Two rules in buying real estates in Basel and Switzerland
For ten plus years I am servicing an international clientele here in the Basel area. I serviced mostly Germans, Americans, and Asians with their taxes in Switzerland. Sometimes I also assisted them in finding their new home!
Currently I am assisting an Asian family in finding their dream home in Basel city. Switzerland has a unique situation in regards to mortgages, real estate taxes, and also the pricing of homes.
I often observe that our International visitors and new citizens tend to compare the houses here with the housing markets where they are from. This is sometimes helpful and sometimes not. Please allow me to explain the reasons why. Here are two rules I would like to convey to my clients:
Rule #1: My first goal in buying real estate is that I need to be capable to sell it again for the same or similar price. In other words, one requires an exit strategy.
I see a lot of mistakes being done in just violating this one rule. I had one family that left back to the states for professional business reasons. They required over two years to sell their home and lost quite some money in selling it. I try to prevent my clients from having to go through this type of situation.
Of course you may also be more daring and assume that you could sell your new home with a profit. That’s possible yet not always attainable. Therefore, having an exit strategy is in my experience the most important factor.
Rule #2: Many people assume the housing prices will keep going up forever but my main focus is on the financing of the house. Today the pricing of houses is in my view distorted. This is due to not comparing the value to value, rather than comparing values with prices being paid elsewhere.
Today when you ask for a mortgage from a bank, the banker will type in the data of the house or flat with a data software. For example, provided by Wüst und Partner AG or Iazi AG. The word of this data collection process is called Regressional Analysis. They type in E.G. square meters, location, number of rooms, with or without balcony, sun and noise exposure and number of bath rooms, etc. This then gets compared with other real estate transactions (apartments and single-family homes) that were sold in Switzerland.
The results aren’t set in stone. You often have quite substantial differences depending on what’s being typed into the software program.
If you were to take a out a loan over CHF 1’200’000 and buy an apartment for CHF 1’600’000, the bank may give you the loan just because that’s what’s currently being paid for the house. They then assume a backed value of CHF 1’600’000.
To make it simple for demonstrative purposes I will give you an example how this scenario could go wrong:
You will buy a row house for CHF 900’000 in 2019. In the same row, one of your neighbors will sell his row house for CHF 780’000 in 2022. That’s CHF 120’000 below the value of your calculated mortgage.
The bank reviews the mortgages assumedly in a turn of five years. They will then realize that your loaned money isn’t backed enough! You will then receive a letter from the bank asking you to pay the difference within six months! These cases don’t occur often nowadays.
We had a family in our clientele that was required to pay up CHF 60’000 within six months! That being said, if there is a correction in the housing market you will hear about this unfortunate procedure more often.
When I buy a house, I calculate a margin of safety of about 10-15% of the house value for this purpose. You must be capable to pay the debt principal in the case of a new appraisal.
Buying a home can be fun yet sometimes emotionally challenging. We wish you the best in your future endeavors. Please contact us with any questions whether big or small!