– How property buyers can escape over-indebtedness after a bad investment -.
Selling overpriced real estate for retirement has been a tradition for decades. For the vast majority of buyers, it was the first and last property in their lives. The idea of calling in an independent expert did not occur to the purchasers – even if they were lawyers or tax consultants. The rehabilitation after such a bad investment often starts with having the object and the financing examined by an expert.
Usury or reprehensible attitude of the contracting parties?
The Federal Court of Justice (BGH) assumes an objective usury from an overpricing of about 90% compared to the market value, which entitles to a reversal, § 138 BGB. If the overcharge is less than this, but is at least 50%, the seller must be reprehensible or take advantage of the buyer’s particular weaknesses. For example, this could be disabilities or a lack of language skills as a late repatriate.
Later purchase price discount of the developer does not change the usury
The new ruling of the Federal Court of Justice (BGH) (dated 10.02.2012, Ref. V ZR 51/11) also allows for a reversal if the seller later accommodates the buyer by offering a price reduction. The consequence of usury – i.e. the resulting nullity of the transaction – cannot be eliminated by reducing the purchase price to an amount below the usury limit. Rather, a new performance is regularly required – i.e. in this case a further notarial agreement. Alternatively, the buyer can “confirm” the usurious and thus void legal transaction in knowledge of the real circumstances, which, however, presupposes that the buyer already knows in particular the real market value or the reduced value of the purchased property and is aware of the thus given voidness of the purchase due to usury, § 141 BGB.
Mostly no statute of limitations
In the case of normal breaches of duty in connection with the conclusion of contracts, claims for damages or rescission become time-barred within 10 years. However, claims become time-barred at the latest when the purchaser has knowledge (or grossly negligent lack of knowledge) of the damage and the damaging party, and a further three years have elapsed from the end of the year in which this condition arose.
An additional option with a limitation period of up to 30 years is offered by the so-called tort, § 823 II BGB. If it is a criminal offence, such as criminal usury or fraud, knowledge of the criminal offence is required in the first instance so that the three-year shorter limitation period is set in motion, § 199 I, III BGB.
And if the seller has long been insolvent or no longer exists?
Reversal, as well as any other form of compensation, can often be claimed against the intermediary. Further opponents of claims are structural distributors, as well as credit institutions involved in the distribution of junk real estate.
A consulting error seldom comes alone
A combination of a bullet (repayment-free) fixed-rate loan and life insurance to repay the loan at a later date is widely used in the financing of capital investments. Often the life insurance policies offered in this connection are particularly disadvantageous and not at all particularly suitable as repayment. Low returns on the life insurance policy are then offset by high interest payments on the loan over decades, which are not offset even by any tax benefits from claiming the interest. While most investors are surprised at the long amortization period due to all-too-slow increases in insurance benefits, they do not realize the full extent of the misadvice until they hire an actuarial expert to review it.
Some insurers then explain that the customer was not interested in an optimal repayment of the loan, but in high interest payments to the bank for tax purposes and in the expensive protection of the loan by the death benefit of the insurance, which is why the premium portion used for this risk protection was high and the savings portion only low.
Expensive consequences of wrong advice also for interest and repayment
But exact recalculation by an expert shows often even with allegedly favorable life insurances that a repayment loan – annuity loan – would have been clearly more advantageous possibly with an inexpensive falling death protection correspond to the current repayment. Often the loan could have been repaid up to more than 3 years earlier with the same total annual expenditure, so that completely unnecessary interest and insurance premiums had to be paid in the last few years, a considerable loss.
In addition to this, the surpluses of life insurers, which have been declining since around 2002, reduce the maturity benefits to such an extent that it is not unusual for more than a quarter of the loan repayments to be missing. Here, too, an actuarial review often shows that the insurer had advertised unrealistically inflated profit calculations at the inception of the contract, for which it may still be liable today.
by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
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About the author
Dr. Johannes FialaPhD, MBA, MM
Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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