The Bigger Picture in Greece
The other day we had a coffee with one of our bank contacts who’s in a position to know his stuff when it comes to what’s happening in the macro situation with the Greek economy. He told us that from 2009-2013 the big four consulting companies (KPMG, Deloitte etc) had almost no revenues from foreign investors looking to carry out due diligence on Greek business and assets. Then around 2015 it started to pick up. In 2017 the revenues were up 1000%. What does that tell us about Greece? That foreign investors are seeing the potential here because the asset prices are so distressed but they can’t stay that way for long.
Another factor is that the rest of the Eurozone is struggling but their asset prices are still at an all time high. Prime apartments in the downtown area of Lisbon are trading at between €5,000 to 8,000 per sqm. Compare that to Athens’ €1,000 to 2,000 and that’s a huge difference. Sure Portugal has incredible tax advantages being offered to foreign investors but if there’s a change of government in Greece in 2019 you can be sure that the Portuguese boom has not gone unnoticed here and it’s likely that an investor friendly regime will boost incentives for foreign investors across all levels, including residential real estate.
That was it. For pretty much hundreds of years. Until the crisis.
At that point Greeks stopped trusting everyone. Banks, their Government, the tax office, lawyers, neighbours. Suddenly everyone was out for him or herself.
So the trend moved towards what is laughingly called ‘a gentlemen’s agreement’. This is the Greek equivalent of a deal memo on the back of a napkin.
Buyer and seller work out the deal, the buyer puts down a small sum of money, say €1,000 and the seller agrees to pull the property from the market. The deal memo then gets given to the lawyers who argue the toss on who/what/where/when and make the final contract.
Yes. That’s what we thought. When we first moved into the Athens market our Greek guys on the ground told us ‘no Greek will ever break their word’. Seemed a bit over the top, but hey, we’re foreigners, we’re willing to take advice.
Well, you guessed it. It didn’t work out so well. In fact every single seller in the first months of working in Athens, changed their mind, the terms of the deal or simply vanished off the face of the earth.
What’s the solution to stopping Greek sellers pulling out of deals?
In the UK, Australia and other common law territories it’s usual to put a restriction or a caveat on title in order to protect your interest. You do the napkin, deal, you pass over some money (could be just a dollar) and then you register that puppy on the the title as soon as you can.
That way, the seller knows you’re serious but also they can’t just back out and walk away. Well, then can, but it’s a slow and expensive process for them to try and wriggle out of the agreement. Judges in the UK and other territories will take a dim view of a contract being broken like that.
But we’re talking about Greece.
The gentlemen’s agreement clearly was not going to work for us. We spent so much time and energy on deals that fell over that we had to find a way.
People on the ground tried to convince us that there was nothing like this in Greece. We knew that was not possible. How does a developer take an option on parcels of land before building and protect themselves.
We hunted how and low and asked everyone we met, all of them gave us the same answer. “Oh it’s just a gentleman’s agreement and that’s all you need.”
Finally we met our great lawyer. We told him the problems we were having and want we needed to try and stop sellers welshing on deals. After apologising for his fellow countrymen he explained how some of the alternatives might work. He told us what we already knew about the Gentleman’s Agreement and that it was worthless and would not stand up in a Court. A bit like Heads of Terms in common law countries.
By law the Seller is bound to give you back 2x the deposit amount you gave them as part of the Gentlemen’s Agreement.
BUT, because the Gentlemen’s’ Agreement is not enforceable over the property, only against the seller (the actual person) the seller is free to sell the property and disappear with the proceeds, then claim poverty if you ever got to a judgement in a Greek court.
The pre-contract is like the promissory contracts you find in some other countries like Spain and Portugal but with a few important differences.
- You can notarise the pre-contract
- You may have to pay stamp duty and transfer tax on the value of the contract when it’s notarised (this is because Greek law has the concept of ‘usufruct’ – that’s where you may not be the owner but you stand to gain financially from the use of it)
But, this is a document you can notarise. What does that mean? Well the notary is way more important than the lawyer in Greece. The notary is a public figure who reads through the contract and makes sure that it is legitimate and legal before signing and stamping with an official seal. Then both seller and buyer will sign in the big book that notaries always carry, after which the notary will register the act of the notarised contract with the local land registry.
Why is this important?
Because if the seller tries to do anything sneaky after the pre-contract is notarised, any lawyer, lender, bank, buyer etc will find that information on the local title search and this will prevent the seller from doing anything to undermine the agreement.
However, this is Greece. The seller may take a chance to pull out of even the notarised pre-contract on the basis that
- The seller thinks you won’t bother to take them to court
- That the standard in Greek contracts is for the seller to repay twice the deposit paid by the buyer
100% return on your deposit money could be a good little business in itself. Except for two things
- If you only paid €100 you’ll only get €200 back for all that effort
- You may have to still take the seller to court to get the money back
Various lawyers have estimated the cost as being around €2,000 and taking up to two years.
That’s OK, now that we know that we’ll make sure we pay a higher figure to the seller when we sign the pre-contract!
That’s the plan. If you pay the seller a larger figure say, €5,000 to €10,000 on the pre-contract the seller is going to think twice about stiffing you and pulling out. As long as the contract is notarised and registered then the seller cannot sell the property and claim poverty.
So the pre-contract, the passing of some reasonable funds and the notarising and registration of the agreement is the most secure method of protecting yourself when entering into a creative real estate contract in Greece.
But it’s not foolproof.
It’s always possible a seller tries to weasel out, and that a Greek judge finds in favour of the Greek person over the foreign investor. It’s not usual but it could happen.
One of the big Greek commercial lawyers we spoke to about this said that he thought maybe 3 out 10 deals structured this way might fall over.
So this is a numbers game. You need to decide exactly how much you put in to a deal to strengthen it and reduce the chance of the seller defaulting, coupled with the risk to your funds.
Note: in Greek law you have the right to get those funds back plus your costs. But as investors we have real world lives and you have to consider your lost opportunity cost, so it’s better to plan this to be a cost of doing business in Greece than get bogged down into legal battles you might now win.
So how do I minimise my cash exposure to sellers pulling out?
One of the best ways is to spread your available cash across multiple deals
Review each deal on its merits and allocate cash accordingly. If a deal is too good to pass up you should consider using a larger down payment that has more chance of locking in the seller whatever happens to the market
Work with investors. By bringing in outside investors and sharing the risk you can make your cash reserves go much farther. Do 20 deals instead of 10, split the upside. You’ll find plenty of wealthy individuals willing to take a risk on a notarised contract for the kind of returns that may be possible in a recovering Greek market
The absolute safest bet in Greece is to pay ALL cash for a property.
But what’s the point of doing creative strategies in that case?
Sometimes you might decided that a deal is so good that you must pay cash and grab the title in your name. Remember, you can always package up that puppy and sell it on terms to another investor or even a Greek family. But you will have the full security knowing your name is on the title and the seller’s is not.
Now there’s an alternative. A kind of halfway between the full on creative contract using a pre-contract that’s notarised and the ‘paid in full’ standard sale contract. And that is the ‘first mortgage carry back’. In Greece this is only possible where the seller has no loans or if the loans are paid off using your down payment. But the good news is that around 70% of Greek properties are unencumbered – that means they have no finance on them.
With the first mortgage carry back you pay the seller a reasonable sum, perhaps equal the the standard deposit from a regular sale i.e. 10% of the purchase price and you use the standard full contract, title moves into your name, but the seller retains a charge over the property until you’ve finished paying.
Not all sellers will agree to this. Sometimes the seller does and their lawyer talks them out of it, but our lawyer always tries to get us this deal. Depending on how sweet the deal is, you can just walk away if the seller won’t play ball, or you can take the property under a pre-contract and sell it on to another investor.
Just to run through the different types of contract again and the pros and cons of each
|Napkin Heads of |
|Minimal e.g. €100||Seller pulls out|
|Pre-Contract||Reasonable deposit needed say €5-10k Legal/Notary Fees, some transfer tax, registration fees||Seller pulls out and Greek court finds in seller favour|
|Full contract with |
|Like a regular sale, at least 10% deposit plus legal fees, notary and registration, transfer tax||Very low. Title is in |
your name and the
buyer would have to
take their own legal
action if you
|Full contract/ full |
|As above||Zero risk, the |
property is yours