July 9, 2022
We have signed a Promissory Note to purchase a 5 bed, 3 bath townhouse in the Algarve region of Portugal that currently has paying tenants generating 1,625 EUR/month. There are 7 tenants but 2 of them are couples. The townhouse actually has 6-7 rooms that could be used as bedrooms. Interestingly, one of the bedrooms is empty and, instead, the living room is currently being used as a bedroom. Then there is a room with the water heater in it that is large enough to be a small bedroom but is currently being used as a large closet stacked with random articles.
The purchase process has been very interesting so far. When we went to view the property, there was a French mother and daughter who viewed it immediately prior to us and put down a cash offer at 225,000 EUR which was the list price. After we reviewed the property we offered 252,000 EUR contingent on the owners taking the offer as stated and not going back to the French with the offer. The owner agreed to this verbally but took the offer back to the French. The French then agreed to 265,000 EUR with the owners and signed a Reservation Agreement with the owners to try and secure the property. However, in talking to our Portuguese lawyer, we were told that a Reservation Agreement is not legally binding in Portugal (which seems to be true based on what happened next). So, we made an offer at 290,000 EUR. The owners then indicated they would proceed with us as well as the French and only conclude the process once a Promissory Note was signed which is legally binding and includes a non-refundable down payment of 10% towards the purchase price of the property. Due to some issues that came up upon further review of the property, we reduced our offer to 285,000 EUR. The owners scheduled signing of the Promissory Note with us as well as with the French on the same day several hours apart. We only discovered this on the day of signing and I am uncertain if the French were aware. Our appointment was first, almost certainly, because our offer was higher. We attempted to negotiate the price down further in the meeting but our Lawyer’s Assistant actually began negotiating against us!!! This negatively affected our position and we were unable to obtain further price reductions. We signed the Promissory Note but, as we discovered several issues with the property including: mold in one of the bedrooms and water damage/mold in one of the bathrooms caused by a particular tenant who did not properly ventilate the back room/bath by opening the doors/windows, water damage showing in the dining room wall, efflorescence on one ground floor wall, drain pipe crack and mold in the small courtyard, roof tiles cracked and roof improperly/ temporarily fixed with roof tape.
So, we added an Addendum to the Promissory Note whereby the owners would rectify these issues prior to the transfer of the Deed. Once we signed, the owners cancelled the appointment with the French which was only one hour later by that time (to be fair, our appointment lasted about 4-5 hours due to the negotiations and addendum we required to be added). The French bidders were enraged and we were informed they made numerous verbal threats to the real estate agent who informed them, the owners, and even us as the competing buyers. So far, those threats have not translated into any physical violence or property damage but we will certainly watch our backs. I am not really surprised at their reaction but, it was clear through the process that the owners were working all angles and Bi and I actually were wondering how it would all work out.
The Promissory Note indicates that we will accept the current leases which, in several cases, extend for another 12 months from June. One of the leases is with the tenant that nearly destroyed one bedroom and a bathroom by creating the mold and water damage issues via lack of ventilation. Why are the owners requiring us to take on this tenant? Is it because they do not want to deal with evicting the individual? I am not sure but there will certainly be more to the story.
Lessons Learned So Far:
1) A property is not locked in until the Promissory Note is Signed. This will likely require a 10% non-refundable deposit from you.
2) Depending on the ethical nature of the Sellers and their Real Estate Agents, a Reservation Agreement may or may not allow you to lock in pricing and prevent a bidding war (it is worth an attempt in my view but you must then proceed quickly to the signing of the Promissory Note).
3) Verbal Agreements should be considered absolutely worthless.
4) Be Ultra Careful about your Lawyer and even their Assistants who may not act on your behalf.
What do you think? Are we over-paying? Have we made a terrible decision? Is this good for diversification or a foolish risk to take in retirement? I am not sure yet but it will be an adventure no doubt! Let us know your thoughts.
Are they really going to fix the problems? Why didn’t they drop you and sell to the French to avoid fixing anything?
Yes, the Promissory Note includes an Addendum they signed whereby they must fix the issues before the signing of the Deed Transfer. The repairs will be reviewed and approved by whomever we choose.
They could have dropped us and sold to the French but we were offering a higher purchase price than the French. So, it was heavily in their interest to take our offer and do the repairs.