Are you buying off plan or an existing property?
The first stage in buying a home in Bulgaria is the signing of a preliminary contract. Your lawyer is responsible for ensuring that this is drawn up correctly and you shouldn’t rely on an estate agent to do so.
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While some agents or developers will provide a properly-drawn up contract, some won’t – and unless you’re a Bulgarian-speaking lawyer you won’t be able to tell which is which! For peace of mind it’s recommended that you have the contract drawn up or at least checked by a Bulgarian lawyer.
There are a number of types of preliminary contract, depending on whether you’re buying an existing (built) property or a new property off plan (i.e. yet to be built or under construction).
Buying an Existing Property
The preliminary contract will describe exactly what you’re buying, including the amount of land associated with the property. The contract will also state the amount of the deposit you’ve agreed with the vendor and any conditional clauses (see below).
Contracts must be in Bulgarian to meet legal requirements, so you should have a translator with you if necessary. As more foreigners purchase property in Bulgaria, some developers and estate agents are beginning to provide contracts in English, which makes the process easier, but remember that to be legally binding a contract must also be in Bulgarian.
Don’t be tempted by the Bulgarian practice of tax evasion, where the sale price declared to the tax authorities (sometimes euphemistically referred to as the ‘tax estimation price’ or TEP) is lower than the actual price paid for a property. If you’re buying directly from a vendor, he may suggest this, and some estate agents may state that the practice is ‘normal’.
New (including off-plan) property is subject to 20 per cent VAT on the sale price. Some unscrupulous developers either don't include VAT in their quoted price or ask you to declare a lower value on the notary deed. The advantage for the seller is that he pays less tax on the profit from the sale.
You will also save money on taxes and fees, but you will have a higher capital gains tax bill if you sell the property and it’s a second home. For example, if you buy a property for €80,000 but declare a value of €50,000, then (if you’re lucky) sell the property a few years later for €100,000, the tax man will see this as a profit of €50,000 and you will be taxed on this amount, not the actual profit of €20,000. What's more, if you’re resident in the UK for tax purposes you will be subject to capital gains tax of 40 per cent on the same amount!
If you keep the property for more than five years, your CGT liability will be zero – but don't rely on this law remaining unchanged! To avoid this increased tax payment, you will have to sell the property to someone who is also willing to under declare the value of the property...
Buying Off Plan
If you’re buying an off-plan property, the preliminary contract should include full details of the property to be built (including a copy of the plans and drawings showing its exact location within a plot or development, the number of rooms and the estimated total living area, and the type of materials to be used in its construction), what extras are included (e.g. swimming pool or parking space), any services to be provided, the timetable for construction, the price (including any possible variations or additions), a schedule of payments, details of penalties for non-completion and circumstances under which the deposit is to be refunded and details of any guarantees applicable.
In an off-plan purchase, payments are spread over 12 to 18 months, depending on when you put down a deposit and when the development is due for completion. Payment schedules vary;
A typical schedule of an off-plan purchase:
Stage vs Payment:
Initial deposit / 10%
30 days after signing preliminary contract / 40%
Completion of ‘shell stage’ (external walls) / 40%
Signing of final contract / 10%
Depending on the agent and developer you’re purchasing from, you may also have to pay a commission on top of the purchase price as well as notary fees and local taxes. In almost every case VAT is included in the quoted price for off-plan property, but you should check. The final contract isn’t signed until building is complete.
The preliminary contract is binding on both parties, so it’s important to obtain legal advice before signing it. It isn’t necessary to have a preliminary contract signed in front on a notary public and a notary public won’t necessarily protect your rights, although he will ensure that a contract has been drawn up correctly.
In any case, if a preliminary contract has been drawn up by a developer or estate agent, it’s worth paying for an independent lawyer to check it before you sign it to make sure that your rights and interests are fully protected.
You will usually be expected to pay a 10 per cent deposit to the seller once you’ve signed the preliminary contract. While this is usually paid in cash, you should be able to negotiate for a bank transfer for larger amounts, which may incur lower charges (check with your bank). In some situations you can pay a small amount of the deposit as a ‘goodwill’ gesture and pay the remainder of the deposit seven to ten days later. The preliminary contract will state the amount and the period in which you have to pay.
You should try to have a clause inserted into the preliminary contract requiring that the deposit be held by a third party until completion. This way, if the seller changes his mind or the sale falls through for any reason beyond your control, you will receive your deposit back.
It isn’t uncommon for sellers to register their property with several estate agents and pull out of a sale if they think they can get a better price from someone else.
One of the main reasons for engaging a lawyer is to protect your interests by inserting any necessary conditional clauses in the preliminary contract, which are of little concern to a notary public. Conditional clauses stipulate requirements that must be met to ensure the validity of a contract.
Conditions usually apply to events out of control of the vendor or buyer, although almost anything the buyer agrees with the vendor can be included in a preliminary contract. If any of the conditions aren’t met, the contract can be suspended or declared null and void, and the deposit returned. But if you fail to go through with a purchase and aren’t covered by a clause in the contract, you will forfeit your deposit or could even be compelled to go through with a purchase.
If you’re buying anything from the vendor such as carpets, curtains or furniture that are included in the purchase price, there should be a clause to this effect and they should be listed and attached as an addendum to the contract.
There are many possible conditional clauses concerning a range of subjects, including the following:
- obtaining a mortgage (see below);
- obtaining planning permission, e.g. for renovation or improvements;
- confirming that the land area being purchased with a property matches the land register;
- selling another property;
- obtaining a satisfactory building survey or inspection.
A mortgage clause states that a buyer is released from the contract if he cannot obtain a mortgage. It’s a good idea to include this clause, even if you don’t plan to obtain a mortgage, just in case your circumstances change.
A mortgage clause should state the amount, term and interest rate expected or agreed with a lender, plus the lender’s name (if known). If you can’t obtain a mortgage for the agreed amount and terms, you won’t lose your deposit. You must make an application for the loan within a certain time after signing the contract and have a specified period in which to secure it.
- Anything written in English isn’t a legal document in Bulgaria.
- Declaring a lower price than the actual sale price of a property is illegal in Bulgaria and you may be prosecuted for tax evasion. The lower price declaration has very little benefits.
- Unless you’re confident in Bulgarian property law and speak fluent Bulgarian, it’s highly recommended to have all documents checked by a lawyer. A lawyer should, of course, also speak your language.
- A lawyer’s fees may be calculated at an hourly rate or as a percentage of the purchase price of the property, e.g. 1 to 2 per cent, with a minimum fee (e.g. €400). In the case of an off-plan purchase, there may be a basic fee based on the value of the property plus an hourly charge for unforeseen extra work.