What is the link between the letter of intent to buy and the offer to purchase?

In Hungary it is common that, before a sales contract is signed or even before the buyer consults a legal representative, the buyer hands over money to the seller or to the real estate agent representing the seller in the sale of the property. At the same time as the money is handed over, the buyer usually expresses his intention to buy the property and makes an offer to purchase in a document known as a letter of intent to buy. It varies whether the buyer is really just signing a unilateral declaration for the seller or whether the document is also signed by the seller. The later actually creates a sales contract between the parties.

What is the concept of a purchase offer?

A purchase offer is a unilateral written statement by the buyer expressing to the seller his/her intention to buy the property, specifying at least the purchase price and the property.

What are the minimum requirements for the validity of a purchase offer to buy a property?

1. The seller and buyer must be identifiable
2. The property must be identifiable
3. Includes the purchase price
4. Make clear the buyer’s intention to buy the property
5. The offeror shall make such statement in written form

What is a validity of offer?

According to the Civil Code, whoever makes an offer to conclude a contract is bound by his offer.

The validity of offer have two important legal consequences:

1. Until the expiry of the validity of offer the offeror may not withdraw its offer, the offeror is bound by it.
2. Acceptance of the purchase offer creates a contract of sale between the offeror and the person accepting the offer.

Validity of offer in practice

• If someone advertises their home for sale and a buyer comes forward to buy the property at the advertised price, a written declaration by the buyer that they wish to buy the property at the advertised price, or
• if someone makes an offer to buy the advertised home and the seller accepts the offer,

creates a contract of sale between the parties without any further action needed to be taken.

No mistake, no typo:

A contract for the sale of real property is concluded between the parties merely by the fact that the seller makes a written offer to sell the property and the buyer accepts it in writing.

In reality, the above example usually takes place in one or more rounds. The situation is usually as follows:

• The real estate agent, acting on behalf of the seller, advertises the apartment at a given price.
• An interested party comes along and makes an offer at a lower price. So here the offer is not made by the seller, but by the buyer. He is offering the seller a lower amount than the price offered by the seller.
• The buyer’s offer, as described above, therefore creates a validity of offer. The seller can accept the offer in a further statement.
• With this declaration of acceptance, the contract for the sale of real property has already been concluded, without the parties having the slightest idea of this legal fact.

Sample purchase offer

A sample offer to purchase is most often encountered when a real estate agency is involved in the sale of the property. Below is a typical sample purchase offer used by a real estate agency in Budapest.

What are the pitfalls and risks of using a sample purchase offer?

And this is where the serious problems start. It can be seen that by signing a sample offer to purchase, a contract for the sale of real estate is created between the seller and the buyer in such a way that

• the buyer does not have detailed information about the property at that time,
• the buyer has not yet consulted a lawyer,
• the parties have not yet agreed on the detailed terms,
• and the buyer often does not even know that he is a buyer, thinking that he has just expressed his interest in the property, and then deciding on the way whether to buy it.

Unfortunately, in today’s real estate market, real estate agents do not always inform the parties of the legal nature of this offer to purchase. More often they are not aware of the nature of this legal instrument and the very serious obligations that it entails. The average buyer only starts to look for a lawyer after signing the “letter of intent”. Unfortunately it is a common experience that only afterwards the legal or physical characteristics of the property or the parties’ expectations of the sale contract are revealed, which subsequently leads to the failure of the transaction.

Failure of a purchase offer – refund of earnest money

When using a purchase offer, an earnest money deposit is usually required. If the sale and purchase agreement concluded by signing a sample offer to purchase fails, the fate of the hundreds of thousands or even millions of forints transferred to the real estate agent or the seller is a matter of serious dispute. Unfortunately since the money is with the seller/real estate agent the buyer’s bargaining position is, for all practical purposes, close to zero. From this point, it is extremely painful for these parties to account to the buyer for the money already received, so we often find that the seller will use every legal and not so legal argument to withhold the money received from the Buyer.

If, in the absence of proper legal representation, the parties have not addressed in the letter of intent a condition that emerged during the preparation of the sale and purchase agreement and subsequently became contentious, it is indeed difficult to determine who is entitled to the amount under the law.

How to make an offer to purchase?

Our primary advice is that instead of making an offer to purchase – if it is otherwise clear that there is a willingness to sell the property at the price offered by the buyer – the buyer should immediately provide the seller with a complete, final draft contract of sale, which is essentially an extended offer to buy. Several law firms have the professional background to put the first draft contract on the table within 1 working day, once they have the necessary information. In this way, the risks inherent in the nature of a purchase offer can be completely eliminated.

If the property is being sold with the help of a real estate agent, this route is unlikely to be viable, because without signing a purchase offer and paying a certain amount of deposit, the buyer will not be able to contact the seller.

In this case, the buyer should seek to

• in the offer to purchase, in particular, agree to terms and conditions on the purchase price schedule and deadlines that he can comfortably meet,
• make clear with the seller exactly what the purchase price includes, including the movables in the property, with photographs documenting the condition of the property at the time of inspection,
• last but most importantly, ask for a title deed and a copy of the map of the property – the contents of which should be checked by a professional,

Above all, trust in your good luck that nothing will go wrong afterwards.

Is it possible to withdraw the offer to purchase?

Since the questions in the title are asked more often than would be optimal, it is essential to clarify to what extent it is possible to withdraw the offer to purchase.

The answer to this question is governed by the provisions of the Civil Code on the validity of offer. An offer to purchase by the buyer may be withdrawn until the seller has sent his acceptance to the buyer.

But there is another twist: if the purchase offer specifies the duration of the offer, the offer cannot be withdrawn, and the offer is binding until the deadline specified in the letter of intent to buy.

In practice, a regular sample purchase offer drafted by the real estate agencies under the name of the letter of intent to buy usually contain a clause stating how many days the buyer will keep the offer. Therefore, it is not possible to withdraw from the offer to purchase (even if it is called a letter of intent to purchase).

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In this article, we briefly take into account the most important costs involved in buying a residential property. We have grouped the cost types according to

• costs of buying an apartment
• costs of buying a house
• costs of buying a plot of land

Costs of buying an apartment

Lawyers’s fees

In view of the mandatory lawyer’s countersignature and the mandatory legal representation before the land registry, the cost of a lawyer’s fees is inevitably included in the cost of any property purchase, including the purchase of a home.

Percentage of the fee

There is a huge variation in the amount of legal fees for real estate contracts at national level. Anything in the range of 0.3% to 1.5% of the purchase price can occur. In extreme cases, you may even receive offers to draw up a contract outside this range.

Pricing in our office

For our part, we believe that the best solution is to set the lawyer’s fee for a real estate contract according to the complexity of the transaction, the amount of work involved and the value of the property as an adjustment factor. In this way, there is a minimum fee that will be charged in any contract, no matter how low the value of the property.

The lawyer’s fee, set at 0.5% of the market value, helps you to estimate the lawyer’s fees for a simple property sale contract of average value. If the value of the property is very high, the complexity of the work is the main factor determining the fee. Thus, expressed as a percentage of the purchase price, the fee can be significantly lower than 0.5% if the contract is a simple one, in addition to the high purchase price.

However, in the case of a specific property you have selected, you should contact our office directly. After a short assessment and free consultation, we will provide our clients with a precise quotation for the transaction, including all the costs involved.

Obtaining the abstract of title

An abstract of title of the real property is needed to prepare the contract. The abstract of title will be checked once again on the day of signing the contract to ensure that the legal status of the property has not changed. This makes a total of 2 abstract of title, at a cost of 3.000,-Ft each – from 1 January 2023. Individuals can request an abstract of title free of charge 2 times a year via the client portal. The client portal interface can be accessed by clicking here.

Land Registry procedure fee

In the land registry procedure, an administrative service fee is payable for the procedure to register ownership. This fee amounts to HUF 6.600,-.

Transfer tax

The buyer pays a property transfer tax on the market value of the property acquired. The property acquisition tax depends on many circumstances. If no discount is available, the buyer will have to pay a property transfer tax of 4% of the purchase price (market value). For a property worth HUF 30 million, this means a transfer tax of HUF 1,200,000.

Personal income tax

In addition to the many costs for the buyer, this item is on the seller’s side. Personal income tax is payable on the income generated by the sale of the property. In very simple terms, income is the difference between the purchase price of the property and the amount spent to acquire it. The personal income tax rate is 15% of the income. From the second year after the acquisition of the property, the personal income tax rate decreases in stages, while from the fifth year onwards the seller no longer has to pay personal income tax, regardless of the price for which he sold the property.

Cost of buying a house and buying a plot of land

The items listed as costs of buying a home are necessarily also included when buying a house or a plot of land. There are, however, other items which, because of their special nature, only arise when buying a house or land.

Obtain a copy of the map of the real property

When buying a house or a plot of land, a copy of the map showing the contours of the plot and the building on it to scale must be requested in addition to the abstract of title. The fee is HUF 2.250. The map is also available through the client portal. It can be paid by credit card.

Land parcel measurement

Geodetic measurement of the plot of land to ensure that the actual and legal boundaries of the plot are comparable. In the vast majority of cases, there is a discrepancy between the legal and the actual boundaries of the plot. The question is therefore not whether there is a difference between the two values, but the extent of the difference. Measurement of the plot may be important in order to prevent future disputes and may reveal that fences delimit a smaller plot than the seller advertises or the land register indicates. The cost of the measurement varies, but it can run into hundreds of thousands of forints.

Soil testing

The soil test and soil mechanics test serve to ensure that the buyer is aware of the soil conditions of the plot. This may be of particular relevance to the cost of laying the foundations for a future building project. The presence of possible contaminants and toxic substances in the soil can also be detected by a service provider with the appropriate infrastructure. The cost may take several thousands of forints, but if someone wants to build on the site later, it will be necessary to have it done anyway.

Indirect costs over and above the cost of buying an apartment

When buying a flat, land or a house, there may be additional costs that are not directly related to the sales contract of the property, but which are definitely worth mentioning in connection with the purchase of a property.

Costs related to a loan

If the buyer takes out a loan when buying a home, there are a number of costs, both large and small, that may arise in connection with the loan.

• valuation fee
• fee for notarisation of the loan agreement
• disbursement fee

Fortunately, these items are often reimbursed or waived by the bank as part of various promotions.

Real estate agency fee

When a seller sells his/her home through a real estate agent, a real estate agent’s fee is charged when the sales contract is signed. This is usually around 3-5% of the purchase price. The real estate agent’s fee is charged to the seller, but in practice it is inevitably reflected in the purchase price. It is therefore not indifferent for the buyer whether he buys the property through an intermediary or directly from the owner. If the same property is advertised by both the seller and the owner, buying directly from the owner is likely to result in a better price for the buyer, up to the amount of the agency fee.

Home insurance

It is strongly recommended that you take out insurance on the purchased home when you sign the purchase contract, before taking possession and after the first instalment has been paid.  This is usually a few thousand forints a month or a few tens of thousands a year. Taking out home insurance early on will ensure that the transaction will not be frustrated by an insurance event occurring before the home is taken into possession, as the insurance will cover the cost of restoring the property.

Moving costs

If buying a house or apartment also means moving to a new property, then the costs of moving are inevitable. It may be possible to move a small household on your own, but if you convert your time into money, it is still the cheapest option to use a professional removal company. The cost of a removal can range from a few tens of thousands of forints to a few hundred thousand, depending on the size of the household to be moved.

Example calculation for the cost of buying a home

In the example below, we try to summarise the costs of buying a condominium in Budapest with an average value of HUF 40 million.

• 200.000,-Ft lawyer’s fees
• 6.600,-Ft Land registry procedure fee
• 6.000,-Ft obtaining 2 copies of the abstract of title
• 1.600.000,-Ft property transfer tax
• 150.000,-Ft costs of taking out loan
• 40.000,-Ft annual insurance fee
• 100.000,-Ft removal costs

Total: HUF 2.103.600

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Concept and main features of a real estate sales contract:

Here are the most basic cornerstones of a hungarian real estate sales contract:

• The seller undertakes to transfer the ownership and possession of the property.
• In return, the buyer must pay a purchase price.
• All this must be strictly in writing.

If the above minimum conditions are met, we are talking about a valid contract for the sale of real estate. No real estate sales contract is concluded in the following situations:

• If the parties discuss the above but do not put it in writing, there is no contract for the sale of immovable property.
• If the parties describe the above to each other in an email, the email alone does not constitute a written statement and the contract for the sale of the property is not concluded.
• If the parties agree to sell the property, but the agreement does not clearly state the purchase price or the property cannot be identified, the contract is also not concluded.

Content of the real estate sales contract?

The main feature of the real estate sales contract is that it is suitable for the registration of the buyer’s ownership. The law sets out the minimum requirements for this. Among the requirements of the law, I highlight the following as the most important.

The contract must include:

• data of the contracting parties;
• the capacity of the parties to the transaction (seller, buyer, giver, donee, etc.)
• the topographical number;
• the declaration of nationality of the parties;
• the so-called “registration permit”, whereby the seller unconditionally and irrevocably consents to the registration of the buyer’s ownership of the property;
• last but not least, the lawyer’s countersignature

Footnote: in the case of payment by instalments, the registration permit is not included in the sales contract but in a separate deed, which usually remains in the lawyer’s escrow until the full purchase price is paid.

Legal fees and contractual costs in Hungary

Although it may sound strange at first, the most common question about a contract for the sale of a property is the lawyer’s fees. You can find out more about our office rates here. If you would like to put the scale of our lawyers’ fees in a Budapest context, you can also read a more detailed article on the background of lawyers’ fees.

In addition to the lawyer’s fees, there are only minor costs on average. For example, the fee of HUF 6.600 for the land registry, the fee of HUF 3.000 for the request of the title deed, or the fee of HUF 2.250 for the request of a copy of the map, which is absolutely necessary in case of buying a house and a plot of land.

These costs are usually borne by the buyer. The parties’ business bargain sometimes involves the costs being shared between the seller and the buyer in some proportion or being borne by the seller.

Abstract of title

Data on Hungarian real estate is stored by the Land Registry in the Real Estate Register. Anyone can request an extract of this publicly accessible data by requesting the property register. Democratic access to the data is ensured by the fact that the title deeds can be downloaded electronically, even through the client portal. In addition, private individuals can currently retrieve two title deeds per year free of charge. In addition, the data can be accessed for only 3.000,-HUF.

The title deed consists of three parts, which are indicated by Roman numerals I to III on the title page. The first part contains the details of the property, the second part contains the rights registered on the property, while the third part is the so-called burden sheet, which, as the name suggests, records the encumbrances and facts registered on the property.

Obtaining the title deed is the first, essential step in preparing a contract for the sale of real estate. Without this step, it is strictly inadvisable to enter into any commitment with regard to the contract for the sale of real property.

Purchase offer/declaration of intent to buy

If the buyer expresses his intention to buy the property in a unilateral declaration, he is legally making a purchase offer. Over the last two decades, the legal concept of an offer to purchase has become an almost inescapable issue in the preparation of residential real estate sales contracts in the context of the involvement of real estate agents. Despite this, almost no one is aware that the acceptance of a purchase offer creates a contract for the sale of immovable property.

It is an absurd contradiction in the domestic practice of this legal institution that, in the absence of a purchase offer and the deposit of a certain amount of “deposit”, the real estate agent usually does not allow the seller and the buyer to enter into a meaningful negotiation. Although an offer to purchase could be a useful legal instrument, its role today is often limited to putting the estate agent in a position in the form of a monster called a letter of intent to purchase.

Down payment

The star of internet searches is the down payment. Many people know a thing or two about it, but few understand how it works. The essential function of a down payment is to sanction the wrongful termination of a contract, not to compensate for the arbitrary termination of a contract.

Once you know the basic characteristics of a down payment, you can confidently answer the most frequently asked question about a down payment: down payment or earnest money? A down payment should be calculated according to which party, or both parties, is liable for the failure of the contract. Earnest money, on the other hand, is returned to the buyer unconditionally in the event of the contract being broken.

Pre-contract

It is important to clarify the conceptual confusion, because the pre-contract is the subject of many misleading lay discussions on real estate sales contracts.

A preliminary contract is nothing more than an agreement between the parties to enter into a contract with each other at a later date. In no case does the mere fact that the parties wish to settle a down payment, the buyer takes out a loan or the property is encumbered require such a preliminary contract.

Right of pre-emption

The co-owners’ right of pre-emption is a common feature of real estate sales contracts. Under the Civil Code, the co-owners have the right of pre-emption if the property is in undivided joint ownership. The owners of separate condominiums may be granted a right of pre-emption in the condominium articles of association.

The right of pre-emption means that the seller must communicate the purchase offer received from the buyer, which he intends to accept, to those entitled to pre-emption. If any person entitled to pre-emption accepts the offer in writing, the real estate purchase contract will not be concluded between the seller and the buyer, but between the seller and the person entitled to pre-emption.

Purchase price

Payment of instalments can be made in cash or by bank transfer. In Hungary we always prefer the latter. In the case of instalments paid by bank transfer, no further receipt is required between the parties. If necessary, both the bank sending the money and the bank receiving the money can provide credible proof of the amount credited.

The correct timing of the purchase price is an essential issue for both parties. Ideally, once 10% of the deposit has been transferred, the remaining full amount will only be transferred when the property is transferred. However, since contracts are not concluded in a laboratory, the above rule of thumb is often violated. However, as a point of comparison, it is always worth bearing the above guideline in mind.

Transfer of the possession of the real property

The purchase price instalments must be properly scheduled, not only in terms of amount, but also in terms of timing. The most important element of this dance is that the payment of the full purchase price should always coincide with the handover of the keys. For all practical purposes, the delivery of the last instalment leaves the buyer unprotected against any breach of contract by the seller, so a transfer of possession even 1 day after the full payment is not an acceptable condition. The reverse is also true. No matter how nicely the buyer asks to move in before payment, it is advisable for the seller to wait until the last instalment has been paid before taking possession of the property. Disrupting the dance puts the seller in the reverse vulnerable position already mentioned for the buyer.

Credit

In the past few year’s low interest rate environment, taking out a bank loan is an almost inevitable part of a property purchase contract.

Subject to current legal restrictions, the amount of the home loan cannot exceed 75 or 80 percent of the market value of the property covered, depending on income.

All commercial banks expect bank-specific provisions to be included in the real estate sales contract. For a lawyer who has seen a real estate sales contract up close, this is a routine task.

Mortgage

Since everyone takes out a loan to buy, it is not surprising that the vast majority of properties for sale are mortgaged by banks. As a buyer, there is no reason to be alarmed by mortgaged property, you just need to choose a lawyer with experience.

The basic requirement is that the buyer does not pay the amount required for the discharge of the real property to the seller, but directly to the bank, according to the requirements in the certificate issued by the bank.

Interest on late payment, late penalty

The basic buyer commitment in a real estate sales contract is to pay the purchase price on time. One of the most basic legal instrument to encourage compliance with the payment deadline is the interest for late payment.

The seller is obliged to hand over the keys to the property to the buyer at the same time as payment of the full purchase price. Failure to fulfil this obligation in accordance with the contract may result in a penalty of a fixed daily amount of a few thousand forints.

Cancellation of a real estate sales contract

Every real estate lawyer‘s nightmare. The legal instrument of cancellation is ultima ratio. It is only dropped when no compromise can bring the parties to a common ground. Cancellation is a unilateral statement to terminate the contract. Contrary to a common misconception, such a statement can only be made by the contracting party against whom the other party has committed a breach of contract.

The consequence of cancellation is that the contract is terminated as if it had never been concluded by the parties. The seller repays the instalments received, the buyer returns the property to the seller.

If I take our Office’s practical experience as a starting point, we are talking about theory or isolated exotic cases rather than tangible, everyday practice. In the case of residential property sales contracts, the repayment of even an installment of the purchase price would be a practical obstacle in the event of a buyer’s withdrawal. The seller usually immediately transfers the amount to another home and the average Hungarian family does not have three forints of savings, let alone millions of forints, to mobilise in this extreme situation.

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What is an earnest money?

This is the amount of money transferred when the real estate sales contract is concluded. It is used to confirm the commitment to perform the sales contract. Let’s say that it is a voluntary penalty for breach of contract.

Let’s see how this security-like amount behaves during the performance of the contract.

• If the contract for the sale of the property is fulfilled, the amount of the earnest money is normally included in the purchase price of the property.
• If the contract is not fulfilled and the buyer is liable (for example, if he fails to pay the purchase price or any part of the purchase price specified in the contract), he will lose the earnest money given to the seller.
• If, for reasons for which the seller is responsible, the contract is not fulfilled (for example, if the seller does not take possession of the property), the buyer must repay twice the down payment received.
• If the contract is terminated for a reason for which both parties are responsible or for which neither party is responsible – for example, if the property is destroyed in an earthquake, for which neither party is obviously responsible – the earnest money will be returned to the buyer.

Flat-rate function

It serves as liquidated damages. This means that up to the amount of the earnest money, the contracting party does not have to prove the extent of the damage caused by the failure of the contract. It also means that the amount previously paid as compensation must be included in the amount that has been paid to the seller. This is classically the case for late payment penalties already paid by the seller. Thus, in the event of a default, the seller must pay the buyer twice the amount of the earnest money, deducting the amount of the penalty already paid.

The enforcement of the earnest money does not prevent a party from claiming damages in excess of the down payment from the party in breach of contract. If it can be proved that the damage is even greater than the amount of the earnest money. This amount can also be claimed from the other party.

What is is the regular amount of earnest money?

Payment can be made by cash transfer, by bank transfer or, in justified cases, even by depositing with a lawyer. The common misconception that payment can only be made in cash is therefore wrong. The amount is usually 10% of the purchase price, but may be increased or reduced as agreed between the parties. Our law imposes only one restriction on the amount: if it is excessive, either of the contracting parties may apply to the courts for a reduction of the amount of the excess earnest money. There is no predetermined limit as to when the amount is too high, the court will decide in each case by taking into account all the circumstances of the contract. For the sake of simplicity, let us agree that in general we can’t make a big mistake to make earnest money of less than 20% of the purchase price.

Down payment or earnest money?

The difference between the two legal instruments only arises in the event of the failure of the contract. We have already described how the earnest money behaves in such cases. In comparison, the down payment is nothing more than a mere instalment of the purchase price. Accordingly, in the event of the contract failing, the advance payment is returned to the buyer without any hocus-pocus.

The risks for the buyer

As already explained in our article, if the contract is terminated for a reason for which both parties are responsible or for which neither party is responsible, the earnest money will be returned to the buyer. In theory…

In practical terms, however, the buyer is still in a significantly less favourable position than the seller. If the seller defaults, the buyer would get back twice the payed amount. But since only the buyer pays the earnest money at the time of the contract not only does the buyer not have twice the amount, but the seller has the earnest money in his possession.

In a regular sales contract, the amount of a few million forints of the earnest money is such a serious issue for the buyer that by withholding the amount, the seller is in a “blackmail position”. If the buyer wants to get his earnest money back, he is forced to submit to the seller’s will.

Talking about paying twice the earnest money is unrealistic fantasy. Of course, it cannot be ruled out, as total solar eclipses are observed every century as well.

Sample document – 2023

Google search results show that one of the most popular topics is downloading samples for earnest money from the web. We also receive daily enquiries about whether we can send you a good sample for handing over earnest money. We would certainly gain a lot of popularity if we could make such a sample document available for download directly on our website. Why we do not do this, in the face of the popularity we so much desire, has already been explained in the previous paragraph.

There is no perfect sample document that can read the minds of the contracting parties and work out what terms they want to agree to in the property sale contract. It is not possible to draw up a safe sample document, since any terms that are left out of that particular specimen obtained from the internet, compared to the one drawn up by the lawyer, will be at the risk of the buyer acting on the basis of the sample document in the event of the transaction failing.

In such an undesirable case, it will not be clear whether the payed amount will be returned to the buyer or not, due to the numerous missing conditions. And the empirical psychology of the situation shows that in this situation surrounded by uncertainty, the seller (property owner), who has already spent the amount in his mind, will not have the intention to pay it back.

Misconceptions about the earnest money

It is a common misconception that a party who breaches the terms of a contract for the sale of real property can be exempted from its obligations under the contract by waiving the earnest money or repaying the amount twice. I will not go into more theory than this, so I will give a practical example.

• We often hear that the seller says he has found a buyer who will pay more, so he will return twice the earnest money to the buyer and sell the property to the other competitor, even though he cannot do so. The seller has no such choice. If the seller refuses to perform the contract – for example, refuses to take possession of the property despite paying the purchase price – the buyer can choose to withdraw from the contract and claim back twice the down payment or continue to demand the keys to the property.
• Equally wrong is the mindset of a buyer who thinks he will forgo the earnest money and buy another property. It is entirely up to the seller who has suffered a breach of contract to decide whether, in the event of non-payment of the purchase price, to withdraw from the contract of sale and keep the money or to continue to demand payment of the purchase price. A defaulting buyer has no choice but to release himself from the obligation by waiving the earnest money.

The function of this legal instrument is to sanction the wrongful termination of the contract, not to be the consideration for the arbitrary termination of the contract.

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Choosing a real estate lawyer

Step 1 to buy a real property is always to hire a real estate lawyer! Unfortunately, it is common practice in Hungary for a buyer to first contact a lawyer only after finding the property, agreeing with the buyer and paying a deposit. This also means that the buyer is already committed to the most important aspects of the real estate sales contract, without having any insight into the legal aspects of the issues. No decision should be taken regarding the provisions of the real esetate sales contract without consulting a lawyer. A few examples of such provisions:

• the purchase price instalments
• the procedure for the clearance of the property
• the penalties for breach of contract.

But the list is endless.

In view of the above concerns, the first thought when thinking about buying a property should be to consult a Hungarian real estate lawyer, especially if the property is being purchased by foreigners. Based on general market practice, the consultation will be free of charge, so go ahead and find a lawyer!

It is important that the buyer hires an independent real estate lawyer. So the buyer’s attorney should not be a buddy of the realtor or the seller. As a foreigner, it is easiest to look for an attorney online. Many Hungarian law firms offer their services in English. It is also important to make sure that the real estate lawyer you choose has a good command of English.

The fees for a bilingual lawyer are usually between 0.5% and 1.5% of the value of the property. In any case, the lawyer’s fee will be higher than for a standard Hungarian contract. The lawyer’s fees are usually borne by the buyer.

If you are interested in the specific remuneration of our office, feel free to contact us!

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Searching the property

Once you have a real estate lawyer, the property search can begin. A real estate agency can help you with this. Always seek the advice of a lawyer, as there are undoubted benefits of hiring a real estate agent but also risks involved to do so.

The realtor’s commission fee is paid by the seller, the buyer usually has nothing to do with this, but it is also worth asking about it. Once the property has been selected, the buyer will only be able to proceed if he or she pays a deposit with the real estate agent, set at a percentage of the purchase price. It is in the buyer’s interest to transfer as little amount as possible to minimize the risks of the transaction.

It is important that the process is supervised by a lawyer, otherwise the buyer may lose the amount transferred, especially if the buyer is unfamiliar with Hungarian circumstances.

Check the abstract of title

Data on real estate in Hungary are stored by the Land Registry. Anyone can request an extract of this publicly available data by requesting the abstract of title. The democratic access to data is ensured by the fact that the abstract of title can also be downloaded electronically via the Hungarian client portal. In addition, private individuals can currently obtain two title deeds per year free of charge. As of 1 January, only authentic title deeds can now be requested for a fee of HUF 3.000,- per request.

The abstract of title consists of three parts, which are indicated by Roman numerals I to III on the title deed. The first part contains the details of the property, the second part contains the rights registered on the property, while the third part is the so-called burden sheet, which records the encumbrances registered on the property.

Obtaining the abstract of title is the first, essential step in the process of finding a real-property. In the absence of this step, it is premature to make any commitment in respect of the contract for the sale of the real-property.

Purchase price of real property

Remember that in Hungary, the purchase price of real estate is negotiable. As all sellers know this, the advertised price is usually 2-10% higher than what the seller wants to get for it. Don’t be shy, bargain bravely!

Preparation of a sales contract

Once the offer has been accepted, the contract can be prepared. The documentation is drafted by a lawyer. Although it may be cheaper to draft the contract in Hungarian only, this is not an acceptable solution for a foreign buyer if the buyer does not speak Hungarian.

Ask for a quotation for bilingual legal services, this should not be skimped on. It is not sufficient to have an interpreter or a relative translate and explain the text of the contract. It is a complex legal document where every comma has a meaning.

Signing of the sales contract

Once the draft text has been agreed by the parties, the contract can be signed. This is usually done at the buyer’s lawyer’s office. Avoid signing the contract in an off-site location, such as the real estate agent’s office or the property to be purchased, as the buyer’s lawyer is the main person who can guarantee professional conditions.

Permission for foreigners to acquire real estate

Apart from the exceptions specified in the law, a foreign individual can only acquire the right to own property in Hungary with a government office permit.

A foreign individual does not need to obtain a government permit in the following cases:

• citizens of a Member State of the European Union
• nationals of Switzerland, Norway, Liechtenstein and Iceland
• dual nationals, one of whose nationality is Hungarian
• in case of inheritance

To obtain a government office permit, you must submit the following:

• application form
• an original copy of the sales contract
• HUF 50.000 duty fee
• authentic abstract of title
• notarised copy of passport
• certificate of good conduct

In the majority of cases, the application for a permit from a government office is a formality. When granting a permit for the acquisition of real estate by a foreigner, the Government Office examines the following circumstances.

• Whether the acquisition of property by the foreigner is contrary to the public interest;
• Whether the foreign acquirer is not banned from the territory of Hungary;
• The foreign acquirer is not wanted.

The administrative deadline is 45 days, which the authority may extend. The deadline does not, of course, include the time needed to supplement missing documents. For our part, we usually recommend a 90-day deadline for foreigners to obtain a permit, so that the buyer does not get into trouble because the deadline is too short. If we happen to get the permit before then, we are happy.

Registration of the buyer’s title at the Land Registry

Once the purchase price has been paid in full, the lawyer starts the procedure for registering the buyer’s ownership. The deadline is 60 days, but the process can be accelerated for HUF 10,000. In the latter case, the legal deadline is reduced to 30 days. In practice, once the HUF 10 000 is paid, the “doors open” for the client and, with a little nudging, the registration of title can take place in a matter of days.

Transfer tax on the acquisition of real estate

Tax is payable on the property purchased. This tax is called transfer tax. It is not included in the purchase price. The property transfer tax is levied on the buyer by the tax authorities in a separate procedure after the sale and purchase contract has been concluded. This can be expected 1-2 months after the full purchase price has been paid. In this regard the same rules shall be applied to forigners as to Hungarian citizens.

The documents are forwarded to the NAV by the Land Registry Office, so there is nothing further for the buyer to do.

The rate of the transfer tax is 4% of the market value of the property. In practical terms, the market value is in most cases the same as the purchase price of the property. This means that for a purchase price of HUF 100 million, the buyer pays HUF 4 million in duty.

Calculators are available online to make it easier to calculate the tax:

• ado.hu
• origoingatlan.hu

Exemption from, or reduction of, duty for foreigners

There are some typical cases where the legislation provides for a reduction or exemption from the amount of duty. These rules also apply to the acquisition of real estate by foreigners. Your lawyer will be able to give you precise information about these exemptions.

For example, the buyer is exempt from paying duty in the following cases:

• For sales contract between direct relatives or spouses.
• When buying a building plot, if the buyer undertakes to build on the property within 4 years.
• In the case of a transfer of real estate between affiliated companies.

The buyer is entitled to the reduction of the transfer tax, for example, he has sold another dwelling within 3 years before the purchase or within 1 year afterwards.

Otherwise, in the case of foreigners acquiring real estate, there is no difference in the range of admissible exemptions and discounts, with the exception of the tax exemption in case of applying for the CSOK, to which only Hungarian citizens are eligible.

Other taxes payable on the acquisition of real estate

In addition to the property transfer tax, the acquisition of real estate may give rise to less well-known payment obligations. Local authorities are responsible for determining and levying the rates of building tax and land tax.

Personal income tax is payable on income derived from the use of real estate, and profit tax is payable on profits made by business entities.

An important issue is clarifying the VAT payment obligation if the seller is subject to the VAT Act. In view of the complexity of the regulations, in such cases it is necessary to involve a specialist consultant. Clarifying the issue of VAT is essential not only from the point of view of the seller, but also of the buyer, including the special legal provisions regarding the payment of reverse VAT.

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• Ingatlan vételárának kiegyenlítése – eladói szempontok
• Bacskó Ügyvédi Iroda ügyvédi munkadíja
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