The biggest financial scam in Switzerland: real estate in Baurecht
Have you ever heard of buying a property in Baurecht (construction right)? It gives you a 20 to 40 % discount but it’s also the biggest financial scam in Switzerland.
A lot of people aspire to become homeowners. But real estate is so expensive! So any trick to lower the bill is more than welcome.
Introducing… properties in « constructing rights » or Baurecht in German.
Let me tell you all about this wonderful idea: Instead of buying a house and the land on which the house is built, you buy the house and lease the land. That way, you can reduce the price by the 20-40%. Sure, you have to pay « rent » to use the land but who cares about that? Right? RIGHT?
In order to understand why buying in Baurecht is the one of the most terrible thing you could do with your money, we first have to get a few facts straight about real estate.
The true value of real estate
Imagine having the choice between living in a brand new house or living in the exact same house built 20 years ago. Which one would you choose? Well, the brand new house sounds more appealing to me: everything inside is new, so it’s expected to work properly for a few years. There is a builder’s guarantee (usually valid for 10 years) in case something has been poorly designed, like a leaky roof. Plus, new houses just look… better: fresh paint, spotless floors, etc.
Since the new house is more desirable than the old house, the new house has to be worth more money, right?
In general, a house, just like a car, gets less and less desirable every year and therefore loses value every year.
WAIT a second! I thought real estate prices were climbing every year! How can it be that houses lose value every year and, on the other hand, real estate prices increase?
So glad you asked…
First of all, prices of equivalent properties tend to increase year over year, yes. But read that again: prices of equivalent properties tend to increase. Which means that the price of a brand new house is higher now than it was 10 years ago. But it doesn’t mean that the price of the new house you bought 10 years ago is higher now, because the house isn’t new anymore!
So, it’s not because the price of real estate increases every year that the value of your house increases as well. If you bought a new house, no matter what the market does, it will lose value during the first few years. For « used houses », the drop in value isn’t that visible because buying a 20 year old house or a 25 year old house doesn’t matter that much: in both cases, it’s an old house.
That’s lesson number 1: don’t be mislead by the trend in real estate prices. It doesn’t mean that your house is increasing in value.
Yet, we always hear about people who bought a house for 500k thirty years ago and sold it for 2 millions, what about that?
Well, the first thing to consider is inflation. 500k thirty years ago was way more than it is today. Second is that throughout 30 years, they probably invested quite some money to maintain the property and that should be added to the acquisition costs. But even accounting for that, the property effectively grew in value, even though the house itself became less and less desirable.
Do you see where I’m getting at?
A property is composed of two things: the land and the construction on the land. If the property increased in value and the construction on the land decreased in value, it can only mean one thing: the land must have grown in value! So significantly that it compensated the loss in desirability of the construction.
The true value of real estate as an investment is in the land, not in the building. The building just loses in value: it gets older and leakier. But the land tends to become more valuable as more and more people want to live in certain areas of the country.
Why Baurecht is a terrible deal
Now that we have this sorted out, the reason why buying in Baurecht is a terrible financial decision is straightforward: you are buying something that loses value (the building) while leasing something that grows in value (the land).
In addition to that, even if the lease payment seem quite reasonable, the lease always has an end date. What happens at the end of the contract? Terms are renegotiated. And are you in a good bargaining position with the owner of the land? « Good bargaining position » is nothing but the ability to leave the negotiation table. Think about it: your house is built on this land. You’ve paid a couple of hundred thousands for it. You can’t move it. You can’t sell it because nobody will buy in Baurecht unless they know how much they will have to pay for the lease. So… you’re helpless!
What about the land owner? It’s his land ; he is entitled to do whatever he pleases with it. If he wants to double the lease payments, what’s standing in the way? If you don’t agree, he can kick you out: you’re on HIS land. Of course, he has to compensate you for the building, but we all know now that it’s going to be less than what you paid for it. So you’re going to take the deal and accept the higher payments.
And you and your family will remain at his mercy for all eternity, since your children will inherit the house and his children will inherit the lease. In the mean time, the value of the land will likely continue to increase while the value of the building will continue to drop.
Alright, I’m done. Don’t buy a property in Baurecht. On the other hand, if you happen to own land, the other side of the deal does look quite sweet…