Many who do go back end up staying. When you look at how many Brits, and others, have either moved to Italy permanently, or who have bought a second home there, or who have even just bought a property investment, there must be some truth to this.
In fact, it is estimated that more than 100,000 non-Italians take up residency every year. When you add to this the second home or holiday home market, you can see that that there is a lot of external demand for Italian property.
Interestingly, there is also strong internal demand for second properties. Something like a third of all Italian families have a second home, and holidaying ‘at home’ is an accepted cultural norm. It also reflects an inherent mistrust of the Italian stock market, and the perception that property is a safer investment.
The non-Italian market is dominated by holiday home-buyers and, to a lesser extent, those who purely want to invest. It has to be said that neither are on the scale or volume that we see in other areas of Europe, like France or Spain. However, this is beneficial as it means that Italy has avoided the mass development that is seen particularly on the Costas in Spain.
In this sense the Italian property market has similarities to the French market. As in France, there has been a migration away from the rural areas to the cities, which means that there is a plentiful supply of beautiful rural properties for renovation. In some areas, like Tuscany, they are getting harder to find, but there are still plenty in the central and southern regions. These are the properties that the holiday home-buyers are most interested in.
For the pure investor, there are plenty of relatively cheap properties, particularly in the south, which would not be suitable for holiday rental, but which are ideal for long-term lets to the indigenous population.
Despite all this demand, the Italian property market as a whole is not that exciting when measured by average increases in capital value. The long-term average increase in property prices is only around 5% per annum, which can be compared with the UK where the long-term average is between 8% and 10%, depending upon whose figures you use.
Growth at the moment, understandably, is going nowhere. However, some areas are performing better and some areas are performing worse. I hope my friend has bought a holiday home in Tuscany to go with his Ferrari because this is one area which has certainly out-performed the average over the last couple of decades. The bargain properties of 10-20 years ago have now been restored and renovated, and change hands at prices which only the rich and famous can afford.
As so often happens, this has meant an expansion of interest
outwards into neighbouring areas, and next door, Umbria, is feeling the benefit of property buyers looking for the ‘Tuscan’ experience at, for now at least, lower prices. By contrast, property prices in the rather impoverished south have done less well.
Traditionally, Tuscany aside, the Brits have tended to cling to the north, in areas like Lombardy, although there is a smaller, but still significant, number of ex-pats on the Mediterranean coast to the south of Naples.
Higher prices in the north have now forced bargain hunters to look at other, previously over-looked areas, in central and southern Italy. Now there is a lot more interest in Abruzzo, Molise, and Puglia on the Adriatic coast, where there are still plenty of cheaper properties available.
Up until recently, if you were tempted southwards, and could combine your property purchase with a business that will help local employment, you would have been eligible for grants from the Italian Government and the EU for the costs of renovation. This was of considerable interest to anyone who wanted to run their own leisure business or hotel or bed and breakfast operation, and could significantly boost the returns on their investment. But all this has now changed, with stringent austerity measure. Now, pretty much you’re on your own.
So, if you are interested in looking for a property in Italy, what is the best way to go about it?
Buying Property In Italy
Before you buy any property abroad, there are certain things you need to think about. After all, there is no such thing as a totally risk-free investment.
First, if you are buying somewhere to go for holidays or even long weekends, think about how you are going to get there, and how long it’s going to take you. For the northern and central areas this is no longer a problem. Just a quick surf around the internet shows that these areas are well catered for by the budget airlines. Easyjet flies to: Bologna, Venice, Milan, Rome, and Naples. Ryanair will take you to (or rather near to): Turin, Milan, Genoa, Pisa, Verona, Venice, Trieste, Bologna, Ancona, Pescara, Rome and Alghero (Sardinia). Bmibaby flies to Bergamo (Milan) and Pisa.
If you are intending to be a frequent visitor you will want to make sure that the property is easily and quickly accessible once you land in Italy. This is even more important if you intend to let it out when you are not there. Potential tenants are remarkably intolerant of travel at the other end. If you expect them to drive for more than an hour from the airport you will literally lose half of your potential clients.
Secondly, I’ll suggest a purchaser considers their exit strategy even before they start looking for a property. Obviously one doesn’t hope for ill health, bankruptcy or divorce, but if their circumstances were to change, they need to know how they will get their money back out and how quickly. As they say ‘hope for the best, plan for the worst’.
As long as they appreciate the risks of buying a particular type of property, or of buying in a particular area, that’s fine. For example, my better-heeled clients can probably afford to take a greater risk and buy in a more remote, or relatively undiscovered area, knowing they can risk allowing time for demand and prices to increase.
Those on a tighter budget might be better off buying in a more established area. Although they might initially be passing up the opportunity for higher long-term gains, they should still enjoy steady growth with the comfort of knowing that selling on should be relatively easy should they ever need to do so.
So, with this in mind, how do you find your ideal property? Let’s go back to our three-step process, which we have used when looking at property in other parts of Europe. These are:
*Research thoroughly which area you want to buy in
*Work out how much you can afford to spend
*Look for properties in your price range in your preferred location.
Which Area do you Want to Be In?
If your interest is mainly in having an investment, which you can also enjoy as a second home, your decision on where to buy will be based on more practical and economic considerations. We’ve already looked at the need to consider accessibility both for yourself, and if you intend to let the property, your tenants. You will also need to think about price, and even the weather.
Italy is a large country with varied terrain and weather, ranging from the Alps in the north, to the plains of the Po valley, to the dry and volcanic areas of Sicily in the south. Add to that the Apennines, a mountain range which runs north-south and cuts the country in half, and that there is the Mediterranean coast line and the Adriatic. Each area provides a different choice of climate and environment.
It very much worth your while taking the time to thoroughly research which area suites your needs and requirements, and don’t forget to watch for seasonal changes. Where you choose will ultimately depend upon your own preferences.
When you have decided on a possible area or areas, you will then need to…
Work Out How Much You Can Afford To Spend
Proper budgeting when buying abroad is crucial because, in Italy as in other countries, you’ll find the processes and costs involved are different to those in the UK.
Over here you’d probably set aside a few hundred pounds for solicitor’s fees and searches, and allow for stamp duty, which can be as much as 4% on properties costing £500,000 or more.
However, the first difference you’ll notice is that although in the UK we are used to the vendor paying the estate agent, if you buy through an estate agent in Italy, typically you will pay what is in effect a ‘finders fee’. Depending on the price of the property, estate agents’ fees can typically be between 3% and 8%, and you, as the purchaser, could well end up paying half of this. In fact, more than likely the estate agent will ask you to sign a contract committing to pay his fee before he shows you any property.
Of course you could avoid this fee by not using an estate agent. Many Italians advertise and sell their properties direct, but, of course, unless you are ‘in the know’, this will not benefit you. So, although there is a cost implication, most non-Italians are better off registering with an estate agent and accepting the extra cost.
Then there are the actual costs of transacting the purchase. As in many other European countries, Italy uses the Notorial system of property transfer. The Notaio’s fees are laid down by Italian law on a sliding scale ranging from 20% on a property with a value of €5,000 to as little a just under 0.2% on properties valued at €2,500,000. In the mid-range the scale is approximately 3.5% for properties valued at €50,000 reducing to 1% for properties valued at €250,000.
You’ll also have to pay what is effectively a purchase tax. If you buy a property from a company or business, you’ll be charged the equivalent of VAT (IVA) on the whole purchase price at a rate of 10%, unless the property is deemed to be a ‘luxury’ residence which attracts a VAT rate of 20%. Sometimes the IVA is included in the asking price, but, confusingly, this isn’t always the case, so do check.
If you buy from a private individual you pay Imposto de Registro instead, Registration Tax, which is typically 7% for non-residents.
All in all, you should budget round an extra 15% on top of the purchase price for purchase costs.
The next step in establishing your budget is to decide, if you are borrowing funds to finance the purchase, who you are going to borrow from.
The easiest way to fund your dream second home is to pay cash, but not all of us can afford to do that.
The next best option might be to raise finance against an existing property in the UK by way of remortgaging or an equity release loan. If the figures stack up, this may effectively allow you to pay cash in Italy. (But we would counsel that you sit tight a wait a bit and see if the lira comes back.)
If you are approaching retirement this might not be an option and there may be no alternative but to sell the family home in the UK. If your budget allows, you might be able to buy something smaller and cheaper as a bolt hole or as a base to visit the grandchildren, and still have enough left over for your home in the sun.
An alternative, which you could consider, would be to take out an Italian mortgage with either an Italian bank, or a UK subsidiary which lends in Italy, secured against your Italian property.
The benefit of considering raising funds in the UK is that the Italian system of calculating how much the bank will lend pretty well follows the method used in the rest of Europe, which is by reference to affordability. Unfortunately, this may well mean that the amount you can borrow will be limited and could be substantially lower than in the UK, where banks are usually more than happy to lend based upon multiples of gross income.
By contrast, in Italy, the banks will only take account of net income, although they will aggregate incomes if the property is being purchased jointly. From the net figure around a third will be assumed to be available to pay loans and other commitments, and from this figure they will deduct the cost of other loans and mortgages you may already have. Whatever is left over will be used to calculate the amount of the equivalent loan.
Even if you jump this hurdle, for example if you only have limited repayments on other commitments, you may still find that an Italian mortgage falls short of what you need. Typically they will limit loans to non-residents to only 60% of the purchase price, although it pays to shop around as some banks will lend on higher multiples.
They will also limit you to a repayment mortgage, and often the maximum term will be only 15 years, or until your 65th birthday, if this is sooner. Some banks also refuse to lend on rural property. Italian mortgages are also expensive to arrange; you can end up paying as much as 3% to 4% in just the admin charges.
Once you have worked out how much you can borrow, and how much you can afford to spend, you can…
Start looking For Properties In your Price Range In Your Chosen Area
Finding Italian properties for sale is relatively easy, although the market isn’t quite as well covered yet from the UK as the French or Spanish markets.
A good starting point is to surf the internet. Italian estate agents are a little way behind their UK counterparts in advertising on the web, but there are plenty of international, mainly UK agents, who deal with Italian properties who advertise digitally. This will give you a good idea of what’s available and the sort of prices you’ll have to pay.
You should also try to attend some of the foreign property exhibitions that are held around the UK. These are advertised in the national newspapers in the foreign property sections. Because the market for Italian properties is more limited than the French and Spanish markets, it is rare to find an exhibition dealing purely with Italian property in the same way that you will see whole exhibitions devoted to either the French or Spanish markets. However, there are general foreign property exhibitions covering properties from Cyprus to Florida and you’ll more than likely find firms specialising in Italy at these.
Of course, there’s no substitute for looking at properties first hand, but if you follow these two steps first it should help you clarify what to look for, and where to look. Once you have registered with agents, and start receiving details, you can think about arranging an inspection trip.
Some buyers have been known to view different regions and locations at a number of different times during the year, to get a feel for what they are like during each of the seasons. This is worthwhile if you have time; you can be surprised at how different somewhere can be in the winter if you’ve only viewed in the summer. Not everyone has the time to do this, but you should try to picture how the location could change when out of season.
Unless you can drop everything and go out on a moment’s notice, there is inevitably a time-lag between receiving details and arranging your travel to view. It’s always worth checking with the agent that the property is still available before you go, to save a wasted trip if it has sold in the meantime. This is especially true of properties shown on the internet. Not all agents are that efficient at keeping their sites up-to-date and if you go out on the basis of what they are showing on their site, you could well be disappointed.
You’ll probably not be surprised to hear that the means of conveying properties in Italy is completely different to that in the UK. You’d think that would make buyers more cautious, but as often happens when Brits travel abroad, they can let the chianti and the sun go to their heads and throw caution to the wind. This is a bad mistake.
First, given the choice, try to use a registered estate agent. There are non-registered, technically ‘illegal’ agents who operate servicing particularly the ‘foreign’ market in Italy, and they can be just as good, if not better, than the registered local agent. Of course, you could also be unlucky and meet the local rogue.
However, in the event of a dispute the registered agent is part of a government-bonded scheme and your rights will be protected.
Here is an interesting story told to me by an acquaintance of mine, who had a curious time with his estate agent.
A few years ago he decided to look in Tuscany either for a property to do up or a plot on which to build a house. I remember that he became very frustrated because whenever he went to view a property in his price range, he was later told by the agent, or the vendor, that the price had since gone up. One time, he was told the price was now double the price shown on the estate agent’s details.
He put this down to there being a two- tier market; one price for locals, another price for the Brits (although he is actually Swedish I guess this doesn’t make a jot of difference to the locals!).
To his credit, when he found a property he liked, he stuck to his guns and negotiated from the ‘official price’ on the particulars and managed to buy at not much more than the price shown.
The last time I saw him he was arranging for a caravan to be taken over to house the builders he was flying in from Poland, on the basis that he thought he could get them to do a cheaper job than the locals! I don’t recommend this approach to cutting building costs, but he is something of a maverick builder in his own right and so he might just get away with it.
The moral of the story? Always get the agent’s details if you can, so you can check the ‘true’ price. Also, remember that everything is negotiable.
Second, make sure you have proper legal advice. The fact that the Italians, like a lot of other countries in Europe, use the notorial system to convey properties, tempts some purchasers to try to save money by not using their own lawyer. As we’ll see in a minute, there are various pitfalls you need to be aware of, and proper legal advice is worth every penny.
Before you start looking it’s worth taking advice from a lawyer and an accountant about the best way to structure your purchase, particularly about the ownership of the property once bought. There are various options such as owning it in your sole name, in joint names with your spouse or partner, in your children’s names, or even through a limited or offshore company.
Each of these has different legal and tax implications, not just in Italy but in the UK as well. What may be tax-efficient in Italy might produce a fiscal nightmare in the UK, and vice versa. It’s worth taking your time just to make some inquiries and think these things through before you put in an offer.
When you find a property you like, and when you have agreed the purchase price, you will be expected to sign a contract.
Before you do so, you should first arrange for a codice fiscale, a tax identification number for non-residents. You will need one of these before you can sign a contract or open a bank account. However, they are easy to obtain. Your estate agent or lawyer will be able to help you arrange for one.
In the UK we’d expect the contract to be prepared by the vendor’s solicitor in a standard format. However, in Italy, preliminary contracts can come in several formats.
The most common is the ‘Compromesso’ which binds both parties to the transaction, but there are other formats which can used to bind the seller only, or the vendor only.
Another major difference is that the contract can be prepared by the estate agent, or if you are buying a new property, the developer. This might be individually prepared for each property, or they might use a pre-printed form. These are not always well worded, and can be biased in favour of the vendor. Often they need to be modified, which is why it is essential you take your own legal advice before signing anything.
Actually, this leads me onto another warning about a peculiarity of the Italian legal system, which is the ease by which property ownership can be transferred. In the UK we are used to a system that makes you jump through the hoops for a couple of months before the property is finally yours. In Italy it can be way of a simple written agreement, although you’d always be advised to get ownership registered at the Land registry in any case. This might sound like a preferable route to take, but it can also be a minefield if you haven’t made proper searches as to what you are buying and the liabilities that come with it. So I will assume that you will go the more conventional route.
When you sign the contract you will be expected to pay your deposit. Again, in the UK we are used to a standard 10%; in Italy you can typically be asked to pay up to 30%, sometimes more. This is obviously a point worth negotiating, if necessary. As in the UK, if the purchaser doesn’t complete, they forfeit the deposit. But if your vendor doesn’t complete, you will receive back twice the amount of the deposit. You will also be expected to pay the estate agent’s fees on exchange of contracts, or at least half their bill.
Before you sign anything, you will, of course, want your lawyer to undertake the searches. This is critical because in Italy, as in Spain, previous mortgages and other debts run with the property and not with the vendor. So your lawyer needs to check that there are no unpaid mortgages, utility bills or other debts attached to the property which will become your responsibility on purchase.
As a minimum, your lawyer should also check that the vendor is the true owner and in a position to sell, and that the property has proper planning and other consents.
You should also consider appointing a surveyor to take a look at the property, particularly if you are buying an older rural property. For some reason a surprisingly large number of buyers overlook this, at their peril. At the very least you could ask a builder to give the structure and services a once- over. Or if you are going to have substantial refurbishment works, you could ask your architect for his opinion. Otherwise you could appoint a geometra, an Italian surveyor, who will be familiar with local building techniques and materials. This can be relatively expensive, typically a minimum fee will be £500, and of course the report will be in Italian, so you will need to have it translated. Alternatively you could ask your lawyer to go through it and alert you to any problems.
When you are happy that everything is in order you can then proceed to the next stage, which is signing the deeds in front of the notary, notaio, and arranging for the property to be registered in your name.
In theory, at least, the notaio should be appointed by the buyer but in practice it is often the seller. This makes a lot of sense if, say, you are buying from a developer where there are a lot of similar properties, as it will save time for the notaio to do one set of searches etc.
The notaio’s role is to check that the property is being transferred legally, to validate the documents, to witness the transfer and payment, and to collect any taxes arising. He will undertake similar searches on the property as your solicitor, ie check it complies with planning, and make sure that there are no unpaid charges or loans attached to the land. This is why some purchasers assume that they do not need to appoint their own lawyer.
Apart from the fact that we have already seen that the quality of the preliminary contracts can be extremely variable, but are no less binding on you for it, you should also remember that the notaio is doing these checks for his purposes, not for yours. He is under no obligation to give you any advice at all. And don’t forget, especially in rural areas, the notaio may consider that his English is not good enough to try to give you technical advice.
When the notaio is satisfied that everything is in order he will call the parties to his office, so that they can sign the transfer deeds, the Rogito, and the buyer can pay over the balance of the transfer monies and any taxes due. Ideally the parties should appear in person, but if you are unable to attend, you can appoint a Power of Attorney to act on your behalf and sign for you.
If it is easier for the parties to arrange for payment out of the country - for example, if you are buying off a fellow Brit and the payment is to be in sterling - the notaio will usually accept verbal confirmation from the vendor that payment has been received.
You will then need to pay any tax arising. And of course the notaio will want to be paid his fees. All in all, including your share of the estate agents fee, as mentioned previously, you need to budget around 12%-15% of the purchase price for these extra costs; obviously more for a ‘luxury’ residence.
You will need to arrange to have these funds in place before you can complete. If you are transferring money from the UK allow a few days, even if you are using electronic transfer, as the Italian banking system can be slower than in the UK.
When the papers are signed and the notaio is happy that payment has been made, he will arrange for the transfer to be registered.
Apart from the obvious attractions like the weather, the cuisine and the culture, Italy is also currently an attractive location for tax reasons.
Non-residents don’t have to pay income tax unless they rent the property out. You might not find this surprising, but taxes on ‘notional’ rental income from property are common across Europe.
Even better than this, there is no wealth tax. Compare this to France, for example, where even non-residents are charged an annual tax on the value of their assets over a certain threshold.
And at the moment there is also no death duty and no capital gains tax, but it remains to be seen how long the Italian Government can afford to be this generous, especially given current circumstances.
Once you own your dream home in the sun, you’ll be responsible for local taxes, but again these are nowhere near as high as in the UK.
The equivalent of council Tax is ICI. This is an annual tax calculated on the notional rental value, the Valore Catastrale, and payable at rates of between 0.4% and 0.8%. In practice this means a typical payment of around £100 a year.
It is estimated that around 45% of buyers from the UK let their properties in Italy. A significant minority of these purchasers are investors, but letting is also popular with holiday owners. This is only to be expected because rents in the prime areas should easily cover all the costs, including utilities and maintenance, and also the cost of finance at standard rates.
For example, a well-located 3-bedroom house in Tuscany, with no pool, could easily let for total rents of £25,000 over a 20- week season, and possibly up to £35,000 to £40,000 with a pool.
If your interest is mainly for investment, and your primary aim is to buy a property to let, your best option is probably still to cater for short-term rentals to tourists. Some enterprising and intrepid investors do let cheaper property directly to local market, but Italian tenancy law is a minefield for longer term lets, and heavily favours the tenant. This is best left well alone.
The best locations for the tourist market are, not surprisingly, in the bigger cities like Rome, Venice and Florence, but it is there, along with Milan, that you will find the highest property prices in the country when calculated on a like-for-like basis. But if you can find an affordable property you should have no problem letting it all year round. The same is true if you can get a foothold in Tuscany.
To give you an idea of the prices you can expect to pay for this type of property, I’ve just completed a random search on the internet. This is what I have come up with in Tuscany.
How about a one-bedroom apartment for just £100,000, or a two-bedroom apartment with swimming pool for £165,000? Or if you are interested in the rent returns, I’ve just mentioned, there’s a three-bedroom farmhouse available for just over £240,000.
Mind you, I have to warn you that often these properties will be advertised as being “suitable for renovation”. If so, be warned that to an Italian estate agent ‘renovation’ can mean the same as complete rebuilding, so don’t be disappointed if you end up viewing a ruin.
However, there is no doubt that there are fabulous bargains, especially the further south you go. In fact, in the deep south, you can buy a farmhouse with a vineyard for the same price as you’d pay for the apartment with a swimming pool.
If you are interested in looking for a property to do up, don’t forget that in most areas you’ll need planning and building consent to do even minor works, including alterations to doors
and windows. Typically, expect to wait 6 months to obtain planning consent, but some regions, such as Tuscany, are even tougher and can not only impose more restrictions, but can also take longer to give consent.
Despite the tough planning regime, illegal properties are not uncommon in parts of Italy. This is especially true of Sicily, where perhaps, unsurprisingly, there is an active black market building trade. It is not unknown for the local authorities to bulldoze illegal houses, but if your lawyer undertakes the basic searches and confirms all consents are in order, you should not have to worry about this.
Do be aware that the central regions of Italy are in an earthquake zone. Having said that, modern technology and building techniques mean that this should really not be a problem in this day and age. But if you buy an older property, do budget for any works which may be required to make it “earthquake proof”.
If you are planning to book your holidays to go ‘house hunting’, do be aware that one of the idiosyncrasies of Italian life is that things tend to grind to a halt in the summer. In theory, August is the Italian holiday period when traditionally there is a mass exodus, which includes the estate agents and the vendors of the properties you want to view, to the holiday areas. However, in practice, holiday season really runs from mid-July to mid-September. You really can’t expect a lot to happen during this period, and if you want to avoid disappointment, you’d be far better off arranging to go either side of the summer.
I hope you have enjoyed our look at Italian property and that you find the prospect of owning your dream home as exciting as I do. Italy is a country of variety and there are numerous lovely properties, often in stunning locations. If you search around you can get a lot of property for your money. And if you buy in the right areas, the rent returns can effectively pay for the property for you.
Funny Foreign Facts
Talk about outstaying your welcome. An elderly Italian couple have resorted to legal action to get their 41-year-old son to leave home. Last week he was sent a letter warning him to move out within ten days or face a court hearing. Even though he has a good job, the son insists on staying in his old room and having his meals prepared and laundry done. The parents say that caring for their son has exhausted them and the mother has been admitted to hospital as a result. So-called ‘bamboccioni, or ‘big baby’ syndrome, is especially widespread in Italy, with 56% of 25 to 30-year-olds still at home.