Buying real estate in Portugal can be an exciting and rewarding investment, but there are also potential pitfalls that every buyer should be aware of. Whether you're a first-time buyer or a seasoned investor, understanding these potential risks can help you make informed decisions and avoid costly mistakes.
Understanding the Risks in Real Estate in Portugal
Investing in Portugal's real estate market can be highly rewarding, but there are also risks involved.
1. The Promissory Agreement Trap
One of the most common pitfalls in buying property in Portugal is the promissory agreement, which requires a down payment of 10% to 20% of the final property price. However, in some cases, the seller may go bankrupt, pass away, or disappear with the money before the deal is finalized. Additionally, if a buyer fails to secure a mortgage, they might be unable to complete the purchase and risk losing their deposit.
To mitigate this risk, it is crucial to include clauses that protect the buyer in case financing is denied. Additionally, ensuring that the promissory agreement is properly registered in government property records can provide additional protection.
2. Buying Properties Without Licenses
Recent legal changes in Portugal real estate laws allow the sale of properties without a habitational license. While this might seem like a shortcut to acquiring investment properties in Portugal, it can be risky as the government may reinstate stricter regulations in the future, making such properties difficult to resell or legally inhabit.
3. Multiple Sales Fraud
Unlike in many other countries, it is not mandatory in Portugal to register a notice of sale on the title registry. This means that a dishonest seller can sell the same property to multiple buyers, leading to legal disputes. At Fresh Portugal, we ensure that all promissory agreements are officially registered, offering clients additional legal protection.
4. Real Estate Agents
Real estate agents in Portugal are good at what they do, sometimes very persuasive, and almost always work on the basis of pressure and the eventual loss of the deal by the buyer, due to high demand and low supply. In this sense, it is essential to be aware that in Portugal there are no real estate agents for buyers, what there are are real estate agents paid through the real estate commission delivered solely by the seller. In this sense, the seller only gets paid if the property sells, which translates into minimal accountability to the buyer and extreme dependence on the seller.
Portugal’s Mortgage System
Portugal’s mortgage system is quite different from other countries. Getting a mortgage in Portugal is tied more to the borrower than to the property, and there are strict age limitations. Most banks will not approve mortgages for individuals older than 70 to 75 years old. For buyers over 55 or 60, this means shorter mortgage terms with higher monthly payments.
Furthermore, Portugal’s mortgage approval process is highly relationship-based. Knowing the right banker or mortgage broker can make the difference between approval and rejection. For example, individuals earning income through LLCs or dividends need professional guidance to properly present their financial situation to Portuguese banks.
Property appraisal is also extremely important. Due to high demand and real estate speculation, many properties reach prices above the real market value for the purposes of an appraisal, which can lead to problems in terms of mortgages. While the agreement between the seller and the buyer specifies a certain price, and this price is certainly what the market is willing to pay, if the bank appraisal does not reach this value, the bank will never finance the purchase based on the deed price, but rather on the bank appraisal price. Extra care when assessing the price is essential to avoid disappointments.
Where to Invest in Portugal Real Estate?
For those looking to invest in Portugal real estate, location and property type play a crucial role. Here are some top choices based on different budgets:
1. €200,000 Investment
- Consider purchasing a small house or a ruin in central Portugal.
- Renovating the property can lead to high rental returns.
- Challenges include finding reliable builders and securing favorable construction contracts.
2. €500,000 Investment
- Lisbon and Algarve are prime locations, offering strong rental demand.
- Short-term rental properties in Portugal with existing licenses are valuable as new licenses are no longer issued.
- Porto is also emerging as an attractive alternative.
3. €1,000,000+ Investment
- High-end properties in Lisbon, Algarve, and Porto offer capital appreciation.
- Luxury real estate in Portugal and commercial real estate provide diversified income sources.
Is Portugal Real Estate Still Booming?
Despite concerns about affordability and some warnings from financial authorities, Portugal’s real estate market remains strong. A growing number of expats buying property in Portugal, especially from the US, are driving demand. Portugal property investment is also supported by political stability and the expectation of lower interest rates, ensuring continued market growth.
For those considering buying real estate in Portugal, now is an excellent time.
