LEGAL AND GENERAL
If you're not Romanian or not married
to one, buying a house isn't straightforward, but it can be done

by Alina Rosca
June 2004

A friend asked me recently if expats can obtain a loan to buy a property in Romania. I have to say that I answered ëYes' without thinking twice. Then he asked me if I knew the conditions under which he can apply for a mortgage. As I had no clue about these conditions I promised to investigate and revert as soon as possible. So I went to the nearest bank, made an appointment with an account manager only to find that, lo and behold, an expat cannot get a mortgage in Romania!

But as I am not the kind of person who gives up easily and because my friend was desperate for a loan for what he called his ìdream propertyî, I decided to speak to more of the banks that offer loans. Then I also realised that the bank I had just visited was a wholly owned Romanian bank, so I thought that this might actually explain the discouraging answer I'd received.

I went on to visit more of the high street banks, owned or not owned by Romanians. The answer was exactly the same ñ No ñ unless the expat took Romanian citizenship, or can prove that his or her domicile is in Romania.

To qualify for Romanian citizenship or Romania residency a foreigner has to fulfil several conditions over a lengthy time period (for citizenship it is seven years and for residency, six). Under these circumstances, I was able to convince representatives of some of the banks to make a legal exception from the general rule as my friend is a person who has a very well paid job, works for an international firm and intends to live in Romania for the next few years.

Nevertheless, they told me that even if the exception is accepted from the point of view of citizenship and domicile, my ìpoorî friend still has to comply with further compulsory conditions.

I was told that, firstly, he must have an employment or collaboration contract unlimited by time with the company with which he works. His monthly expenses must come to no less than 40 per cent of his monthly income. He would be expected to make a deposit of between 25 and 30 per cent of the value of the property,

and he has to be able to collateralise the loan with another property, and if necessary, cash ñ and furthermore, this would have to add up to one and a half times the value of the property he is hoping to acquire. (Please note that these requirements are not the only requirements for obtaining a loan and that they vary from one bank to another.) My friend had fulfilled all these requirements except one: he did not have an employment or collaboration contract for an unlimited period of time.

I decided to seek an alternative source of finance, and found an investment fund that was ready to give my friend the much needed loan. The conditions under which the investment fund was ready to grant the loan were more or less the same as the conditions imposed by the banks minus the citizenship, domicile and unlimited period of time contract.

Now that we had the finance in place we were ready to conclude a pre-contract with the owner of the property. As me and my friend thought that the hardest time passed we looked forward to the visit to the notary ñ which we believed to be only a formality. We were wrong.

The notary we visited gave us a very complicated, expensive solution to our simple request to conclude a pre-contract. Although I tried to explain in simple terms the details of our proposed transaction, and although we had all the necessary documents with us, the response was the same ñ only a very complicated and expensive solution would do.

After endlessly discussions we had to find another notary. Lucky there are some other notaries in this country who actually have the understanding of simple issues. More dramatic is the situation when the notary is imposed on a buyer by the bank and you cannot replace him. In this situation, the best bet is to substitute the bank with another one rather than argue with the notary. So the question is ñ do the notaries lack the necessary experience and knowledge or is it a habit of theirs to complicate the issues or make them impossible?

All the representatives of the banks I spoke to said that they are not granting loans to expats as the Romanian legislation and the internal central bank regulations stop them from doing so. Studying the legislation and regulations I do not understand why a resident has to have domicile in Romania. In my humble opinion a resident has to have residency in Romania but not be domiciled here. At the end of the day, in order to pay taxes in Romania an expat has to have his residence here but not be domiciled here. If my theory is wrong, then let's have the expat pay the taxes in Romania in accordance with their domicile and not their residence. That will make a huge difference as no expat will have to pay taxes after 183 of days of continuously living in Romania, but after six years.

Further, as we get closer to joining the EU, our legislation has to be harmonised with EU law. I am not aware of any piece of EU law (or even North American law) that requires - for such a simple banking operation as granting a loan - an expat to establish permanent domicile in a country where he or she lives and works temporarily. Moreover, in the UK, for instance, an expat can obtain a housing loan based on his temporary residence and work contract (which does not have to be concluded for an unlimited period of time).

Having said the above I believe that to withhold a loan to an expat does not make sense, because generally speaking, an expat has a higher income than a Romanian. He cannot leave the country with his property in his suitcase, and at the time when he decides to leave permanently he can either sell the property - which means an extra fee for the bank - or decide to pay off the mortgage from outside Romania. Both ways the bank has nothing to lose; if by any chance the borrower defaults on the payment, then fine: the bank will recover its money by claiming the collateral. With a guarantee of one and a half times the value of the loan there is not too much risk.

So who wants the business? Most of the representatives of the banks told me that they desire to take as little risk as possible. I understand this, but at the end of the day in the mortgage business you expect that a percentage of your customers will default. Therefore, the question I ask myself is: do the banks want to do business or not? Do they actually intend to leave a very profitable niche for other financial institutions? If so, they are doing a good job.

Even if there are alternative lending institutions to banks, the potential market is large enough to accommodate more lenders. When I speak about this niche I think not only of expats who are unable to obtain a loan but also about real estate projects for foreign investors. Let's not forget that the number of expats and investors is growing. It is always better to repay a loan than to pay a high rent.

Until changes are made to banking legislation an expat should consider the following alternatives. You can always marry a Romanian citizen (but don't forget that the risk is a divorce settlement), you can obtain domicile in Romania, or you can try convincing a friendly bank to write a letter to the central bank asking for permission to grant the loan. Make sure that your lawyer is ready to argue at length with the notary and the in-house lawyers of the bank or financial institution; or, set up a Romanian company to obtain the loan in its name. This option can become costly as incorporation and maintenance fees need to be paid, and it can be a bit messy from the tax point of view.

Despite the fact that the banking system and legislation remain quite complicated as regards property acquisitions for foreigners, and the fact that quite a few people who are working in the banking system do not have the experience to understand quite simple transactions, expats should not be discouraged from acquiring property here. Do not forget that the real estate market is still on the rise. Moreover, I am sure that the present regulations and legislation will eventually be modified for the better. Until then buy a property, get a smart banker, get a smart notary, and last but not least, get a good lawyer.