Find an independent lawyer
You need a good lawyer when buying property anywhere in the world and Spain is no different. So your first step, before even talking to estate agents, should be to find a trustworthy lawyer. With a competent, independent lawyer looking after your interests you run little risk of coming unstuck when buying off-plan in Spain.
Many of the people who run into trouble do so because they use a lawyer recommended by their estate agent or, what is worse, the agent’s in-house lawyer. Estate agents are highly motivated to close sales that pay juicy commissions and unscrupulous agents recommend lawyers who will facilitate this outcome. Furthermore some estate agents have murky commercial relationships with their recommended lawyers, which creates conflicts of interests. Buyers can be lulled into a false sense of security whilst the recommended lawyers do nothing more than oil the wheels of the transaction on the estate agent’s behalf. This has been the fate of some of the Brits who bought on the Alcaidesa development currently at the centre of the present money-laundering scandal. Estate agents making a fortune selling the dodgy development were recommending lawyers who were also making a fortune selling the dodgy development. The buyer’s needs for security of purchase were irrelevant in this equation.
Reserve payment contract
When you have chosen a property the first step is to take it off the market and reserve it for a limited period of time. This is done by paying the developer a reserve of 3.000 to 6.000 Euros, which typically buys you 30 days to arrange for signing a private sale contract and making the first payment. The reserve payment should be accompanied by a signed contract (reserve contract) that specifies the terms of this payment. Don’t make any payments without a signed contract that you understand. If it is in Spanish you will need someone you can trust, preferably a lawyer, to explain it to you. The payment is normally made to the developer, but occasionally to the estate agent acting for the developer (avoid this if possible).
Note that when considering whether or not to make a reserve payment you may find yourself under some pressure to do so from the vendor side (estate agent and/or developer). All the usual stuff, you know, someone else is about to move on it, price is about to go up, etc. Even if it were true just ignore it. If you miss the property it’s not the end of the world and you’ll find something else, maybe even something better. But if you buy in haste and fail to take the appropriate precautions you may live to regret it.
Assuming that the reserve you have paid is fully refundable then you have 30 days (or the period specified in the reserve contract you have signed) in which to do all the appropriate checks (due diligence) before you go past the point of no return. This point comes when you sign the private sale contract and make a substantial non-refundable payment of 10% or more.
If the reserve payment is non-refundable you still have 30 days but might lose the payment if you decide to back out. Decent developers and agents will always return a reserve payment if this is the wish of the client.
To be effective due diligence requires a professional understanding of Spanish law so always leave it up to your solicitor and don’t even think about leaving it out altogether. However as it helps to understand what is going on at each stage I will explain briefly the sorts of things your lawyer will be checking for you (not all the checks are necessary in each case and your lawyer will be best placed to decide what checks are appropriate in your case).
- Review of private sale contract. The private sale contract you sign with the developer at the next stage covers all the key aspects of the agreement you have with the developer. It is also legally binding so don’t sign without being sure of what you are committing to. It will specify the property you are buying (supported by the plans and specifications), the obligations of each party, key dates, and how a failure by either of the parties to comply with the contract will be resolved. Your lawyer will need to check the contract to ensure that it adequately protects your interest.
- Confirm that the developer has insurance or bank guarantees to protect your stage payments (as required by law). This is a very important issue as otherwise your payments could be at risk should the developer fail. Some developers try to avoid providing this guarantee as it represents an extra cost to the developer. Do not make any stage payments to any developer who cannot prove that your payments are insured. Many developers will tell you that they are in the process of arranging the insurance; this is not good enough.
- Check the land registry to confirm 1) that the land belongs to the developer and 2) what debts or charges are secured against this property.
- Check whether planning permission has already been granted by the local authority (Licencia de construcción y ocupación). If not then you really shouldn’t sign anything more than a fully-refundable reserve payment contract. Whilst planning permission is still outstanding any contracts you do sign need to make it very clear that, as a minimum, you can back out at any time, with no penalty and with a full refund.
- Check the financial accounts of the developer. This can be difficult for various legitimate reasons. However under certain circumstances it might be worth doing, though it is rarely necessary. In any event developers should have provided you with a reasonable amount of background information on the company.
- You may wish to check that the development complies with the regional urban plan. However if the developer can demonstrate planning permission then compliance with the regional plan can be taken for granted everywhere in Spain other than certain municipalities on the Costa del Sol, Andalusia (see last point below).
- Note that when buying in the municipality of Marbella (Costa del Sol, Malaga province, Andalusia) your lawyer will need to check that there are no judicial proceedings in progress or doubts as to the legality of the building permits granted by the town hall of Marbella.
Sign private sale contract with developer
Once your lawyer has carried out an appropriate due diligence you can then sign a private contract of sale with the developer. At the time of signing this contract you will typically make a substantial payment of 10% or more (plus VAT) of the price of the property. This is the point of no return beyond which you cannot back out without heavy financial penalties, probably involving the loss of all payments you have already made to the developer.
This private contract is legally binding and commits the developer to deliver the property as detailed in the plans and specifications within the timeframe agreed. However it is not the same as owning public title deeds to the property and this contract cannot be registered in the land registry – the only truly secure guarantee of ownership. You will not own the property in this sense until it has been built and you have signed public deeds of purchase before a Notary.
You do not need to be physically present in Spain to sign this contract. A contract signed by the developer can be faxed to your for countersigning and returning by fax. However signed originals also need to be exchanged by post. Both you and the developer should end up with original copies signed by both parties.
Stage payments and construction
Once you have signed the private sale contract with the developer and made the first payment there is not much to do until the property has been completed and you can take possession with the signing of public deeds. During this period, which could be anything up to 2 years, construction of your property will be underway and you may be required to make a series of stage payments, if that is what you have agreed with the developer. If you are required to make any further payments ensure that you receive an official receipt from the developer detailing these payments.
Developers are on the whole very bad at keeping buyers informed of construction progress. Many clients have complained of being left completely in the dark from the time they sign the sales contract. Some developers have processes in place to keep clients informed of the progress of work, regardless of any problems, but they are in a minority. This is particularly frustrating for overseas buyers who aren’t in Spain and can’t drive down the road to see how their property is coming along. You should push the developer to send you regular progress reports and give you plenty of warning if there are any changes to the expected date of delivery.
Final legal checks
Once the property has been completed you can take possession by signing the public deeds before a Notary. Before doing this your lawyer will need to carry out a series of final checks:
- Confirm that the property has been certified as finished by a registered architect (Certificado de final de obras).
- Confirm that the property has been given a residential-use licence by the local government (Cédula de habitabilidad o licencia de primera ocupación). Once the property has been built an official from the planning department of the municipal authority will inspect the property to ensure that it complies with regulations for newly-built residential properties. If the property conforms to regulations it will be granted the appropriate licence. Without this licence you cannot in theory take out a residential mortgage nor have the utilities connected. Promoters have been known to sell properties without this licence, which only stores up problems for buyers.
- Request a land registry filing for your specific property to check that there are no unexpected debts or embargoes on it. At some point during construction the promoter should have signed deeds before a Notary (escritura de división horizontal) that register the division of the original land into all the individual properties resulting from the construction. This means that the property you are buying is now inscribed in the land registry and you can check its status. You should not sign any deeds before your lawyer has checked the land registry filing (nota simple).
- Have the local authority confirm in writing that the property has no outstanding debts (such as unpaid taxes) with the local government, or other outstanding issues that might cause the buyer problems.
Signing public deeds
This is when you gain full legal title the property and receive keys. A document of deeds (Escritura Pública) will be signed by both you and the developer before a Notary, and the deeds can then be submitted to the land registry, at which point you become the undisputed owner of the property.
At the same time as signing the public deeds you will need to settle all outstanding payments with the developer and the tax authorities. If you are paying with your own funds you will need to produce a bank-guaranteed cheque to cover the amount, or demonstrate that the funds are being paid in some other way that is acceptable to the developer (by bank transfer for example). To avoid any problems when using a cheque it is best to use one drawn off a Spanish bank account. If you are using a mortgage a representative from the mortgage lender will be present to confirm that the developer is receiving payment from the lender.
It is always best to attend the signing of deeds in person, accompanied by your lawyer. However if you are unable to do so you can grant your lawyer or another person power of attorney to sign the deeds before a Notary on your behalf.
After signing the deeds
Though the Notary’s office will have faxed notification of the sale to the land registry your lawyer will need to submit the deeds to the land registry and have your title inscribed in the registry. This needs to be done immediately after signing the deeds.
You will then need to register your purchase with the municipal authority corresponding to your property so that you can pay the rates.
Last of all you will need to set up accounts with utility companies so that you have water, gas, electricity, and a telephone line. These will all have been pre-installed by the developer but you will still need to set up an account and make payment arrangements with the utility companies.
Snagging is the process of ironing out the little faults that inevitably arise in a newly-built property as it settles down onto its foundations. Cupboards, doors and windows that don’t shut perfectly, switches that don’t work, taps that don’t close fully, cracks in plastering, the list is endless and will vary from case to case. Snagging also needs to identify any faults such as failure to comply with plans and specifications. You need to identify these problems within days of taking possession, document them carefully and then have the developer put them right.
Snagging is normal and expected, though the better the build quality (materials plus workmanship) the less snagging that needs to be done. It is very important to pay great attention to snagging when you take possession of a property that you originally bought off plan. If you carry out a thorough and well documented snagging, using digital photos and comparing the reality of the property to the plans and spec, the greater your ability to ensure that faults are put right by the developer, quickly and at no cost to you.
Don’t leave snagging to the estate agent you bought from, don’t leave it to the developer, and most of all don’t leave it out altogether. Snagging can be a problem for overseas buyers who don’t have the time and wherewithal to do it themselves. The best solution by far is to hire a professional, such as a chartered surveyor, to manage the snagging process for you. The benefits far outweigh the costs.