How to buy an apartment building?

Despite the fact that one of the domains of the Affordable Advocate office is to focus on real estate services, we have encountered the purchase of apartment houses rather sporadically. This makes us all the more attentive to the individual steps and point out the specifics to our clients.

What do we call an apartment house? Wikipedia states that it is a building with several apartments in which tenants live and for this they pay a payment called rent or rent to the owner of the apartment or house. According to this definition, it is not necessarily a brick house, which we typically think of as an “apartment building”, but theoretically maybe a prefabricated building.

Buying an apartment building requires teamwork first and foremost. It is necessary to coordinate the individual steps not only with the legal representative of the other party to the purchase contract and with real estate brokers, but often also with a financial advisor who advises on the financing of the transaction and with an expert who can correctly estimate the return on investment. As a rule, there are usually more than one person on either side of the purchase contract, which can also shuffle the cards in coordinating the process.

Specifics of the contract for the sale of an apartment building

Let’s take a closer look at the individual differences.

• Complexity of the transaction. All leases need to be reviewed to see if there are any long-term liabilities or problematic tenancies. It is a good idea to find out not only what is given on paper, but also to look into what the real relationships in the building are. And that requires a certain amount of almost detective work.

From the point of view of the future management of the house , it is usually preferable to have tenantless flats, as you can easily renovate the flats, find the tenants you want to contract with yourself and, above all, set up the lease agreements as you see fit. You also have a free hand if you plan to sell off individual apartments. However, it should be stressed that if the apartments are already occupied by tenants, this does not prevent the transaction.

According to the Civil Code, it is generally true (not only for real estate) that if the owner of the property changes (e.g. on the basis of a purchase agreement), the rights and obligations under the lease pass to the new owner. This means that even if the new owner or the prospective buyer does not care, the rent will continue to be paid and, very importantly, under exactly the same conditions as the previous owner. The only change in the tenancy relationship will be that the new owner will become the landlord (automatically).

• Yield: an apartment building is usually acquired as an investment opportunity. However, this means obtaining detailed information on the number of units, occupancy, operating and management costs and other economic aspects. Of course, the intention of the future owner is essential: either to sell the property on a unit-by-unit basis or to rent out the units. Of course, a combination of both is also possible.

For the owner, renting represents a source of income, but on the other hand it also entails considerable costs for the management and maintenance of the building.

A prospective homeowner should also be interested in circumstances outside the building before buying, such as construction plans around the building, future subway construction or other major changes in the area. These may increase the price of rent (or apartments if sold) in the long term, but in the short term they only present tenants and prospective tenants with noise, traffic changes and a number of problems that may discourage them.

The key to ensuring profitability is to ensure that the financing of the transaction is such that the repayment of loans with fat interest does not outweigh the benefits of the investment. With the help of an expert, a detailed calculation of all costs, repayments and, on the other hand, potential profits, is necessary.

• Legal aspects. This should ideally be entrusted to an experienced lawyer. In the case of an apartment building, the establishment of certain easements can be expected. Typically those relating to utilities. Easements do not interfere with the sale, but it is necessary to get acquainted in detail with their content so that the owner has an idea of what he will have to endure within his property (for example, the right of a third party to establish or run water, sewer, power or other lines on or through the servient land). Other legal specifics may relate to the regime of common areas, or issues related to the rights and obligations of tenants.

• Technical condition of the building: Before any purchase, it is essential to check the technical condition of the property. While for the purchase of an apartment unit we are interested in, for example, the associated basement and the planned repairs in which the owner of the apartment will participate, when buying the entire building the perspective changes radically. The condition of the entire building, including common areas, roof, basements, elevators, etc., must be examined in detail. This is where working with an experienced builder or architect comes in, who will help to estimate what investments will be needed in the near future in connection with the property and what their amount will be. Older buildings in particular are often in need of renovation and modernisation and can suffer from problems such as damp. Issues such as a leaking roof or an uninsulated basement, which may be of only remote concern to the owner of a single dwelling unit, are in this case the full responsibility of the owner.
• Legal documentation: even contracts for a single dwelling unit require drafting by a reliable person with an eye for detail. In the case of such extensive contractual documentation that buying a house entails, it is necessary to keep track of all the numbers, designations, measurements and other details. A single mistake could result in the proposal being returned from the Land Registry and a new deadline running. This is why a team of lawyers usually steps in to check every single item of the contract several times. In addition to the purchase contract, the documentation also includes a contract for a future contract and, as a rule, an escrow and pledge agreement.

• Tax aspects: although the property tax was abolished in 2020, a number of obligations remain. For the seller, this mainly concerns the income tax on the sale of the property, and for the purchaser, the subsequent registration for property tax, filing of the tax return and the actual payment of the tax.

• Financing: it is naturally more challenging for a buyer to obtain financing for the purchase of a condominium by the very nature of the fact that the purchase price tends to be many times higher. Even banks are therefore more vigilant in granting loans and mortgages.

• Liabilities to tenants: As mentioned above, if the existing tenants remain in the house, the new owner assumes all liabilities to them. It is important to be aware of any existing contracts and any problems in the house.