Is selling your house in instalments an underestimated opportunity or an incalculable risk? This model can expand your pool of buyers by up to 15%, but it also entails risks. We show you how to make the process secure and avoid financial disadvantages.
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The topic briefly and concisely
Selling a house on installment broadens the range of buyers, but requires notarization with an enforceable clause for security.
The safest method for sellers is the retention of title, where the property only transfers to the buyer after the payment of the final instalment.
By spreading the income over several years, you can potentially reduce your tax burden on the sales profit by up to 20%.
You want to sell your house, but the buyer can't pay the full price immediately? Selling a house in instalments is an alternative to the traditional sale that can open up new groups of buyers. Instead of a one-time payment, you receive the purchase price over a set period in monthly instalments. This model, also known as seller financing, requires precise contractual security to minimise the risk of payment default, which can occur in over 5% of cases. This article guides you through the legal fundamentals, contract design, and the necessary security mechanisms so that you can make an informed decision.
Key Points: Weighing Opportunities and Risks
Selling a property on an instalment basis can be a strategic decision to expedite the sales process and utilise tax advantages. At the same time, it carries financial risks that require careful planning.
Extended Buyer Pool: You reach potential buyers who cannot obtain 100% financing from banks, which can expand the potential buyer market by an estimated 10-15%.
Risk of Default: The main risk is the buyer's insolvency. Without proper protection in the land registry, this can lead to a total loss of the remaining receivable.
Tax Advantages: Proceeds from the sale are stretched over years, which can potentially reduce the capital gains tax burden if the 10-year deadline has not yet expired.
Contractual Complexity: An instalment purchase contract is more complex than a standard contract and always requires notarisation with specific protective clauses.
Interest Income: You act as a lender and can charge interest on the deferred purchase price, often at 1-2% above current mortgage rates.
A sound neutral valuation is the basis for any sales decision and protects you from misjudgements.
Basics of Instalment Sales: Legal Considerations
To sell a house on instalments means essentially granting the buyer a loan. This process must be notarised to be legally binding. Verbal agreements in this context are worthless and offer no security. The notarial contract regulates all the details and serves as your most important protection instrument. The costs for the notary, which are determined by the Court and Notary Costs Act (GNotKG) and amount to about 1.5% of the purchase price, are usually borne by the buyer. Ensure that the contract includes an immediate submission to compulsory execution. This clause provides you with an enforceable title, allowing you to execute without lengthy legal procedures in the event of payment default. The property transfer tax, by the way, is due immediately in full after the contract is concluded, not only after the last instalment has been paid. These legal conditions form the foundation for a secure sales process.
Seller Safeguards: How to Minimise Your Risk
The greatest risk in hire purchase is the buyer's default on payment. To protect against this, there are two primary security models that must be notarised. Careful planning can significantly reduce the financial risks.
Retention of title until full payment: In this option, you remain the legal owner of the property until the final instalment is paid. Although the buyer is noted as the beneficial owner in the land register (pre-registration), the final transfer only occurs after the complete purchase price is paid. This is the safest option for sellers.
Registration of a mortgage to secure the remaining claim: Here, the buyer is immediately registered as the owner. At the same time, a mortgage in the amount of the remaining purchase price is registered in your favour in the land register. Should the buyer default, you can enforce through this mortgage. This model carries a higher risk if the mortgage is registered only as a secondary charge.
Additionally, the contract should always include a detailed arrangement for default interest, which typically is 5 percentage points above the base rate. These mechanisms are crucial for effectively securing your claims.
The notary contract: These clauses must not be missing
The notarial contract is the cornerstone when selling a house in instalments. It must contain far more details than a standard contract to protect both parties. Inadequate contract drafting is one of the biggest mistakes in private property sales. Pay attention to the precise wording of the following points:
Exact payment schedule: Precise amounts of instalments, due dates, and the total duration of the contract. A term of 5 to 10 years is common.
Interest on the remaining debt: Determination of the interest rate for the deferred purchase price. Currently, interest rates of 4 - 6 % p.a. are market-appropriate.
Enforcement clause: As previously mentioned, it is essential for the buyer to submit to immediate enforcement.
Maintenance regulations: Clarify who is responsible for repairs and maintenance costs during the instalment payment phase. Usually, this is the buyer as the beneficial owner.
Special termination right: Agree on a right to terminate the contract without notice if the buyer falls behind with more than two instalments.
Re-transfer reservation note: This secures your claim to re-transfer ownership in the event of the buyer's breach of contract.
A thorough review of these clauses protects your assets and ensures a clear legal framework.
Tax aspects and potential savings
An often overlooked advantage of installment sales is the tax structuring possibilities. If you sell a property within the 10-year speculation period, the profit is fully taxable. However, with installment sales, the profit is distributed over the duration of the installment payments. This allows you to break the tax progression and reduce your overall tax burden by up to 20%. The taxable profit is allocated proportionally per year, which leads to significant benefits in years with lower income. However, note that interest income from the seller's loan is considered as income from capital assets and must be taxed at the flat rate of 25% (plus solidarity surcharge and possibly church tax). For an accurate calculation, consulting a tax expert is essential to avoid pitfalls and optimize the financial conditions.
Conclusion: Making a data-driven decision
Selling a house on instalments is not a cure-all, but a financial instrument with clear pros and cons. It can broaden the pool of potential buyers and allow for tax benefits of up to 20%, but also exposes you to the risk of payment default. Success depends almost entirely on comprehensive contractual security. An enforcement clause and a land charge or a reservation of title are indispensable. Before considering this route, you need an objective foundation. A professional, AI-supported property valuation like the one from Auctoa provides you with the exact market value and the necessary data basis. Unsure if selling on instalments is right for you? Use our ImmoGPT chat for an initial, complimentary assessment of your situation. Make your sales decision not based on gut feeling, but on valid data.
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Additional useful links
Verbraucherzentrale provides important information on the pitfalls and risks of partial property sales.
MDR highlights the specific risks of partial property sales, especially for seniors.
Sparkasse explains the concept of rent-to-own and assesses its opportunities and risks.
BDO offers insights into the tax treatment of non-interest-bearing purchase installments in property sales.
Statistisches Bundesamt (Destatis) provides official data and indices on construction prices and the property price index.
Statistisches Bundesamt (Destatis) offers detailed statistics on house and land prices.
Deutsche Bundesbank presents its indicator system for the analysis and assessment of the German residential property market.
FAQ
What interest rate should be applied to a private installment sale?
The interest rate is negotiable. A useful reference is the current market interest rate for mortgage loans with a comparable term. Typically, a markup of 1 to 3 percentage points is added as compensation for your personal risk. With a current mortgage rate of 3.5%, an interest rate between 4.5% and 6.5% for the seller’s loan would be appropriate.
What documents do I need for selling on instalments?
You will need the same documents as for a regular house sale: a current land register excerpt, the cadastral map, building plans, the energy performance certificate, a living space calculation, and proof of modernisations. Additionally, a credit check of the buyer (e.g. Schufa report, proof of income) is highly recommended.
Who is responsible for maintenance during the instalment period?
Normally, the buyer becomes the 'beneficial owner' upon signing the contract. This means they are responsible for all costs, burdens, and maintenance of the property, even if they are not yet the legal owner. This provision must be explicitly stated in the notarial contract.
Can I terminate the installment purchase agreement early?
An ordinary termination is generally not provided for the seller. However, you should ensure that an extraordinary right of termination is included in the contract in the event of significant payment delays by the buyer (e.g., in the case of two or three consecutive missed instalments).
How does selling in instalments affect an existing mortgage?
If your property is still encumbered with a mortgage charge, this must be cleared before the sale, or assumed by the buyer. A sale by instalments is more complex in this case. Often, the purchase price must be structured so that the remaining debt with the bank can be paid off with the first instalments or a deposit, in order to have the mortgage charge cancelled.
Is an installment sale a good option for heirs as well?
For a community of heirs, selling on installment might be a way to dispose of a property without having to agree on a single sale price that is due immediately. The regular installments can be easily divided among the heirs. However, all co-heirs must agree on the contract terms and share the increased risk together.
