How to Buy Property in Spain Safely

Spanish Property: Valle Romano in Estepona

Spanish Property: Valle Romano in Estepona

Buying property in Spain safely is an article that provides a trove of information; it will help you clear the minefield and avoid the most common pitfalls. It acts as a compendium on my five-part series ‘How to Buy Property in Spain’. You may also be interested in reading Buying Resale in Spain, Buying Off-Plan Property in Spain, Buying Distressed Property in Spain, How to Buy Commercial Property in Spain or How to Buy Rural Property in Spain.

By Raymundo Larraín Nesbitt

Lawyer – Abogado
10th of October 2014

Introduction

Over the last decade I have written a series of specialized articles featuring real estate conveyance that acted like jigsaw pieces. The purpose of this pretentiously-titled article is to collate part of my dispersed writings on the same topic and group them altogether acting as a backbone that binds and fleshes them out cohesively in a single document. The individual jigsaw pieces should now fall neatly into place forming, one hopes, the overall conveyance puzzle I had in mind.

Following on the above, for reasons of space constraint, I cannot reproduce in this article the hundreds of pages I have written on the matter over the course of years. The idea behind this article is to act as a placeholder repository that conveys basic information on a wide range of conveyance matters and most significantly provides the links to the focused articles which are the ones that really provide in-depth cover on any given subject. So please kindly bear with me and follow the external blue links to the dedicated articles when you want to delve deeper into a topic.

2014 Overview of Spain’s Real Estate Market – A Silver Lining

After seven years of recession I believe we may be almost out of the woods. 2014 in my opinion will be remembered as marking the inflection point where the market started to pick up again and a new property cycle began.

Granted there is still a huge oversupply of properties that will likely take several years to be absorbed by the market. Spain in the boom years built in frenzy more properties than France, Germany and the United Kingdom altogether. This irresponsible glut of properties is largely explained as a result of a combination of factors such as ultra-low interest rates which fostered widespread easy credit, unbridled lender ambition, bloated property valuations commingled with the Administration’s oversight. Properties with poor location and lack of amenities (particularly those found inland) will likely not sell as no one is interested in them irrespective of price. They should have never been built in the first place as they appeal neither to foreign nor domestic demand

What is holding back recovery to a large extent is the credit shortage or credit-crunch. Lenders are being over-conservative handing out mortgages and are enforcing strict lending criteria as many are still widely viewed by experts as undercapitalised. Fortunately the European Central Bank has in a surprising move lowered the base rate last September to a historical low of 0.05%. This is a welcome respite for mortgage borrowers (maybe not so much for Germany) which may in time help credit to flow back to families and society at large. Albeit being realistic this new base rate will not translate to an immediate availability of credit and is likely to take quite some time to permeate through. But it is most certainly a step in the right direction. This bold move by the ECB suggests interest rates across the Eurozone will remain at historical lows for some time allowing buyers of second homes to take advantage of competitive rates.

Credit is the lifeblood of the real estate market; without mortgage financing the market languishes and grinds to a halt relying heavily on cash-buyers which are obviously a minority. Encouraging signs of lenders willing to lend again, with reasonable terms, are beginning to hit the headlines. Affordable borrowing will play a major role in the rebound as it is a prerequisite to a solid housing market recovery.

The overall outlook is that there is still a massive glut of properties available but what’s important to note is that the market is multi-tiered and we are witnessing recovery at different speeds much the same as Europe offers countries with variable growth levels. The high-end of the spectrum, dominated by premium properties, is selling quickly once again. As in every recovery in Spain the rebound is kick started by well-heeled buyers acquiring high-end properties. The drive sparked by top-of-the-range real estate will eventually gain momentum to the point of pushing forward the mid-range market in a herd mentality. This is how every recovery in Spain has begun and I believe we are precisely at a cycle turning point with well-off clients seizing first-rate properties with the general market to follow trend in due course.

For the first time in several years reports are surfacing pointing to a fledgling house price recovery. Even Spain’s National Statistic Bureau (INE) has joined in reporting the first house price increase in a six-year period. What it is clear to my mind is that the market has indeed levelled off and we are now well on track on the road to recovery with well-located and smartly-priced properties gaining traction.

Any industry insider will tell you that we have witnessed in 2014 – for the first time in seven years – strong foreign demand mainly from north European countries (Nordics), Russians and to a lesser extent Arabs. Domestic demand remains depressed conditioned by all-time high borrowing costs with the exception of high-end property which has proved resilient with affluent Spaniards from Madrid and the Basque country (let alone wealthy foreigners) snatching up trophy properties at bargain prices in well-to-do locations.

A traditional indicator of recovery in Spain has been when savvy wealthy Spanish families buy into the market decisively which is indicative of a cycle end and the beginning of a new one as witnessed over the last two property cycles (eighties and nineties). Upbeat macro figures are pointing more and more that we could really be at the start of a new growth period. Whether this bourgeoning recovery holds up and translates into consistent growth remains to be seen as external geopolitical factors could easily derail it.

Hire a Qualified Registered Lawyer

This is the single most important advice that can be given before you start house-hunting. If you only happen to follow this first tip the rest of the points mentioned in this article become redundant. The advantages are summed up in my article Buying Property in Spain – 10 Reasons to Hire a Lawyer.

Hiring a lawyer is by no means mandatory on conveyance procedures. But I cannot stress enough the importance of retaining a Spanish lawyer, if you are a foreigner, to act on your behalf in a conveyance procedure, both on buying and selling property. This should be your starting point before signing any reservation agreements or paying any deposits.

It is often that I hear that those with vested interests in their being no lawyers involved are often the most outspoken on advocating that retaining a lawyer’s service is an unnecessary expense and always put as an example that Spaniards themselves don’t hire them on buying property.

Whilst it may be true that some Spaniards do not retain a lawyer to act on their behalf in a conveyance this can be explained for a number of reasons. Almost every Spaniard has a relative or a friend who happens to be a lawyer and advises them free of charge. Besides they are fluent in their own language (!) and have ready access to a myriad of legal articles which are regularly published in the press. Despite this Spaniards still end up having all sorts of problems on buying or selling property because they did not want to incur in additional expenses hiring a professional. Quite often their blunder far exceeds what a lawyer would have charged for his service.

To identify oneself as an “abogado/lawyer” one must be both qualified and registered in Spain:

· Qualified: having passed and attained a Spanish law degree or else by having homologated it.
· Registered: being admitted to practice Law at one of Spain’s regional Bar Associations.

The second point is already inclusive of the first one, as on applying to practice Law before a Bar Association one must submit both his Law degree and his full academic record. Additionally, someone with a criminal record may not join the Law Society. One should exercise extreme caution on those claiming to be an ‘abogado’ and yet are unregistered to practice. Ask yourself why? Quite a few of the notorious mishaps featured in the press relate to non-qualified intruders dealing in conveyance matters.

Besides registered lawyers have the advantage of professional indemnity insurance in the event of negligence or malpractice. Bottom line; make sure your lawyer is registered to practice, for your own sake. Be wary of cold-calling from legal advisors, senior legal advisors, legal executives, legal assistants, paralegals and in general anyone who does not clearly identify himself/herself as a lawyer/abogado (and is therefore registered).

Unlike other countries such as the United Kingdom these fancy titles don’t mean anything in Spain – we have no paralegals. Or you are either a registered Spanish lawyer or you are not, period. It’s that simple. Someone who is not a trained registered lawyer is not qualified to give legal advice in any shape or form, cannot entertain to address himself/herself as a ‘lawyer’, cannot solicit clients for legal services – even if outsourced – nor practice law in Spain. You can easily check if your lawyer is registered to practice law on this registered Lawyer’s database. Beware of the increasing number of bogus law firms cold-calling requesting money upfront (particularly regarding timeshare). They are not law firms, they are boiler rooms (unlicensed, unregulated and unsupervised).

If the property you wish to buy is high-end you may want to seek advice beforehand so as to mitigate tax exposure, namely to Spanish Inheritance Tax. Often the best tax planning results are achieved prior to acquiring a property as they may require the incorporation of a string of holding companies to lock-up the asset. You can read further in my article: Buying and Owning Spanish Property through Companies: Pros and Cons.

Bottom line it is advisable to retain an independent lawyer in Spain both on buying and selling property.

You can check this list of recommended English-speaking lawyers or request one from your home country’s local consulate in Spain.

NIE Number Requirement

One of the first steps on buying property in Spain, besides hiring a lawyer, is to apply for what is known as a Spanish NIE number which is a Tax Identification Number for foreigners enabling you to file and pay taxes into the Spanish Tax office. It will be required, for example, on all the following:

  • Buying or selling property.
  • Inheriting assets in Spain.
  • Opening a bank account.
  • Taking out insurance.
  • Buying a car.
  • Working in Spain.
  • Obtaining a mortgage.
  • Some private foreign schools require a NIE number from parents and/or new (foreign) pupils to enrol them!

Basically any activity involving paying taxes requires a NIE number. You cannot complete on a property in Spain without one, either on buying or selling, as the Notary will disallow it.

You may apply for a NIE number in person or else appoint a lawyer to do it on your behalf.

For the former, be ready to take time off work, allocate holidays, spend over €1,000 in booking flights and hotels to Spain all to wake up very early and make long queues under a scorching sun for hours on end. Did I mention your Spanish must be excellent as public servants will seldom speak in English let alone other languages?

Or alternatively you can cut to the chase using the most popular option which requires appointing a lawyer as a proxy by means of a limited Power of Attorney (P.O.A.) specific only to apply for a NIE number. Lawyers usually charge a reasonable fee of €100 – €150 for it. In under ten days you will have a new NIE number mailed (or e-mailed) to you to get you started on your property hunt.

Property Types

 

I distinguish broadly between five types of real estate property. The first four may be grouped under the generic term ‘resale’ property whereas the fifth is new-build or off-plan which requires a category all unto itself and for this reason I reserve it the last place below.

I go into the trouble of distinguishing these five categories or subclasses because they each sport their own nuances and idiosyncrasies which ought to be highlighted clearly to would-be buyers so they are fully aware of the differences. In most legal articles dealing with Spanish property conveyance you will find them all grouped together in a mixed bag making no distinction which I honestly believe is a crass mistake. The division is not merely academical but practical.

1. ‘Standard’ Urban Resale Property

Is hands down the most frequent property-type conveyed.

Please read my article Buying Resale Property in Spain.

2. Commercial Property

Is a type of property legally earmarked as commercial premises subject to special taxation and other particularities (i.e. opening licence).

Please read my article How to Buy Commercial Property in Spain.

3. Rural Property

Requires a (cautious) approach to it due to the myriad problems it has caused in the past.

Please read my article How to Buy Rural Property in Spain.

4. Distressed Assets (Fire Sales and Bank Repossessions)

This term refers to pre or post lender repossessions which are rife on the radio and press. The following two articles clearly explain how to profit from distressed real estate assets held by lenders or directly from private owners seeking a quick sale. Fire sales and foreclosures offer great value as they are heavily discounted.

Please read my articles Buying Distressed Property in Spain and Bank Repossessions in Spain.

5. Off-Plan or New-Build Property

As explained above, the fifth type of property cannot be labelled – by definition – as resale and requires a distinct category all unto itself. Off-the-plan or new-build property is when you sign a contract to buy a property that is yet to be built and is not expected to be finished until several years’ time. I strongly recommend reading my articles:

Buying Off-Plan Property in Spain
Off-Plan Construction Guarantees
Bank Guarantees in Spain
Supreme Court Rulings on Bank Guarantees
Licence of First Occupation

They provide an insightful account of the full off-plan buying procedure. Due to space constraints I am unable to reproduce the hoard of information available to them. These articles explain key concepts, such as Bank Guarantees and Licence of First Occupation, which are specific to off-plan and not shared by its resale cousins (with the exception of Catalonia where LFO’s are indeed required for resales).

The market has swerved from one extreme to another; from loving off-plan to having a major fallout. In time the market will find its equilibrium. Although nowadays you will find that off-plan is being almost demonised in the press the fact is that buying off-plan has many advantages as well as some associated drawbacks. Not that long ago it was normal to obtain a significant discount (premium) on buying off-plan as you took on a risk until the unit was ready to be delivered legally (with a Licence of First Occupation). The main risks were related to the uncertainty of the property ever being delivered as well as the time elapsed until completion which could easily take two years or more.

Many took advantage in the boom times selling on these properties for a sizeable profit prior to completion (also known as “flipping”) as it was basically a leveraged investment (ultra-low interest rates coupled with lenders’ lax lending criteria fuelled widespread easy credit) which only required a fraction of the funds paid up front. That same off-plan dwelling was significantly more expensive (i.e. 30%) if you purchased it key-ready as now there was no associated risk (uncertainty).

This, however, changed over time leading us onto today’s depressed market. Now that the dust has settled, purchasers are increasingly turning to resale property in lieu of off-plan as they judge it safer post-credit-crunch particularly out of fear of developers filing for creditor protection or not being capitalised enough to complete existing builds. Off-plan is being shunned as they believe the hazards nowadays frequently outweigh the rewards, making the resale and let market look altogether more appealing within the context of a grim financial environment.

This will no doubt change in the future with the upcoming of the next property cycle. The million-dollar question is of course second-guessing when that will be!

Your guess is as good as mine.

Financing

Most buyers require a mortgage set-up to finance their property purchase. Post-credit-crunch lenders in Spain have been understandably reluctant to finance properties and they have discouraged this activity by non-subtly raising the borrowing fees to all-time highs.

This however changed earlier on this year when Spain’s number one lender by market capitalisation, Bank Santander, decided to spearhead the change by leaving the door ajar on relaxing its mortgage terms. I am confident that, as in the past, smaller lenders will follow the market leader’s example and begin to facilitate credit by offering more competitive and affordable terms to borrowers which will pave the way to a full-blown recovery.

Spanish lenders are risk-averse nowadays so they expect a buyer to come up with a 30 to 40% deposit. This will however likely change in the near future, as credit begins to flow, requiring smaller down payments from borrowers.

I strongly recommend a buyer reads beforehand my mortgage-related articles:

Spanish Mortgage Loans: An Overview.
Spanish Mortgage Loans: Beware of Abusive Clauses.
Mortgage Collar Clauses Revisited (‘Cláusulas Suelo’).
Lifetime Loans or Reverse Mortgages in Spain Explained.

The Buying Process

 

The buying process differs between resale and off-plan property. This is explained because in the former the property is readily available, or key-ready, whereas in off-plan it is yet to be built and takes several years as a norm. I will explain separately both procedures as they each have their own particularities with some elements in common.

I. Resale Buying Process

 

The full buying procedure is explained step-by-step in my article How to Buy Commercial Property in Spain under the section “Profile on the Buying Process”. This three-step procedure applies to all four resale property types outlined below:

‘Standard’ urban resale.
Commercial.
Rural.
Distressed.

Please refer to said article for a full account of details as well as useful tips on common pitfalls to avoid on buying resale property. I won’t replicate the information here as it would elongate this article unnecessarily besides duplicating the information.

The first step is to sign a reservation contract or deposit agreement at a real estate agency which is normally non-refundable. This takes the listed property off the market (normally for the next 30 days). I strongly advise a buyer hires a lawyer before he commits to sign a reservation contract. Some of these deposit agreements are standard templates which may be poorly worded and can create serious obligations for a buyer that go against his best interests.

Examples:

a) As a buyer; by creating an obligation to buy. By setting an unrealistic completion date of only six weeks as from the time of signing the reservation contract when this short timeframe may exceed the time needed to set up a mortgage with a lender. This leads to a breach of the contract which may result in heavy losses for a buyer as he may be ‘forced’ to complete (can be compelled legally to do so by the seller’s lawyer). A buyer can be sued for specific performance by the seller compelling him judicially to buy the property.

b) As a seller; by creating an obligation to sell. Should the vendor opt out (because for example they have found a second buyer willing to pay more) they may be forced to pay double the amount of the down payment placed by the first buyer as a reservation deposit. Likewise a seller may be sued by the buyer for specific performance to try and compel a sale.

The above two examples highlight why it’s highly advisable to hire a lawyer from the outset so that he reviews the clauses set forth in the reservation contract carefully before you sign and pledge to anything. Do not act rashly signing away. Let a lawyer carry out the basic legal checks first.

Strictly speaking a First Occupancy Licence (LFO) is unrequired for resales and applies only to new-build or off-plan property. That said, in some parts of Spain, such as Valencia and Catalonia, a LFO is required for resales as an exception to the general rule. Additionally a trend has emerged over the last couple of years with risk-weary lenders demanding a LFO is produced for resales to cover their backs on granting a mortgage loan. Many transactions are being put on hold because of this ‘new’ requirement for resales which used to apply only to off-plan property as explained in the next section below in detail. The reason being is that lawyers must request from the local town hall copies of a LFO which may take several months.  In my personal opinion this is absurd as we have gone from one extreme to another; from lenders blissfully ignoring a LFO for off-plan in the boom days to now demand them for every resale which was never their purpose and defeats their logic. It is daft in my view to ask for a LFO on a twenty-year-old property that has all the utilities connected and has no legality problems of any kind. This simply adds an unnecessary new layer of red tape which may contribute to potentially jeopardize resale transactions constituting a deal-breaker in some cases without adding any legal safety to long-standing resales.

The second step will be to sign a Private Purchase Contract (PPC, for short). This step is optional for resales and at times it is merged with the first one for simplicities’ sake. You normally make a down payment of 10% of the property’s value setting a reasonable date for completion (particularly if you require mortgage financing). If movables are being sold along the property it is highly advisable an inventory is added to the PPC. This inventory should be drawn up with great detail to avoid misunderstandings. This inventory will likewise be added to the Title Deed at the Notary Public on completion. It is regarded as a contractual element which binds both parties. If the seller does not include something from within, it will be regarded as a breach of contract.

The third and final step is to pay the balance and complete before a Notary Public. You will require your NIE number and a valid copy of your passport. Your lawyer will ensure that Community of Owners’ fees, utility bills and IBI tax are all up to date. A new owner is held liable for all community fees from the current year he’s buying on a pro rata basis as well as all those dating back three years. This liability is extensive to what is known as ‘derramas‘ or unforeseen community expenses such as painting the building or fixing the lift. Which is why it is very important that at the time of completion your conveyance lawyer attains a certificate from the Community Of Owners signed jointly by the administrator and president stating that all community fees are up to date by the vendor. Should there be any payment outstanding, it goes against the property itself not against the former owner; your lawyer can always practice a retention at completion to offset this outstanding debt.

II. Off-Plan Buying Process

 

The procedure differs from resale property for the very reason that the property is yet to be built. It also follows a three-step procedure. I strongly advise reading my article Buying Off-Plan Property in Spain  for a full list of potential pitfalls associated to this property type. The major differences with resale property are the time elapsed between the stages, which will normally span a couple of years or more, as well as the stage payments.

The first step once you have chosen a development that suits you is to sign a reservation contract at an estate agency. This deposit is non-refundable. The same warnings highlighted above for resale apply here for off-plan.

The second step is to sign a Private Purchase Contract (PPC) and start making a series of stage payments. These stage payments, as a rule of thumb, equate to half of the properties’ sales value. Stage payments (and initial reservation deposit) should be covered by what is known as a bank guarantee.

Bank guarantees are essential and of utmost importance in the event a developer becomes insolvent or fails to complete a development within a reasonable timeframe for whatever reason. They act like safety nets for buyers on all the money paid. You should be able to keep receipts of all the stage payments (including the initial reservation deposit) as the Notary public will require at completion a detailed trail of paperwork that justifies each and every amount paid to the developer to comply with Spain’s anti-money laundering laws. If you happen to wire your funds to Spain using the services of a foreign currency broker (which in my experience saves thousands of euros) make sure they supply you with justification of all the moneys transferred over to a developer. The problem with off-plan is that stage payments are normally carried out years before completion so it is easy to misplace a receipt of one or more payments which may cause serious issues down the line with the Notary at completion who may even refuse point blank to witness a property conveyance unless all anti-money laundering provisions are strictly adhered to.

The third and final step is to complete before a Notary Public and make payment of the balance (remaining 50%). The third stage normally takes a couple of years after signing the PPC depending on how advanced the construction of the property is. I strongly advise to complete only with a Licence of First Occupation (LFO) in place. Completing without a LFO is legal in Spain but highly inadvisable (only justified in qualified exceptions such as a developer teetering on the brink of insolvency). For a full list of the serious legal associated risks on completing without the property attaining a LFO by the Town Hall’s Planning Department I refer to my article Licence of First Occupation. As from the moment a developer attains a LFO he can legally compel you to complete on the property. This is known as ‘forced completion’.

Before you complete it is strongly recommended you carry out what is known as a snagging list which will highlight any construction flaws i.e. mismatched tiles, damp patches, mould growths, leaking faucets, flaked painting, damaged appliances, unsuitable drainage. Normally I would hire a reputable chartered surveyor who will draft a complete report (to British standards) outlining any build defects or problems. I have never come across an off-plan property that doesn’t have one or more defects at least. Your appointed lawyer will then negotiate with the developer that he finishes or completes any pending works even withholding a pre-agreed amount at completion to guarantee the work will be done. Once you complete on a property, and hand over all the money to the developer, your negotiation position is severely undermined. So any outstanding problems should be fixed prior to completion not post-completion.

At completion one must hand over all the bank guarantees to the developer’s legal representative. Bank guarantees are void as from the time the developer attains a LFO from the Town Hall where the new-build is located, well before completion. Up until the issuance of a LFO any community of owner’s fees are the responsibility of the developer. One is held liable for garbage collection tax as from the time the LFO is issued which normally takes place some two years after completion. You can expect however to receive a backdated billed from the Town Hall for the previous two years. The same applies to IBI tax.

I strongly advise you change all locks to the off-plan property you have just acquired, including storage rooms. Many people had copies of these keys during the construction phase. Your legal representative will change all the utilities over to your name. If you have purchased in a development make sure you acquaint yourself with the Community of Owners statutes and bylaws. Some buyers will try to defer completion until the communal facilities (swimming pool, lush tropical gardens, tennis court) or promised amenities (golf club, luxury hotel, private hospital) are finalised. Holding out completion on such grounds cannot be done (successfully) for legal reasons. Please read my litigation article on the matter: 10 Reasons why Your Case Against a Developer may be Thrown out of Court in Spain.

Associated Buying Expenses

As a rule of thumb purchase costs add 10 – 15% over and above the purchase price. In some regions of Spain, particularly in Valencia, this figure may be higher. Please take thorough legal advice to budget your purchase before you commit. You can read my article Taxes on Buying Spanish Property for more details.

Besides paying taxes (explained below), a buyer is bound to pay the following fees:

Notary fees (for the formalization of the deeds): approx. 0.1 – 2 %
Land Registry fees (for the inscription of the deeds): approx. 0.1 – 2 %
Mortgage & Gestoría fees (if finance is required): 1 – 2 %
Lawyer’s fees: 1 – 2 %
Estate Agent’s fees: 5 % (these are paid for by the vendor unless agreed otherwise)

Taxation

I will split the explanation between the taxes that are to be paid at completion and those borne post-completion (to be filed on an annual basis). The former (completion) is common to both residents and non-residents alike. The latter (post-completion) differs as explained below.

A. Completion

You can read my in-depth article Taxes on Buying Spanish Property.

Resale: is subject to Property Transfer Tax (or ITP in Spanish) which varies, depending on the Autonomous Community where the property is located, between 7 to 10%. As an exception to this general rule, on buying commercial property, from either a developer or a professional, 21% VAT is applied in lieu of Transfer Tax.

Off-plan: is subject to both VAT (currently set at 10% of the total property price) and Stamp Duty (ranging between 0.5 – 1.5% of the total property price; dependent on location as it varies from one Autonomous Community to the next).

B. Post-Completion: Taxes

You are liable to file and pay Income Tax on owning property in Spain for which you may need to appoint Fiscal Representation in Spain. These taxes differ between buyers holding resident status and those who do not.

i. Resident

Defined as spending in Spain more than 183 days in a calendar year or else have their main centre of interests and activities in Spain (i.e. spouse, children, main business). Residents are taxed on their worldwide income and assets.

ii. Non-Resident

Non-residents are liable for Non-Resident Income Tax and, additionally, may be liable for Wealth Tax on their Spanish assets. You can read further my in-depth article Non-Resident Property Taxes in Spain.

•    Resident in E.U. or E.E.A.: 20% (19% as from 2016).
•    Non-resident in E.U. or E.E.A. (rest of the world): 24%

Non-EU/EEA residents are taxed at a flat rate of 24 per cent on their Spanish-sourced income – for example, rental income from property in Spain, income from a business in Spain and interest on funds deposited with a Spanish bank. Those who own a Spanish property exclusively for their own personal use and have no other source of taxable income in Spain pay a version of income known as ‘imputed income tax’, which is calculated on the property’s cadastral value (rateable value). Spanish authorities take the view an owner derives a benefit in kind from owning property irrespective of whether it is true or not and taxes it accordingly.

Wealth Tax had been supressed but has recently been reintroduced as a consequence of the financial crisis. Please read my article, in collaboration with Blevins Franks, on Spanish Wealth Tax (Patrimonio) for more details.

Careful with the Tax Office on Buying or Selling at a Discounted Price – La Complementaria

Now that I’ve established it is a great time to buy property in Spain – the bad news. Due to Spain’s ongoing real estate depreciation many buyers are securing properties at such knockdown prices they are unwittingly drawing the attention of the Tax Office. So much so that over the last years many will have received a letter from Spain’s Inland Revenue some six months after completion demanding supplementary tax is paid on the property on having ‘underpaid’ ITP or Property Transfer Tax. This is known as “la complementaria” in Spanish legal jargon and affects resale property. You can read further in my article La Complementaria or Bargain-Hunter Tax on how to pre-empt it and how to appeal one.

This can be explained because the authorities use standard value tables (“bases de comprobación de valores”) to draw a comparison between the fiscal value of the property and the declared sales price at completion. These tables were reviewed every now and then following the upward trend in property price. This was fine so long as there was a continuous capital appreciation but when the market grinded to a halt seven years ago these tables froze in time and do not reflect accurately the overall 50% depreciation real estate assets have undergone (speaking in broad terms). So basically the rateable values that Tax Authorities zealously use are, at best, outdated showing in most cases top-of-the-range pre-crash valuations which are logically not in line with today’s market values.

If the Tax authority detects a statistical meaningful deviation they will exact the difference in what they deemed the buyer has ‘under-declared’. In most instances this is simply not the case. Buyers have only shrewdly taken advantage of the opportunities a crashed real estate market has to offer. Albeit unbeknownst to them this draws the attention of Regional Tax Authorities which will do their best to recoup what they (wrongly) see as an ‘under-declared’ sales price.

On buying distressed Spanish property you should pre-empt this by requesting beforehand an assessed property valuation specifically for tax purposes. This will be a legally binding report which your lawyer may use at a later date.

If you have already received this letter don’t panic, this is happening frequently. You can either pay the requested tax or else appeal it. Providing the difference is not deemed as ‘significant’, your chances of appealing it are fairly high.

If it the amount demanded is low I honestly believe it is not worthwhile the aggravation to appeal. The key decisive factor is that the difference between the fiscal value (the rateable values explained above) and the declared value (what is recorded in the Title Deed at completion before the Notary Public) should be high enough to attract a large tax bill; this will warrant paying a law firm for its legal services. Law firms charge typically between €800 up to €3,000 for this service (this is inclusive of a chartered surveyor’s valuation necessary to appraise the property). So basically any tax bill high enough that exceeds said amounts will easily offset both a lawyer’s and appraiser’s fees warranting an appeal. For high-end property lodging an appeal on a “complementaria” is worth every penny in my professional experience.

Post-Completion: Make Sure Your New Property is registered under Your Name

Once you’ve completed (or closed) on the property before a Notary Public you should ensure it has been registered under your name. A property normally takes two to three months to be registered at the Land Registry post-completion (if no mortgage finance is required).

You will be given the ‘original’ Title deed to the property a few days post-completion.  Losing the original Title deed (“Escritura”, in Spanish) is only a minor setback as you can easily request copies from the Notary before it was witnessed.

If you require mortgage financing you will have to sign additionally, besides a Title deed, a Mortgage deed. Your lender will be the one dealing with registering the property; expect at least a six-month delay – if not more – until you are returned the ‘original’ Title deed. Lenders withhold always the original Mortgage deed for their own records and will give you only an authorised copy. Once the property has been duly registered you can request the ‘original’ Title deed for your safekeeping.

The reason why it takes so long is that all taxes associated to the purchase must be paid first. Only then can the deed transferring ownership be lodged at the Land Registry. A buyer can ensure everything is above board on requesting a Nota Simple. I would advise requesting one only after two to three months have elapsed since completion. Law firms can provide you a copy of a Nota Simple translated into English for a reasonable fee.

Post-Completion Checklist

Once you have acquired your new property, you will now have to face all the associated running expenses besides the taxes I already explained in a previous section above. Make sure you have budgeted these expenses carefully so as to avoid unpleasant surprises! Some of the luxury gated communities with lush tropical gardens and beautiful infinity pools that dot the Spanish coastlines have pretty steep maintenance expenses (tallying several hundred euros a month!).

Any unpaid community bills will result in the Community of Owners placing a charge against your property which may lead to auctioning it off publicly to recoup the debt! This legal procedure in Spain works fairly efficiently (as in twelve months on average). Moreover unpaid communal debts can be chased by Spanish Community of Owners abroad against assets you hold in your home country (within the European Union). Please read my articles Bad Debtor’s List (“Fichero de Morosos”) and Spanish Creditors Pursuing Debts Abroad. I also advise hiring home insurance as it is notorious that properties built in Spain are not entirely waterproof (or at least not to the same standards as in the UK) and are prone to damp patches in the winter period.

You should open a Spanish bank account if you haven’t done so already. Utility companies do not accept overseas payments so you should set at least all the following as a direct debit against your Spanish account:

•    Utility bills (invoiced quarterly in the case of water and monthly with electricity).
•    Rubbish collection tax. Paid twice or once a year depending on the town hall.
•    IBI tax. Paid annually (akin to the UK’s Council tax). I strongly urge this tax is set up as a direct debit; failure to pay it may lead the authorities to auction off your property in a procedure which is surprisingly expedient – as in months. Whoever is the owner of a property on the 1st of January of the current year is liable to pay for this tax.

Finally, on owning property, I cannot stress enough how advisable it is that you make a Spanish Will to dispose exclusively of your Spanish estate. This will not preclude any other made in your home country and is limited to your Spanish assets. It will save your beneficiaries time, money and hassle at a time of bereavement.

On a positive note the European Court of Justice on the 3rd of September 2014 has put an end to discrimination between residents and non-residents on benefiting from regional tax allowances regarding Spain’s Inheritance Tax. This landmark ruling will now force the Spanish Government , as it cannot be appealed, to allow non-residents to benefit as well from the generous regional tax allowances which until now were (unfairly) reserved to those holding resident status only. Predictably non-residents will group seeking a refund on what they overpaid over the last four years (statutory time period). This was a contentious point that I had been criticizing for years in all my articles and blog posts on the matter as discrimination cannot be tolerated among fellow EU member states as it undermines the very principles on which a united Europe was built on.

How to Buy Property in Spain – Conclusion

The budding signs of recovery are abundant indicating a turn of the tide in 2014. It is an excellent time to buy property again in Spain taking advantage of today’s post-crash low prices. I must highlight that in the particular case of British the favourable exchange rate trend only makes things cheaper by reducing the average conveyance transaction by thousands if not tens of thousands as the pound is on a two-year high against the euro. Osborne’s bold pension reform also provides new opportunities to seize the moment.

The strengthening of the pound against the euro, record low interest rates and big discounts make three compelling arguments to seize the opportunity and buy now.

Make sure you are assisted on your house-hunting by reputable experts (such as a long-established real estate agency, a reliable mortgage broker or a seasoned lawyer) to benefit most from the wide range of available bargains – you will be spoilt for choice.

I would advise buying with a view to enjoy the property and Spain’s privileged mild weather rather than be on the prowl for a quick profit as I believe that it may still take a while before we see again consistent capital appreciation.

I would also strongly advise that you rent a property in the area you are interested in for a reasonable time before committing to buy just to test the waters and experience first-hand the effect of seasons and how they impact your property and surroundings. You will avoid nightmare scenarios such as buying a flat above a late-night bar that only springs to live in the summertime.

You could always go for a Rent-to-Buy contract which allows you the freedom of letting a property whilst simultaneously entitling you the right to exercise a purchase option if interested (at a pre-agreed heavy discount stipulated in the lease contract which is well below the current market value); a win-win for both landlord and tenant. For more information please read my article Let-to-Buy in Spain: The Smart Choice which explains the pros and cons in detail. Alternatively you may be interested in buying property with a view to rent it out. Please read my articles Letting in Spain: The Safe Way and Tenant Eviction in Spain.

That said if you are buying for the long-term on a well-located area you should do nicely over the next years as an investment provided you purchase now at a reasonable price while bargains are still available.

You never know what you have until you lose it” – Anonymous.

Related articles:

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

2014 © Raymundo Larraín Nesbitt. All rights reserved.

Comments

comments

15 thoughts on “How to Buy Property in Spain Safely”

  1. Diana

    Hi, I’m on the ground in Barcelona and have run into the local terms for things. This article includes some great information, but it leaves me unsure of what some things are…

    For example:
    Cedula de habitabilidad
    Arras
    Catastro

    Thanks!

    1. Profile photo of Raymundo Larraín NesbittRaymundo Larraín Nesbitt Post Author

      Hi Diana.

      Addressing the three points you raise:

      1. “Cédula de Habitabilidad”. This is another term for a ‘First Occupancy Licence’ or ‘Licence of First Occupation’ (LFO, for short). It is explained in the above article under the section of buying off-plan and briefly mentioned in the section dedicated to resale property. Here is a link to my specific article which covers what a LFO is in detail: http://www.spanishpropertyinsight.com/legal/licence-of-first-occupation-explained/
      2. “Arras”. This is explained in much detail in my article ‘How to Buy Commercial Property in Spain’ concretely in the section that covers the second stage of buying commercial property with practical examples. Here is link to said article:
      http://www.spanishpropertyinsight.com/2014/07/17/buy-commercial-property-spain/
      3. “Catastro”. I haven’t yet written a specific article explaining it but take note to do so in the future. The catastro is a public registry that, amongst other things, records the boundaries for urban, rural and special types of properties. The cadastral value of real estate is used as reference by the Tax office to levy taxes on properties.

      Sorry, I cannot post the direct link to the articles which would make it all the easier. You are welcome Diana and good luck on the ground!

  2. Jordi Castillo

    Thank you Raymundo for your article, very useful. My partner (English) and I (Spanish) and both non-residents are in the process of buying an apartment on my home town Sant Feliu de Guixols (Costa Brava). I am wondering if it will be more tax efficient to put both names or his or my name on the title deeds. Also I currently have an inactive Spanish Limited Society with 3 parking spaces for a building project that never took off. In order to cover some of the yearly costs of running the apartment we will rent out this apartment, will it be cost effective to activate the SL for half of the year to declare the future income?

  3. Bruce Simpson

    I am looking at buying a villa near Mijas Pueblo which was built on urban land around fifteen years ago but is built much too large for the plot size. The approx figures are 500m2 plot, 195m2 legitimate build size, but actual build size around 295m2. Because of this, a Licence of First Occupation has never been granted, but all taxes etc are paid up to date to the Town Hall. I am told that we can apply for an exemption certificate – similar to a LFO -‘and that costs may be up to £25000, but no exact figure can be given. I understand that banks may not consider a mortgage offer without the actual LFO but am unsure as to whether this exemption licence is worth the hassle/money? The villa has been for sale for ages and I think this missing licence is the main reason why?
    Should I go ahead and buy without either licence, and if so, then how do I obtain a fair relative valuation? Or should I not touch it with a barge pole? I did speak with a local lawyer who advised me to only buy if the prude was insultingly low, but the vendor wants approx 50% more than the advocates valuation!
    Thanks for any advice.
    Bruce

  4. Profile photo of Raymundo Larraín NesbittRaymundo Larraín Nesbitt Post Author

    Hi Bruce,

    It’s very difficult for me to give concrete advice on such a matter without having examined any legal paperwork.

    Having said this, why are you so sure it was built on urban land? Does the Title deed, nota simple or any other legal document specify it is indeed urban land?

    Regardless, as I mention above, you should steer away from properties that lack a LFO. There is normally a very justified reason on why they have not attained it from the town hall’s planning department.

    You can read in my article “How to Buy Off-Plan Property in Spain” the associated legal risks of buying a property which lacks a LFO. I reproduce the text below:

    http://www.spanishpropertyinsight.com/legal/buying-off-plan-property-in-spain/

    • Primarily, you will not be able to take out a mortgage on the property or remortgage it – if needed be – by any lender other than the developer’s bank.
    • You will not be able to benefit from the official utility supplies; only from the developer’s supplies (water and electricity) with all the associated problems this has, namely that you may be cut off at any time as it is the developer who is paying for it and if they go into receivership you will be shut off. Besides, the site supply electricity doesn’t have the same strength and power surges are fairly common on simultaneously turning on various electrical appliances such as air conditioning. Until the LFO is attained, the developer has to pay, by law, for the utility supplies.
    • Any future prospective purchaser, or their lawyer, will haggle with you and require a steep discount if you lack a LFO. In a resale, the purchasers in turn will undergo the same problems to secure finance by means of a mortgage loan. A lack of a LFO tacitly implies that you are actually reducing the pool of potential purchasers for your resale.
    • If there are Planning issues, the town hall can set a charge against the property and you, as the new owner of an off-plan and not the developer, may be held liable to pay the fine for the planning illegality.
    • Needless to say, you cannot rent a dwelling without a LFO.

    Sincerely Bruce, with so much property up for grabs why complicate yourself and get tangled in a legal problem? As your lawyer mentioned, the risks are only offset if the price is ridiculously low.

    I have only recommended clients to buy (new-build) property without a LFO when the developer was about to file for insolvency. In which case my clients would have lost their down payments with little to no chance on recovering them in an ensuing creditor receivership as they stand last in the creditor’s ladder.

    So completion, despite there being no LFO granted, made perfect sense to protect their assets in this particular scenario. They had no other option; I believe you do. In all my articles and blog posts I always insist not to complete on (off-plan) properties without a LFO. The associated risks are much too serious. You will have problems when you, or your beneficiaries, in the future try to sell on this property. A property that lacks a LFO should not be dwelled, so logically the ‘”fair valuation” you seek would be very low as it is uninhabitable. It’s not fit for purpose which is precisely why lenders will turn you down on applying for a mortgage loan.

    Bruce be practical and just walk away. Look for something else; you will be spoilt for choice. It’s a buyer’s market.

    1. Bruce Simpson

      Thanks for the above which I have shown to the Estate Agent involved – and written to them as follows:

      “It might appear that I’m being unreasonable or “the bad guy” here, but I’m not! I’m seriously trying to sort out a deal for us to buy this villa. It would appear that the vendor either needs to reduce her selling price further or she must sort out her paperwork in order to achieve any higher market value – and that is likely to involve considerable time and costs.
      I have been reminded several times that in order to have any licences or exemptions granted by The Town Hall then the villa will need to meet today’s building regulations rather than those in place when it was built. As one example, electrical wiring & utility connectivity standards are much different today with cable width being much more robust than only a few years ago – and I’m advised that it is likely that the villa may not be wired to today’s standard. Equally, the same applies to sewerage & drainage standards. These are all potential ongoing costs. I’m told that maintenance of the road down to the Casa may also be a big problem – although my biggest worry right now is how difficult it is to turn safely out onto the main road.
      There is some difference of opinion regards the surrounding seemingly abandoned land and it is unclear what will happen with it as some is still classed as “campo”. At present, there is a scrap Luton-bodied lorry opposite the entrance & other plots look in a poor state of disrepair making the approach to the Casa quite uninviting. The dogs below roam until late at night with their compound & lean to building floodlit and horrible to look at. Having spoken to a previous renter of the Casa, they have confirmed that the dogs barking is a problem.
      All in all, this is a problem property in a location that has many problems as well. Maybe I should heed everyone’s advice and “be practical and just walk away” as Raymundo Nesbitt advises?”

      Their reply is as follows:

      “Thank you very much for your e-mail and the comments made by Sr. Nesbitt.
      He is mainly referring to new builds that have not received their 1st Occupation Licence.
      The property is definitely on Urban land and yes this is on all the documents.
      There is NO problem with the Utility suppliers. The owners have been paying Town Hall Rates, Rubbish Collection and have Electricity and Water Bills.
      None of our numerous rental clients have ever complained to us about the dogs, but then again, they all had dogs themselves except for the present tenant.
      The road down to the house is the joint responsibility of all. I remember Pedro cutting back the grass growing along the middle the last time but did not ask anyone to contribute to the cost. Juliette told me this morning that the plot at the bottom to the right of the path opposite the villa has been repossessed from the English man who owned it and Paco’s (Juliette’s partner who you met) cousin has bought it and intends to build a house there.
      Regarding the exit on to the main road, I find that quite straight forward, as there is a mirror opposite and it is not a busy road. Just need to be good at hill starts!
      Anyway, it sounds as though you have a lot of doubts, which I can understand, so maybe this property is not the one for you. A shame as I shared the enthusiasm you both felt! ”

      As the house has been there over 15 years & has a known history of single ownership plus rental through the local Estate Agent, do you still think I should walk away?

      Appreciate your comments – Thanks

  5. Profile photo of Raymundo Larraín NesbittRaymundo Larraín Nesbitt Post Author

    Hi Bruce,

    Again, without having access to the legal paperwork surrounding this case I cannot make an accurate assessment.

    I strongly advise you to hire a lawyer so he examines the legality of this property. This will help you to make an informed decision before you commit yourself.

    Regards
    Raymond

  6. Parker

    Hello Raymundo,
    I am a non-resident (non-EU-resident) thinking of buying an expensive villa in Andalucia which I plan to rent out in the next few years and then to completely rebuild for my own use. I have a wife and two little children – 2 and 5. I am thinking how to buy it – im my own name or in the name of a Cyprus limited company. I am mostly concerned with a wealth tax burden and inheritace tax in the future.
    Is my understanding correct that there is no wealth tax (or equivalent) for the ownership via the Cyprus company (now that Cyprus has been removed from the blacklist)? And from a rental income tax perspective there is not much difference between the two options?
    Is there a difference from a tax point of view between buying it in my sole name or together with my wife? Can I add my small children to the title deed to reduce the wealth tax burden and if so, how technically is this done? From an inheritance tax point of view I guess having all 4 of us on the deed is an advantage?
    Would appreciate your reply.
    Many thanks!

    1. Profile photo of Raymundo Larraín NesbittRaymundo Larraín Nesbitt Post Author

      Morning Parker,

      Many queries.

      I think you may be confusing Wealth tax with a specific tax levied on holding companies located in offshore tax havens. Wealth tax will still be payable, yes.

      Cyprus is no longer regarded as a tax haven by Spain as from May 2014 (double-taxation treaty and exchange of information in place). The special 3% annual tax levied on a propertie’s cadastral value by a holding company located in Cyprus is no longer applied. I think you are referring to this. You may want to read my article:

      Buying and Owning Spanish Property through Companies: Pros and Cons (Dispelling Spanish Inheritance Tax Myths)
      http://www.spanishpropertyinsight.com/legal/buying-owning-spanish-property-companies-pros-cons/

      On a different note, regarding Wealth tax, which was suppressed and then re-instated by the Government, it was meant to be suppressed – again – in 2015. However it has been exceptionally extended by one more year by the Government. This taxes net assets above €700,000 following a sliding scale. You can read further in my article:

      Spain’s Wealth Tax
      http://www.spanishpropertyinsight.com/tax-and-pensions/spanish-wealth-tax-patrimonio/

      The idea behind this is that the moment the economy recovers in Spain Wealth tax will be suppressed again. Spain is now clearly and objectively recovering at full speed. I personally don’t expect to see this tax active over the next two years.

      As for Inheritance tax the overall trend is that it is being reduced. Other European countries are exerting peer pressure. As for Andalusia, I believe the trend over the next years will be to reduce this burden as well following up on what other Autonomous Communities are doing in Spain (as in some Inheritance tax has been suppressed). More on this in my articles:

      Making a Spanish Will
      http://www.spanishpropertyinsight.com/legal/making-a-spanish-will/

      Changes to Spain’s Inheritance and Gift Tax Laws
      http://www.spanishpropertyinsight.com/2015/02/08/changes-spains-inheritance-gift-tax-law/

      From a rental perspective you can offset expenses and overheads on using a company providing it is line with its activity. You can’t do that if you buy on your own name.

      If you buy the property jointly with your wife yes there is a difference. As I explain above in my article Buying and Owning Spanish Property through Companies: Pros and Cons, the more people that own the property jointly the less inheritance tax that is paid. A beneficiary pays on the percentage he is bequeathed. So if you own 50% each with your wife this greatly reduces inheritance tax for your appointed beneficiaries.

      Yes you can add your two small children to the Title deed. This will indeed reduce the Inheritance tax. Is it recommendable? No, I wouldn’t advise it. On selling you will need a judge’s permission to sell following a legal proceeding, with all that implies, as we are dealing with under aged children. It can take fairly long and it is complex. So in case you need a quick sale, for whatever reason (i.e ill health), this will throw a spanner in the works and you may even lose the buyer.

      Besides on planning for the long run, Inheritance Tax will be reduced gradually in Andalusia following the overall trend in other Autonomous Communities as well as in European Union.

      Hope that clarifies Parker. Let me know if I can assist you buying this property. I’m based in Andalusia (Marbella).

      Regards

  7. STEPHEN WELBY-JENKINS

    What is considered as ” normal” when buying a property in Mallorca in terms of fixtures and fittings deemed to be “built in” eg built in kitchen appliances
    Fitted wardrobes etc, log burning stove – with chimney through a roof ?
    We were shown the property by the estate agent ( a long established German firm) and were under the impression these were included.
    Obviously easily removable items are expected to be taken but is it normal to take integral items subject to ” making good” after removal ?

    1. Profile photo of Raymundo Larraín NesbittRaymundo Larraín Nesbitt Post Author

      Morning Stephen,

      As you write correctly, fixed features, such as wooden beams (decorative, not supporting), floor tiles, built-in wardrobes etc are normally sold with the property.

      Movables such as Siemen’s kitchen appliances (double-door fridges, oven), etc are normally not included.

      What’s normally done is that affixed to a resale’s Private Purchase Contract lawyers agree on an inventory of furniture and goods. This inventory is regarded as part of the contract and is legally binding compelling both sides. If the seller omits something he will be in breach of contract.

      The lesson is that this inventory on buying resales must be painstakingly detailed; nothing can be left to chance or ‘overunderstood’ as included. I have seen, for example, multi-million pound properties being sold with a huge state-of-the-art flat screen tv from a renowned brand (over €15,000) affixed on a wall that was ‘understood’ as part of the sale.

      The vendor, after the deal was closed, sneekily replaced the tv with a crappy €500 one from local Hipercor. Which stresses again that the inventory must detail (for example) a tv’s brand, the model, size etc.. not just a generic ‘flat screen’ reference. This is just eye candy to jack up the price and entice a potential buyer. You are effectively buying into the idea of a luxurious life style; that’s what’s being sold.

      The Title Deed itself only bears a generic description of the property (plot size, built size, boundaries, number of rooms and such). Such things as movables or fixtures are not mentioned. So anything that is not included in the inventory (with great detail) signed by both parties in agreement is as if it were not being sold and cannot be claimed.

      If your lawyer did not include an element in said inventory or alternatively it wasn’t worded as part of the contract or even as essential then you really don’t stand a chance before a Spanish law court. The judge will throw away the case as he will understand that these elements were not deemed as essential by a buyer and do not frustrate the goal of the sales contract.

      Hope that clarifies.

      Regards

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