Steps and ways to purchase a property

Herdade de Aroeira

 

A variety of fees and taxes are associated to the purchase of a property which could amount up to 10% for a second-hand property and 25% for a newly built one.

Most fees are based on the fiscal value (valor tributável) of the property, which is usually much lower than the actual price paid.

Most taxes are paid by the buyer.

The different steps needed to take when buying a property in Portugal are described below:

Steps of a purchase

The 'Simplex' Government Program

Since January 2009 the Portuguese government is implementing a reform called SIMPLEX designed to cut the bureaucracy, modernise the public services and lower the administrative burden on companies and citizens.

Various reforms are already implemented, such as the Law n°116-2008 by which Notaries (Notários), Lawyers (Advogados), Bailiffs (Solicitadores), Chambers of Commerce and Industry (Câmaras de Comercio e Indústria) and Registry Offices (Serviços de Registo) have now the competence to deal with, witness, check and control the legality of the acts and contracts of any real estate or mortgage transaction.

Final deeds (Escrituras) are no longer compulsory when buying or selling real estate.

Land registry, payment of taxes or additional formalities were also simplified thanks to an online service called “Casa Pronta”.

Costs involved with a purchase

Property transfer tax (IMT)

In case of purchase of a new property a Value Added Tax (IVA) of 20% is due instead of the Property transfer tax (IMT).

Mainland - Estate for permanent residents - 2009
Value of Residential Property
% Tax
Amount Deductible
Up to 89,700 €
0%
0
From 89,700 to 122,700 €
2%
1,794 €
From 122,700 to 167,300 €
5%
5,475 €
From 167,300 to 278,800 €
7%
8,821 €
From 278,800 to 557,500 €
8%
11,609 €
> 557,500 €
6%
0
Mainland - Estate for non-permanent residents - 2009
Value of Residential Property
% Tax
Amount Deductible
Up to 89,700 €
0%
0
From 89,700 to 122,700 €
2%
897 €
From 122,700 to 167,300 €
5%
4,578 €
From 167,300 to 278,800 €
7%
7,924 €
From 278,800 to 534,700 €
8%
10,712 €
> 534,700 €
6%
0
Madeira, Azores - Estate for non-permanent residents - 2009
Value of Residential Property
% Tax
Amount Deductible
Up to 112,025 €
0%
0
From 112,025 to 153,375 €
2%
2,245.50 €
From 153,375 to 209,125 €
5%
6,483.75 €
From 209,125 to 348,875 €
7%
11,026.25 €
From 348,875 to 696,875 €
8%
14,511.25 €
> 696,875 €
6%
0
Madeira, Azores - Estate for non-permanent residents - 2009
Value of Residential Property
% Tax
Amount Deductible
Up to 112,025 €
0%
0
From 112,025 to 153,375 €
2%
1,121.25 €
From 153,375 to 209,125 €
5%
5,722.50 €
From 209,125 to 348,875 €
7%
9,905.00 €
From 348,875 to 696,875 €
8%
13,390.00 €
> 696,875 €
6%
0

Example: In Mainland, property price is €200,000 for a non-permanent residence, therefore the IMT will be:

200,000 x 7% = 14,000

14,000 - 7,924 (amount deductible) = € 6,076

Exceptions:

Rural plots: Rural plots are subject to IMT at a flat rate of 5%.

Urban plots: Urban plots are subject to IMT at a flat rate of 6.5%.

Offshore companies registered in an approved jurisdiction, e.g. Ireland, are subject to IMT at the same rates as above. If belonging to a ‘black listed jurisdictions’, e.g. the Isle of Jersey, IMT is levied at the flat rate of 15%.

Stamp taxes

Property stamp tax = 0.8% of purchase price

Mortgage stamp tax = 0.6% of loan amount

Other fees

Selling Agent’s Fees: Are usually between 3 and 6% of the selling price, depending on the cost of the property and the type of contract, and are paid by the vendor. However, they are usually considered when the asking price is established, so in effect, they are paid by the buyer.

Surveyor’s Fees: If a building or plot of land needs to be inspected, the fee will depend on the type of survey, any special requirements and the value of the property.

A full structural survey and valuation should be charged less than half a percent of the property value.

Legal fees

Lawyers Fees: usually 1 to 1.5% per cent of the purchase price for an average property.

Valuation: around 500 €.

Bank charges (in case of mortgage): around 250 €.

Provisional Registration: around 650 €.

Final Deed Registration: around 750 €.

Summing up

Assuming a second-hand mainland property financed by a mortgage, the additional costs according the sales value of the property will be:

100 to 150 thousand Euros: 5%

150 to 200 thousand Euros: 5.5% - 6%

200 to 250 thousand Euros: 6.5% - 7%

250 to 350 thousand Euros: 7.5% - 8%

350 to 500 thousand Euros: 8% - 9%

Over 500 thousand Euros: 9% - 10%

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Conveyance

Conveyance ensures that the buyer secures the title of the property with all rights associated with it.

It ensures that the title of the property is correct, that the seller is the rightful owner having the right to sell it, and that it does not exist any factors which could obstruct a mortgage or a re-sale.

Checklist

Get the classification of the property at the National Land Registry Records (Conservatória do Registo Predial):

  • Plot of Land (Lote), it has already been designated and registered for building purposes
  • Rural Land, check the planning rules and get the planning / building permission
  • Existing house or part of a building (Fracção)

Check the legal title to the property: it should be registered, at both the National Land Registry Records (Conservatória do Registo Predial) and Tax Department, in the name of the seller and not carry any onuses or liabilities.

Ensure that all building, planning and habitation licences were delivered. All houses built after 1951 must have a municipal habitation licence (Licença de Habitação) and a technical habitation certificate (Ficha Técnica de Habitacão) if built after the 30th of March 2004.

Check the Municipal Master Plan (Plano Director Municipal - PDM) for the existence of any public planned construction which would affect the value of the property and the reasons why you decided to purchase it.

In some cases, like rural land, the neighbours might have priority over the purchasers, so better check that they desisted of their right.

Required documents

In order to prepare for the promissory contract (Contrato de promessa de compra e venda) some documents showing ownership should be asked to the vendor:

  • Land Registration Certificate (Certidão de Teor do registo predial), valid for 6 months and issued by the National Land Registry Records (Conservatória do Registo Predial).
  • Tax Registration of a Property (Caderneta Predial) issued by the Tax Department - It needs to bear a stamp from the Tax Department and is valid during 1 year after emission.
  • Tax Information Certificate (Certidão Matricial), valid for 6 months and issued by the Tax Department when the seller does not have the Caderneta Predial.
  • Licence granted by the municipality stating what the building can be used for (Licença de Utilização), issued by the Town Hall only for Property built after 1951. The existence of a valid habitation permit is a precondition for a valid conveyance of property to take place in Portugal and the existence of such permit presumes that a valid building license was issued previously.

Land and buildings have separate tax documents, therefore one should check if there is a document for the land and another for the building.

Promissory Contract

The Promissory Contract sets out the terms of the transaction such as the identity of the owner, a detailed description of the property and land boundaries, registration and tax numbers, purchase price, deposit and date of completion.

Usually, the contract is signed within 30 days from the date of reservation. At this stage the purchaser would normally be expected to pay a deposit, which is negotiable (between 10% and 30% is common practice).

In Portugal, the parties become contractually bound with the signature of this Promissory Contract of Purchase and Sale (Contrato de Promesa de Compra e Venda), which sets out the terms of the transaction: property details, price, method of payment, completion date, warranties, penalties, etc.

Until such contract is signed the vendor is not committed and can change his mind. It is useful to remember that conditional clauses can be added in the promissory contract in order to protect you from events being out of your control and to prevent you to loose your deposit. For example: Obtaining a mortgage or obtaining a planning permission and a building licence.

  • Deposit: If the buyer decides to withdraw from the sale, he will loose the value of the deposit. If it is the case of the vendor, he will reimburse the buyer from the value of his deposit and pay a compensation which is usually equal to the amount of the deposit.
  • Required Documents:
    • Tax Cards of the buyer and seller from the Tax Department
    • Identity Cards/Passports of the buyer and seller
  • Final Check: Just before signing the final deed, it is important that you do a final check to ensure that the property is still in the same state than when you negotiated it with the seller. You should verify as well that all appliances included in the property price are still there.

Deed of Conveyance (Escritura)

If you have applied for a bank loan, you will need to register the mortgage at the National Land Registry Records (Conservatória do Registo Predial) along with the provisory registration of the acquisition.

Then, and upon payment of the transfer tax (IMT), you will be ready to sign the Deed of Conveyance (Escritura).

It will be signed before a competent entity to legalise the deed (see the 'Simplex' note above) and will be the actual property transfer.

The competent entity will verify the identity of the parties and the validity of the deal, both legally and from a tax point of view. This is the document that gives the purchaser the proper title to the property. Bear in mind that registering your new home is the most important act of buying a property in Portugal because ownership will be enforceable against third parties only after after being registered at the National Land Registry Records (Conservatória do Registo Predial).

Timing

  • 5 to 20 days to get the Land Registry (Certidão de Teor) and the Tax Certificate (Certidão Matricial)
  • 1 week to 1 month to receive the Local Authority Habitation Licence (Licença de Habitação) if the seller does not have it with him or if it is not referred in a previous Deed of Conveyance
  • 1 week to 1 month to negotiate the terms of the Promissory Contract, execute the Promissory Contract and pay the deposit to the seller directly
  • 2 weeks to 3 months to sign the Deed of conveyance and pay outstanding balance to the seller directly
  • 1 month to complete registration of property in the buyer’s name

Buying-off plan

Buying a new property still at the planning stage is becoming increasingly popular in Portugal as it provides the purchaser an hefty discount and spread the payment during the construction process.

Advantages:

  • Buying at a discount with payments spread over the duration of the construction.
  • By the time the property building is finished it is likely that its value increased resulting immediately in profit.
  • Some developers offer guaranteed rental revenues from the purchased property for a period of time (usually between 3 and 5 years). However, one should check that it is not incorporated into the selling price.
  • Being newly built, maintenance and/or renovation costs are expected to be minimal.
  • Being one of the first buyers in a new development usually offers the opportunity to select among the best properties in terms of location, sun orientation or unique features.
  • Some promoters will let the buyer customise the property during the construction process.

Disadvantages:

Basically, everything related with a delayed delivery:

  • Market could fall during construction time making rental or re-sale difficult.
  • The delivered property may not be quite as expected.
  • Construction deadlines might slip.
  • The developer might enter bankruptcy.

Decision process

Buying-off plan not only requires some imagination in order to visualise the development when finished but also some prudence. The following questions should be answered before making a decision:

  • What is the value of the property compared to the market price in the area?
  • How is the current rental market and its expected evolution?
  • Is it a renown location and are prices expected to rise in the future?
  • How many properties are to be sold, is there a risk of saturation?
  • What is the developer's reputation and what guarantees are offered?
  • How does the considered property compare with others in the estate?
  • How much are the condominium charges?
  • What are the unique selling points of the estate and what services are offered?

Purchase process

There are usually four basic steps:

  • Reservation. The buyer will be asked to pay a reservation fee (usually a small deposit value i.e.: 2.000 €).
  • Signature of the contract. A further deposit (usually 10 per cent) is required. The contract must contain:
    • timetable for the property’s completion
    • payments timeframe (i.e.: completion of the structure 20%, completion of the roof 20%, completion of the interior 20%, final completion 20%)
    • penalties for non-completion, guarantees for building work, details of the builder’s insurance policy (acting as a non-completion guarantee)
    • copy of the plans and drawings
    • a clause withholding a part of the payment (i.e.: 10%) during a certain amount of time (usually 6 to 12 months) as a warranty against building defects detected after entering the property.
  • Building completion: when construction work is finished.
  • Legal completion: when the balance of the purchase price is paid.

Building from scratch

Building a new home is a long process and requires preparation before you start the construction. Many topics should be thoroughly analysed in order to avoid costly mistakes.

Budget

First, you must determine how much you can spend and to evaluate the whole construction cost. If you need a mortgage, check with a financial institution the amount of the loan, its length and your financial capacity to pay it back.

The land

What do you do first? Do you select the style and plan or do you choose the land first? Both approaches have merit. If you are focused on the style and size of your future house, you will have to search the perfect land matching your home plans. Since it is much easier to design or adapt your house to suit the landscape than to alter a landscape to accommodate the specifications of your house, one usually chooses the land prior to selecting the floor plans.

When both the land and the floor plans have been selected you will need to insert the plan into the chosen lot in order to create the fit. Bear in mind that the configuration of rooms, the placement of windows, the location of the driveway and many other design elements will be affected by the plot you build on.

Another important aspect is that you will have to respect the building regulations of the region. You will also need to investigate factors such as soil condition, drainage and the medium term infrastructure plans for the region (PDM).

At the municipality, you need to check:

  • The Municipal Master Plan (PDM – Plano Director Municipal) which is defined every 10 years and define the areas and new infrastructure development to be build.
  • The percentage of construction you can build on the plot and the possible existence of other building restriction.

The floor plan

You can ask an individual architect to custom-design your house based on your own specifications or use stock plans from a catalogue which meet your needs. A custom designed-house is created specifically for your family at your own taste but will be more expensive to build. When taken from a stock plan, the builder can make small modifications in room size, style or other details at minor cost.

Team of professionals selection

A good way to select an architect (arquitecto), a builder (construtor) or any other professional, is asking the local people who you can trust or owners of properties in the area.

  • A topographer, to confirm the plot’s boundaries as well as its declivity.
  • An architect or a home designer, to design or adapt the floor plans. If you want to confirm that your architect is fully licensed, you can check it at the Architects Association website (link 'Directório de Arquitectos').
  • An engineer for the supervision of the specialised specialised works (soil stability, electricity, gas, sewage, waste water, telecommunications, thermal and acoustic behaviour of the building.)
  • A general builder for the house construction.
  • A surveyor to ensure that the builder does his work according to the plans and specifications.

The Contract

A written contract signed by the buyer, the builder and the architect is mandatory. It includes a detailed description of the project (Caderno de Encargos) and a copy of all the subcontracted contracts (electricity, sewage, ...).

Any alteration to the project should be done in written form, signed and annexed to the contract. Remember to read the entire contract and to have all questions answered. Never pay more than what is stated in the contract. It is wise to have a clause in the contract withholding during 6 to 12 months after completion, a part of the total payment (usually 3% to 5%) as a warranty to ensure that the builder will fix all building defects encountered during that period.

The builder should present an insurance contract which covers the buyer in case of his bankruptcy or in case of non completion of the building.

The contract should contain:

  • The contractor's full name, address, telephone number, and professional license number (Nº de Álvara) which can be checked through the National Building & Real Estate Institute (Instituto da Construção e do Imobiliário) website.
  • A detailed description of the work to be done specifying the materials to be used: quality, quantity, weight, colour, size, brand name, etc.
  • The starting and completion dates.
  • Final quotations (orçamentos) of the subcontractors with all costs discriminated.
  • How, how much and when payments are to be made.
  • A penalty clause for late completion.
  • Any warranties and guarantees of workmanship.
  • The description of cleaning and debris removal at the end of the construction.
  • The designation of a court of arbitration in case of dispute.

Administrative authorisations, licences and inspections

The project and the special works (stability, electricity, gas, sewage, waste water, telecommunications, thermal and acoustic behaviour of the building) have to be submitted to the local municipality which has the authority to grant the approval of the project and the authorisation to proceed with the construction (Licença de Óbras) but has to forward the special works to the relevant entities for approval.

The different steps are:

  • Application for a water and sewerage connection to the SMAS (Serviços Municipalizados de Àgua e Saneamento).
  • Application for electricity connection to EDP (Electricidade de Portugal).
  • Application for telephone connection to PT (Portugal Telecom).
  • Inspection by the water and sewerage authority.
  • Inspection by the power authority.
  • Inspection by the telecommunication authority.
  • Water and sewerage connections.
  • Electricity connection.
  • Telephone connection.
  • Final inspection to obtain the Municipality Habitation Licence (Licença de Habitação).
  • Registration of the building at the National Land Registry Records (Conservatória do Registo Predial).

Guarantees

Under Portuguese law, builders are responsible for small defects during one year after completion and five years for structural defects.

After completion, it is also wise to ask a structural surveyor to have a complete check of the building and a fully detailed report about detection of any problem or building defect.

Final steps

After completion, the builder should request the Municipality Habitation Licence (Licença de Habitação) confirming that the local authority (Câmara Municipal) has inspected the property and that it complies with planning permission and building regulations. The property should be inspected as well by the tax office (Serviço das Finanças) to fix its value for future payment of Property Transfer Tax (IMT) and Capital Gain Tax when being sold. The property should also be registered at the National Land Registry Records (Conservatória do Registo Predial).

Buying new

More and more newly built apartments, townhouses and villas are put on the market all over the country.

Advantages

  • One can move in right away.
  • No restoration or renovation cost.
  • You might be offered a choice on the interior design and decoration.
  • A 5 years guarantee from the builder against structural defects.
  • Fittings are brand new

Disadvantages

  • New properties tend to be smaller than older and have smaller land.
  • Fittings and decoration might not suit your taste.

Buying second-hand

Advantages

  • One can move in right away.
  • Features probably a larger plot of land than new buildings with a mature garden.
  • Construction defects have probably be fixed.
  • Appliances are already installed.

Disadvantages

  • Might need restoration and renovation work.
  • Interior design might not suit your taste.

Fractional ownership

Fractional ownership might be a good choice for those who will only occupy their property part of the year and do not want the burden of renting it the rest of the time.

The two major schemes are:

Part-ownership - a group of people part-owning a specific property or a consortium of buyers owning shares from the company owning the property. The number of co-owners is a compromise between an affordable price and the length of time each member can use the property. A contract is drawn by an experienced lawyer in order to protect the rights and interests of each co-owner.

Sale and lease back - usually preferred by investors looking for a low-risk and long-term investment. It consists in the purchase of a property (often newly built or buy-off plan) and then lease it back to a management company for an agreed term and price. During the leaseback period, the management company is responsible for letting the property, furnishing, maintenance, and paying all bills. Investors have the option to use their property as well for a number of weeks at a reduced rental price. Properties sold under a leaseback scheme are normally located in popular resort areas such as golf or coastal resorts, where self-catering accommodation are in high demand.

Advantages

  • Low risk investment.
  • A management company maintains the property.
  • Good return on investment.
  • Possibility to occupy the property during short stays.

Disadvantages

  • Return on investment can be lower than other letting schemes.
  • Fixed rental returns can not be adapted to the current letting price evolution.
  • Some lease back schemes never actually transfer the ownership of the property.
  • There can be penalties in case you withdraw from the program.
  • Some promoters may not be flexible in terms of personal usage.
  • The developer may charge high management fees.

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Steps and ways to purchase a property