About Croatia - Buying Real Estate

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One of the few places left in Europe where buying a house or apartment close to the sea is still affordable, Croatia enjoys popularity with property buyers from around the world who appreciate the opportunity to own a home in a beautiful, largely unspoiled country and also by the attractive potential investments returns.

 

It must have been a daunting prospect for the first foreign owners who started buying property in Croatia in the late 1990’s: selling property was a new experience for many Croats and there would have been no help about what to do or where to go. However now things have changed considerably and there is a good deal of information available on the internet about how to buy and how to navigate the bureaucracy.

 

One feature of the bureaucracy which is still proving troublesome however is the requirement for foreigners to obtain government permission to own a property which can take anything from 18 months to three years to obtain, although it is rarely denied. This situation will continue for EU citizens until 2009 when this law is due to be scrapped as part of the EU accession arrangements. Until then buyers have a second option of setting up a Croatian limited company which allows the buyer to have immediate ownership. There are many companies who will perform this service including lawyers, accountants and some estate agencies. The following table describes the pros and cons of the company route versus the private route.

 

Comprehensive listing of real estate agents

 

 

Buying Real Estate Information Provided by A Place in Dalmatia

 

Pros Private Route Pros Company Route
Zero Capital Gains tax on any profit from a sale as long as you sell more than three years after receiving MJ permission.

 

  • Immediate ownership of the property
  • Can sell the property whenever you wish
  • If you sell within 3 years of buying the tax on the profit is just 20% (not 35%)
  • Option to sell the company rather than the house, with the result that no profit tax is due and your buyer is not liable for 5% real estate sales tax (i.e. stamp duty)
  • No delay in applying for planning permission (if you plan to do work which requires permission – including things such as replacing the roof)
  • No delay in applying for a letting licence (very relevant if you wish to buy to let)
Cons Private Route Cons Company Route
  • 35% Capital Gains Tax if you sell within 3 years after receiving MJ permission
  • Waiting time for Ministry of Justice permission (Between 18 & 36 months).
  • You will not be the legal owner until the MJ permission is received and you have recorded your name in the land registry
  • Cannot apply for planning permission or a letting permit until you have “legal ownership” i.e. your name is in the land registry
  • Require the co-operation of your seller should you wish to sell before the MJ permission and even if you get their cooperation the sale can be messy with doubts about who the buyer should pay.
  • If you sell after 3 years, the tax is still 20% of any profit
  • Ongoing responsibilities as a company owner.
  • Require the services of an accountant to perform basic bookkeeping and filing of accounts

 

One Property, Ten Different Advertised Prices!
An oddity of the Croatian property market is that when people wish to sell, they rarely give their property to one estate agent to market on an exclusive basis. More likely the vendor will offer it to two or three agencies to sell, although it’s not uncommon for the property to be offered to 15 or 20 agencies! In any case, the property often ends up in the hands of multiple agencies as the agencies who agree to try to market the property often pass it onto other agencies in order to maximise the number of people who will hear of the property. The agents share the commission when the house is sold, so this arrangement is in the vendor’s interest although it usually means that he has no idea who is advertising his property, and more confusingly at what price it is being offered.

To be fair to the agents, the vendor often adds to the confusion by telling the agents to “add your commission on top”. For some agents this means add 2%, but unfortunately for others it means adding 20% or more! Just to add to the confusion, there are some unscrupulous agencies who steal the pictures and text from another agency’s website and upload it onto their own site offering it at a very low price (which the seller would never accept) to attract buyers into the agency. It’s easy to spot these rogue agencies because they know nothing about the property and if they do take you to see the property, they will not be able to show you inside!

Unfortunately, the end result is that browsing the web is not always the best way or easiest way to get an accurate picture of the prices of Croatian property. The best way is to work with one or two selected agencies who will help find properties which match your requirements as closely as possible and who can also advise you on which areas might best suit your needs. Working this way should not cost the buyer any extra but will mean that the agent is working in the buyers interests. Another advantage of this method is that although most agencies have a website, regular use of email still seems to be unheard of in most agencies whereas a personal phone call agent to agent almost always yields a better, fuller and infinitely faster response.
 

Finding Clean Title
Apart from avoiding rogue agencies, buyers also should avoid properties with unclear title (sometimes called unclean). Clear title means that all the registered owners are alive and agree to sell. Traditionally houses were inherited by all the children in a family who would divide the living space generation after generation until each with the inevitable overcrowding being eased by some of the family members emigrating or going on to build their own home. However although they emigrated, they still kept the ownership of the property to pass on to their children. In practice the arrangement more or less worked. People knew who owned each house and it was understood that the people who actually lived there may well only be relatives of the 60 or so true owners. However socialism complicated things because now people had a good reason not to register their property ownership and things got worse when one of the owners died without leaving a will. There is a way of cleaning up the title of a property so that the property can be sold but it can take years and costs money, so it is not uncommon to see an old stone house in a beautiful setting turn into a ruin even though there are many who would like to buy and restore it.
 

Usage Permit
A new law has recently come into force requiring that all new properties must have a usage permit before being sold. This is rather like a building completion certificate in Britain and is issued by the local government when a property has been built legally and the taxes have been paid. Currently it’s a problem in Dalmatia as only a few years ago, building illegally and (possibly) getting retrospective permission sometime later was the norm. You don’t have to drive too far in any direction until you see unfinished concrete buildings, most of which are illegal and some of which the government has already started to demolish. Unsurprisingly, there is a political element at force and foreigners who bought some land and then illegally built a house seem to be more of a target for the demolition crews rather than the Croatians who did the same.
 

Building
For those interested in buying an illegally built house and retrospectively get the permission, it would be a mistake to expect that the house would cost considerably less than a legally built one. Although logic dictates that it should, the Croatian who owns it is unlikely to see it that way. A second reason to think twice is some houses just can’t get retrospective permission because plans were constructed for the entire coast in 2005/6 and many areas have not been designated for residential use. In particular it is almost impossible to build anything within 70m of the shoreline, although the plan does restrict development in the entire area up to 1km back from the sea.
Many people are interested to buy a plot of land “first row to the sea” and build a villa, but this type of land is rare and commands a big premium e.g. land designated for agriculture costs about €5 -€10/m2, but buildable land in a pretty setting can cost €400/m2.
 

The Buying Process and the Costs.
Fortunately buying is relatively straightforward in Croatia, if the paperwork is in order. Often, after a lawyer has performed an initial assessment of the papers, a pre-contract is drawn up and a deposit is paid (usually direct into the vendor’s bank account). The pre-contract will states that the buyer will forfeit his deposit if he withdraws from the deal and the seller states that the title is clean and that he will sell the property by an agreed date or be obliged to give the deposit back to the buyer plus the same amount again. The sales contract is signed usually a month later with the remainder of the contractual price being paid over on the same day. After that it’s the estate agents job to bring a copy of the contract to the land registry, the katastar (which is like a duplicate, though less important land registry) and to the local tax office. Buyers are charged a 5% Real Estate Transfer tax on re-sale properties. Buyers of new-build properties purchased from the developer are liable for 5% tax on the value of the land only, although the developer must pay 22% PDV (the Croatian equivalent of VAT) on a new build. Often this is passed onto the buyer and it is always worth checking what is in the price and what isn’t.
Legal fees on a purchase are typically 1½% all-in and estate agency fees range from 2% - 6% plus PDV.
 

Mortgages
At the time of writing, in early 2007, there are no mortgages available for foreign citizens who wish to buy in Croatia yet, although Hypo Alpe-Adria Bank offers a financing product similar to leasing through their London office. Most people however find it cheaper to raise the money in their home country by re-mortgaging their home. Eventually this will change, but not until the Croatian National Bank eases the restrictions it puts on the banks in Croatia making it easier for them to loan money. The only small exception to this is where a foreigner has a Croatian company which already owns a property in Croatia to be used as collateral.



 

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