Buying real estate: The most common mistakes

An average private household has more than half of its net worth invested in real estate. This emerges from data from the Swiss National Bank.

This makes it all the more important that you proceed meticulously when purchasing your own apartment or single-family home. Careless mistakes can have costly consequences. This applies both to finding a suitable property and to taking out a mortgage.

Anyone who buys a new property has to deal with a multitude of players involved, all of whom pursue their own financial interests, but do not always play with open cards. Be it the broker, the general or total contractor, the architect or the bank.

An overview of known pitfalls.

Blind trust in a new building project

For a new construction project, you should always obtain references from the seller, but also from the general contractor and the architect before signing the contract. If you have already had the purchase contract notarized and the deposit transferred, it is too late for that.

The preliminary investigations should focus on solvency issues and construction quality. It’s a warning sign if you can’t find out anything about a company involved in the construction, says Zurich real estate agent Rolando Guglielmetti.

On the other hand, if the company can already demonstrate several successfully completed projects, that is a good sign. “Most companies do really good work, but unfortunately there are also some that have caused problems in the past,” says Guglielmetti.

If in doubt, you should obtain an extract from the debt collection register of the respective contracting party. In the past, he himself also witnessed a general contractor go bankrupt. «The other partners involved were able to save the project. But the case shows that you shouldn’t use your money carelessly.” Whenever possible, it makes sense to transfer deposits to a blocked account or to a dedicated and project-specific account that is monitored by the bank.

Deciding under time pressure when purchasing an existing property

However, the probability of being able to secure an apartment in a new building project is comparatively small because construction activity in this area is modest. The range of existing properties is larger. Especially since the interest rate turnaround, an increasing number of existing properties are coming back onto the market.

But even when buying an existing property, you should look carefully and not make any hasty decisions – for example because you are afraid that someone else might snatch the property away from you. You should definitely view the property more than once to identify any weak points and to ensure that you are not paying a price significantly above market value. An absolute no-go for existing properties is buying based on photos on the Internet, i.e. without even viewing the property.

For older properties, it is worth consulting an architect or other specialist who can help you assess the building structure. For example, if the house with the dream view is on a slope and cracks are discovered on a wall, this could indicate a defective construction. In order to estimate the costs for a planned renovation, it also makes sense to work with experts. For older properties, higher maintenance and additional costs are generally to be expected, as well as renewal costs depending on the condition.

The energy condition of the house, i.e. the insulation and heating, is also becoming increasingly important, says the real estate agent Guglielmetti. “The kitchen or bathroom are less important.”

Negotiating too little when closing the mortgage

Blind trust is also out of place when taking out a mortgage. The mortgage interest rates that banks publish on their websites are often so-called showcase interest rates. They are deliberately set high so that the customer advisors have the opportunity to grant generous discounts in a personal conversation. A marketing tool, then.

If you don’t compare and get multiple offers, you run the risk of placing an unnecessary additional financial burden on yourself with mortgages with long-term fixed interest rates. “Hardly any bank offers the best possible interest rate. In many cases, the negotiation with the customer advisor is reminiscent of a bazaar,” says Florian Schubiger, co-founder of the consulting firm Vermögenspartner and operator of a mortgage comparison platform. If you get offers from five different banks before closing, you can assume that the best offer isn’t too bad.

Schubiger advises caution with eco-mortgages, where mortgage lenders offer lower interest rates for properties if they are built according to ecological standards. The sustainability discounts often only apply to part of the mortgage or for a limited time. This puts the amount of the discount into perspective when you consider that this often also refers to the shop window interest.

As a customer, you should be aware that some banks encourage their advisors to sell certain types of mortgages more frequently, depending on the situation in their own balance sheet and the macroeconomic environment. Fixed-rate mortgages are more lucrative for banks and give them a higher margin. However, in times when interest rates are generally low, selling money market mortgages is also attractive.

Financial miscalculation on the mortgage

Money market mortgage or fixed-rate mortgage? Two or ten years? Two or three tranches? There are many choices when it comes to taking out a mortgage. Many home buyers rely on their gut feeling when making their decision.

However, the financial advisor Schubiger particularly advises against taking out mortgage tranches with very different terms. When the tranche with the shorter term expires, you usually have no choice but to stay with your current mortgage lender. “This weakens your negotiating position and in most cases you no longer receive a competitive interest rate when you renew your mortgage. It’s better not to stagger too much.” He recommends a difference of no more than 12 to 18 months between the terms.

Anyone who decides on a money market mortgage that is based on the Saron reference interest rate should ensure that they can continue to sleep well even if interest rates rise significantly. The past two years have shown that an abrupt change in key interest rates is not just a theoretical possibility.

Older home buyers should also be careful not to tie up too much equity in their home in case they need to rely on liquidity again in the future. However, it just doesn’t make sense to have large, low-interest sums in your bank account while you’re paying interest on a high mortgage. “In this way, you actually finance your own mortgage and become the bank’s water heater,” says Schubiger.

Time pressure can also become a factor when taking out a mortgage. It happens that home buyers who have won the bid from the seller are held off by the mortgage lender until the last moment, says financial advisor Schubiger. He advises caution when an advisor says sentences like this: “If you decide today, I will give you a discount of 0.1 percentage points.” Or if the lender wants to sign the contract before the interest rate is defined.

Paying little attention to the small print

When buying a home, you have to deal with sales contracts, building specifications, work contracts and other documents. If you read the small print carefully and seek advice, you can save yourself a lot of trouble in the event of construction defects and delays. Things can become inconvenient if the general contractor passes on liability for defects in the contract to subcontractors – which is often the practice today.

The same applies to mortgages: Some banks provide for an exclusion of offsetting in their loan agreements, which is disadvantageous for the debtor if the institution goes bankrupt. He remains stuck with the full mortgage debt, but loses that part of his deposits that exceeds the 100,000 francs guaranteed by the deposit insurance. If you are uncomfortable with this, you can request that this clause be deleted so that, in the worst case, debts and credits can be offset against each other.

According to the consultant Schubiger, certain banks also reserve the right to “securitise” the real estate loan, i.e. to sell it on to other players on the financial market in order to obtain liquidity. The investor who takes over the mortgage from the bank could treat the homeowner less squeamishly than the house bank would in the event of a crisis or if the customer defaults on payments. If you don’t want to take this risk, you can request that these clauses be deleted from the contract and switch to another lender.

NZZ live event: Home ownership: How the dream becomes reality
From a financial perspective, is it still attractive to purchase a home? We discuss developments on the Swiss home market, the options for real estate financing – and how this is related to retirement provision.
Wednesday, November 22, 2023, 6:30 p.m., NZZ Foyer, Zurich, and online
Tickets and further information can be found here