Shaky economies have led to steep price drops on vacation homes. Note to potential buyers: It's complicated. By Sandra Block, Senior Editor From Kiplinger's Personal Finance, February 2013 The Tuscan sun will warm your soul, and you'll probably never eat a bad meal in Provence. But if you want to buy a European villa without spending a fortune, look south to Greece, Spain and Portugal. Their economic misfortunes have forced sellers to slash prices on vacation homes with panoramic views of the ocean, access to golf courses and volumes of old-world charm. SEE ALSO: Vacation Homes: Deal or No Deal? Prices for some properties have fallen by 50% or more since the recession began in 2008, says Mike Braunholtz, sales director for Prestige Property Group, which sells homes around the world. He cites a five-bedroom villa in Portugal that originally listed for 1.5 million euros (almost $2 million) and recently sold for less than 500,000 euros, or about $652,000 (currency conversions are as of December 4). On the Spanish island of Majorca and in the Marbella area, prices have fallen by 30% to 60% since the beginning of the recession, says Alfonso Gordon, senior consultant to AEGI, a trade association for Spanish real estate agencies. Upside, Downside Advertisement There are few restrictions on U.S. citizens who want to buy vacation homes in southern Europe. But make no mistake: It's more complicated than buying a beach house on the Gulf of Mexico. You'll probably have to open a bank account in the country where the home is located to pay bills and local taxes. You'll also need to obtain a local identification number. In Spain, for example, you'll need to apply for a foreigner’s identification number (known as an NIE) with the local police. Be aware, too, that real estate practices differ from those in the U.S., says Joachim Wrang-Widén, of Christie's International Real Estate. While it's not unusual for buyers in the U.S. to have their own real estate agent, it's uncommon in southern Europe, he says, and it may be difficult to find a buyer's agent there. "It's a different legal system, different language, different currency," he says. "You should have your wits about you." If you open a foreign bank account to pay your bills, you'll probably have to file an annual Report of Foreign Bank and Financial Accounts (FBAR) with the U.S. Treasury. This form is mandatory if the total value of your foreign financial accounts exceeds $10,000 on any day during the calendar year, says Christine Ballard, a certified public accountant in the international tax division of Dixon Hughes Goodman LLP. If you decide to rent out your vacation home when you're not using it, you'll have to pay U.S. taxes on the income. You're eligible to deduct the same expenses you could claim for rental property in the U.S., says Ballard. You may also have to pay taxes on rental income in the country where your vacation property is located. The IRS allows you to claim a tax credit for a portion of the foreign income taxes you pay, but you'll need a tax professional who understands how to calculate foreign tax credits. Advertisement Most overseas vacation homes are far removed from the riots that have roiled the capital cities recently, Wrang-Widén says. "If you were to buy an apartment in central Athens next to Parliament, you might encounter people on strike." But protests and walkouts could make it difficult for you to get to your Mediterranean getaway. In November, widespread strikes in Spain and Portugal forced airlines to cancel flights between southern Europe and connection hubs in London and Paris. Last April, a two-day strike shut down ferry service to the Greek islands, stranding thousands of people over a holiday weekend. Another risk: Prices of vacation homes could fall even more before the market rebounds. European banks have been reluctant to foreclose on distressed properties, and that has kept some real estate prices artificially high, says Ronan McMahon, a real estate investor and contributor to InternationalLiving.com. For example, some owners of distressed condos and villas in Greece have opted to hold on to their properties instead of selling them at fire-sale prices, he says. In Greece, he adds, "I wouldn't suggest buying yet unless you stumble across a killer deal where someone has to sell now." In Spain, banks have moved to sell homes in failed developments, which will likely lead to substantial discounts, McMahon says. Some are also offering financing in an effort to get the properties off their books. Still, he says, the process takes much longer than it does in the U.S. "In Spain, a regular foreclosure process will take up to five years." Cash Is King Advertisement Don't expect to buy your Mediterranean dream house with 10% or even 20% down. Like their counterparts in the U.S., European banks responded to the financial crisis by tightening credit standards. In Spain, nonresidents with good credit can get a mortgage for up to 60% of the value of a home, compared with 70% to 80% for residents, says Pia Arrieta Morales, a partner with Diana Morales Properties, in Marbella. In Portugal, financing is hard to get because banks are still grappling with solvency problems, says Rafael Ascenso, of Porta da Frente, a real estate agency with offices throughout Portugal. As for Greece, loans are available only "to individuals who can prove they don't need them," says Yannis Ploumis, of Ploumis-Sotiropoulos, an Athens real estate brokerage. Real estate agents say most foreign buyers pay cash. Cash buyers can often get an even better deal on already-depressed properties. Gordon recently sold a property in one of Madrid's best neighborhoods to a cash buyer for 30% below the list price. "Trying to buy in Spain with a mortgage at a Spanish bank is very difficult," he says. "People with money can negotiate." Transfer taxes, notary fees and other upfront costs can add 10% to the purchase price, McMahon says. Hire an attorney who is unaffiliated with the seller to help you understand all of the terms of your contract, he advises. "Something that would be completely normal in one of these countries might be completely abnormal to the foreign buyer," he says. Advertisement You should also look for a buyer's agent who has experience dealing with foreign clients. He or she can also help you locate a reputable property manager if you want to rent out the property when you’re not using it. Foreign buyers who rent their properties benefit from a long tourist season, Wrang-Widén says. In Spain, the rental season typically runs from March to October. The rental season for the Greek islands runs from April to September. "After that," he says, "it starts getting a bit windy." Above all, take your time. Don't let the charms of another country and a few sangrias (or ouzos) blind you to the drawbacks and risks of owning a home overseas. Visit the country several times before you make an offer. Never buy condos or other properties in an unfinished development, and don't buy anything you don't plan to keep for several years, McMahon says. If property prices turn around in a year, you'll feel brilliant; if they don't, you'll still have a place in the sun. Greece: Exotic Island Homes Greece's financial problems have enabled some investors to get "amazing deals" on exotic Greek island homes, says Mike Braunholtz, sales director for Prestige Property Group. This large, three-bedroom home with a swimming pool on the island of Crete was recently listed for $352,000, down from $385,000, according to A Property in Greece, a U.K.-based real estate agency. Strict building regulations have prevented large-scale beachfront developments, says Spyros Mantzos, of A Property in Greece. Most buyers "will have a sea view," he says. "There aren’t blocks of apartments in the way." Asking prices for properties in top tourist destinations are "very negotiable," says Xanthi Kalognoma, regional administrator for Re/Max Greece. Buyers pay about 10% in purchase/value-added taxes, plus up to 3% in legal fees, along with annual property taxes of about 2%, depending on the value of the property. But don't take a chance on Greece unless you're comfortable with volatility. While most people don't expect Portugal and Spain to abandon the euro, "it is a true and genuine worry for Greece," Braunholtz says. A return to the drachma could depress the value of property purchased in euros and paralyze the country's financial markets. Greek lawmakers recently approved a multi-billion-euro austerity package required to obtain bailout funds from international creditors, but the country's finances remain perilous. A recent Standard & Poor's report observed that Greece's economic depression "has tested Greece's political and social institutions—in some cases to [the] breaking point." Spain: Sea Views In Marbella, Diana Morales Properties recently listed this five-bedroom villa near the Mediterranean for $605,000, down from more than $1 million a few years ago. In some popular tourist destinations, condominiums with a sea view are selling for as little as 80,000 euros (about $104,000), says François Carrière Pastor, managing director of Coldwell Banker–Spain. In some less-developed areas, buyers will pay up to 300,000 euros ($392,000) for a similar property, he says. Spain has no restrictions on property sales to foreigners, says Pia Arrieta Morales, of Diana Morales Properties, in Marbella. Buyers of newly built properties will pay a value-added tax, which was scheduled to rise from 4% to 10% in January. Taxes on resales range from 8% to 10%, depending on the purchase price. Legal fees average about 1% of the purchase price. Rampant overbuilding has led to sharply reduced prices in some popular resort areas in southern Spain. Still, bargain hunters should be wary, says Joachim Wrang-Widén, of Christie's International Real Estate: During the real estate boom, thousands of vacation homes were built in violation of zoning laws. "Basically, local authorities are putting the ignition key in the bulldozer," he says. "The claim is against the developer, and the developer might not be in existence anymore." According to some reports, as many as 300,000 illegal homes were built in Andalusia alone. Portugal: Still Pricey On the island of Madeira, this three-bedroom villa with views of the ocean and the mountains recently listed for $645,000, reduced from $717,000. Real estate prices in Portugal are the lowest they've been in more than a decade, says Bruno Andrade, a representative for Re/Max Portugal. Even so, prices haven't fallen as much as they have in Spain, says Ronan McMahon, a real estate investor and contributor to InternationalLiving.com. Portugal is "still extremely expensive, even with the stronger dollar," he says. "Reality hasn't struck there at all." Portugal escaped the overbuilding frenzy that swept through Spain and other parts of Europe before the downturn. In fact, about two-thirds of Madeira is off-limits to development, says Tony de Nobrega, owner of Nobrega Realty on Madeira Island. Although the Portuguese government is trying to encourage more tourism, Portugal will never be as busy or crowded as some of Spain's popular tourist destinations, he says. To encourage more foreign investment, Portugal recently enacted a law that allows anyone who purchases property for 500,000 euros or more to qualify for residency. Once you have residency, you can travel throughout Europe without a visa, Nobrega says. Second-home buyers must pay a 6% flat tax on properties above 550,800 euros; below that amount, properties are taxed on a sliding scale. Expect to pay about 1% of the purchase price in legal fees. This article first appeared in Kiplinger's Personal Finance magazine. For more help with your personal finances and investments, please subscribe to the magazine. It might be the best investment you ever make.