Investment Apartments in Germany -- High Court Ruling on Rent Pool and other Guarantees
by Uwe Falkenberg

Operative provisions of the judgement:
A vendor of investment property with a rent pool has to state all costs and risks likely to be incurred by the investor.

Background:
The vendor buys and renovates apartment blocks to divide them into condos and sell those individually. An investor (the plaintiff) bought such a property and joined the rent pool. He demands the contract to be reverted and the purchase price plus damage to be paid back. He claims incomplete and wrong information in the sales process.

Ruling:
The vendor is in violation of providing the required information if claiming to positive expectations with regard to the return on the investment. This applies when the investor joins the rent pool at the recommendation of the vendor. The risk of repairs and vacancy in other apartments has to be quantified and shown in the calculations and not only mentioned on the side. While advising on property as an investment the expected cost is a key figure in the calculation. It has to demonstrate that the vendor not only is in the position to buy the property but also to maintain it. The investor can assume that the vendor has included all risks in the calculation. Vacancies or repairs at a normal scale should not immediately reduce the yield promised at the purchase.
BGH ruling 30.11.2007, V ZR 284/06

Comment:
As a reaction many vendors working with such a system have tried to solve the problem by providing a guarantee. The intention is to picture a higher value than the actual value at the time of the offer and thus demanding a price higher than the current actual value. Here are some questions to ask when considering such a purchase:

Rent pool: Demand to see the actual rent of your investment apartment and find out whether you are subsidizing less valuable apartments or you are given a higher rent than your apartment actually earns and you pay the difference that you receive over time out of your over priced purchase price.

Repairs guarantee: What is the actual state of the apartment you are buying? Do not buy based on a viewing of a renovated apartment with the promise that this is how your apartment will be at some point in the future. Why not bring it up to standard and sell it then?

Management cost guarantee: How much does a management cost guarantee help if you are not satisfied with the performance of the property management? Does it cover the cost of a management that you prefer?

What happens to the guarantee when the vendor goes out of business? Bank guarantees are usually offered but they only make up a fraction of the total obligations. These guarantees deflect that you are investing in a property with an inherent set of risks. The approach to try to talk away these risks is deliberately misleading. If you are not comfortable with property investment choose a different type of investment. If you want a property investment with all its great opportunities and some risks than make sure you have all the true information and not pay above the market price for some questionable guarantees.

As a side line let me mention that some of these constructions will be scrutinized for tax reasons. It might be seen as not being a property investment with implications for write off privileges and long term capital gains.

Recommendation
Do not let guarantees deflect you from inspecting all aspects of the apartment you are actually buying!