Purchasing Property in Spain

1. Research 

Lack of research can lead to purchasing property in an unsuitable area. An Apartment on the Frontline in Marbella may cost more than a villa inland, but may have greater rental potential.

Similarly, Spain is a large country with different cultures and climates. The Costa Del Sol has different attitudes and regulations to property purchase to the Costa Blanca for example. You need to prioritize your requirements.

2. Price trap

It is essential to realise how the pricing of properties occurs in Spain.

Most of the time, the asking price has little to do with the real valuation of the property: Firstly the price of resale properties would include the commission payable to the selling agent.

Unlike in the UK whereby the rate is between 1%-2% and is included in the asking price, in Spain the agents fees will be usually 5% and can sometimes be added to the asking price. In some cases this figure can be as high as 10%.

(These higher commissions aren’t necessarily because agents are unscrupulous or greedy – though such people do exist! – but rather that it is generally more expensive to sell a property in Spain than in the UK what with flying people out, hotels, wining and dining etc. It’s a different market with a different cost structure).

Just be aware of how these figures are calculated because a property for which a customer is asking 330,000 euro may only result in the seller getting 300,000 euro and more importantly, this lower amount is the figure that a professional valuer would value the property at for mortgage purposes.

As the percentage of mortgage amount you can get is based on the lower value – you may sometimes be disappointed if you haven’t done your sums properly. 

Secondly, as far as new properties are concerned, a valuation is not necessary when a property is sold ‘off-plan’. So there may not actually be a ‘valuation’ only an asking price!

As there is usually about 2/3 years until completion this may not appear to be a problem initially, particularly in view of the fact that you usually only need to pay 25% of the purchase price up to the private contract. It only becomes a problem as properties reach completion and mortgage values come in lower than the original purchase price.

Many people mistakenly believe that because a development has a ‘mortgage’ on it then they automatically qualify for such a mortgage. Some unscrupulous agents will exploit this naivety.

The fact is -  you must be capable of supporting a mortgage on completion and the property must be capable of ‘valueing-up’ to the mortgage required. This is ultimately your responsibility. 

3. Understanding the buying process.

It is essential that you understand this as there can be many factors affecting the purchase. Before committing yourself to making an offer on a property you need to ensure that you have the funds to purchase the property. This sounds obvious but it does happen that sales fall through because of the inability to raise sufficient capital.

If you are going to require a mortgage you will need to speak to a mortgage advisor in order to have a principal agreement in place.

As well as this, you need to have a facility with a currency exchange group to ensure that suitable funds are available for the purchase at the required time. You are also going to need the services of a solicitor and a reservation deposit available. The deposit is usually between 3000 and 6000 euro’s and can be taken by credit card/debit card or by swift payment through your bank. 

Also it is important to realise that 10-12% extra is needed at the final stages of purchase to cover taxes and fees.

4. The pressure sale

In previous years it has not been unknown for a client to lose a property by 10 minutes because they have hesitated rather than reserved it.

The market is not as bouyant now and this is more of a rare occurance.

However once again, some unscrupulous agents will still try the pressure close by telling you that this property will be sold if you don’t make your mind up immediately.

If you are unhappy at this, walk away – there will be other opportunities. On the other hand if you really have fallen in love with the property ask for proof that there is other interest before making an offer. 

5. Trying to cut corners

When purchasing Spanish property it is necessary to use the services of a notary as they sign the title deeds over and confirm that the person selling the property is the owner. 

However, you may be told that it is not essential to use the services of a solicitor as you can do this work yourself.

This is a very bad idea and any attempt to save money by doing this is not worth the risk. Debts in Spain are levelled against the house, not the owner, and therefore it is essential that these are taken into account before the purchase is complete.

These can be anything from mortgages to outstanding fines or bills. A solicitor will ensure that these are paid by the seller and that the seller really owns the property!

They will also deal with the registering of the property as well as the mortgage company.

Another important function is to agree the declared value of the property in the deeds (escritora). In Spain, the declared value is often less than the purchase price and it is this figure used to work out the tax on the property (IVA) as well as any capital gains on it that may arise in the future. The Revenue is aware that this is happening but do monitor the situation to avoid over-abuse.

Our advice is that it is essential that you use a Spanish lawyer (English speaking). Their costs are usually 1% of the purchase price.

6 The Fast Buck

It has been a common practice in the past for agents to encourage purchase of ‘off plan’ property – this is property not yet constructed.

The benefit of this has been that the purchase price is fixed, but it is expected that the value of the property will rise as construction takes place, ultimately leading to returns between 25% & 40% before you actually take the keys of the property.

Another benefit is that usually you would only have to put down around 25-30% of the purchase price initially with the rest payable on completion.

The advantage that you have here is that the balance can be invested elsewhere whilst construction takes place – thus earning extra interest.

There has also been the facility to sell the property prior to completion meaning you don’t have to find the extra 75%.

In the current market, be very careful buying property with a view to selling before ‘taking the keys’. This strategy is all well and good while prices continue to rise and there’s a lot of movement in the market  -  but as the property market matures this can be a very dangerous strategy as you may not be able to sell in time – so be cautious.

Overall our advice is to look carefully at any ‘off-plan’ investment as there are good and bad points to most of them. 

7. The Buy to Let Situation

We all love the sun and want to own a holiday home that we can let out when we are not using it.

Many agents welcome these clients with open arms explaining that the rental market is all year round. It is – but only for good properties.

Ask yourself where would you like to take your vacation? Would you like your holiday half way up a mountain or deep in the middle of an overdeveloped area?

The fact is, most holiday makers want to be by the sea or on a golf course and anything else may look beautiful to the property owner, but not so beautiful to someone who only has two weeks vacation a year.

Use common sense when considering the ‘Buy to Let’ situation. 

8. Bank guarantees and building licenses

It is essential when buying a property that you check that a developer has got bank guarantees in place to cover any deposits taken from customers.

If your deposits are secured it will mean that in the event that construction is not completed, you will get back any monies paid.

You should also check that the constructor has got suitable building licenses in place as well.

Recently there have been scandals whereby it turns out that the official licenses have not yet been given to constructors to build on the land. This has now resulted in the construction process being halted and clients deposits being frozen.

In some cases the construction that has been carried out has to be knocked down.

The good news is that legislation for granting licenses is now much tighter. Also the density of the build to open space granted is much lower. In some cases in Andalucia you can now only build on 10% of the land area and to a maximum of 3 storeys. This should result in less over development and more green areas.

Despite this word of warning it may be worth knowing that in some cases developers offer off-plan investments where buildings are sold in phases. It may be that one phase doesn’t yet have the licence but will almost certainly get it. Investment at this stage could pay dividends as the value of the investment would rise immediately once the licence is obtained.

We are aware for instance of one golf development where all the plots are being sold without licences but with funds held in an escrow account. If the licences are granted, the value of the land will rocket. But if not, the clients will get their money back with standard bank interest paid!

9.The Developer turned Agent

Look out for companies that cross over into agency and developer. These companies will promote their properties first. They will show you properties that suit themselves first, not necessarily suit your requirements.

Remember those tick boxes.

The best advice will come from agencies that offer Independent Advice or Developers who have a product to sell and simply get on with it!.