EDITOR’S NOTE: Lawyer Raymundo Larraín Nesbitt takes us step-by-step through the legal procedure to buy new-build property in Spain from a developer.
By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Lawyers
8th of March 2017
Continuing last month’s topic on Buying Property in Spain from a Private Seller (Resale Property), this month I provide a general overview on the full legal procedure on buying off-plan property from a developer (also known as new-build). The procedure to buy off-plan differs significantly from buying resale; to the point it warrants its own article as the pitfalls vary meaningfully from one another.
The following article provides a sweeping outline on the buying procedure. If you are looking for concrete advice on a given matter, I highly advise you read my listed articles below which focus on specifics. Just scroll down the page to the bottom section which headline is “Related articles.”
I have simplified the procedure on purpose for ease of comprehension. If you are looking for more detail, I advise reading my article How to Buy Property in Spain Safely which gives an in-depth account of the full buying procedure.
It is strongly advised you read this article in tandem with my article Buying Off-Plan Property in Spain.
First Stage: The Reservation Contract
Bear in mind that you are paying a deposit on a property which under normal circumstances does not even exist yet and is unlikely to exist until a couple of years’ time. New-builds, unlike their key-ready resale counterparts, have an inherent element of risk associated to them. This risk is mitigated in the knowledge that new-builds are, in general, significantly cheaper than a resale property (on average by 30%). Moreover, as they are new, they are normally built catering to the highest quality standards and employing the most modern materials and know-how. This has a significant impact in insulation, for example, which may in turn impact your Town Hall tax bill by reducing it significantly (read pro-tips below).
After making enquiries and looking around for a property you may have taken a liking to one. Off-plan properties are normally listed by developers or real estate agencies. They will nudge you to sign what is known as a reservation contract (or holding deposit) which strikes the new-build property off the market for a pre-agreed period of time; normally spanning 30 days.
The deposit normally amounts from €3,000 to €6,000 depending on the property. The deposit contract is a succinct document that is normally only one page long. It has very few details, amongst them the developer´s name and company details, the development’s facilities, a general property description and the asking price.
The reservation deposit will be deducted from the final sales price at completion (third stage, see below).
- It is strongly recommended that you hire an independent conveyance lawyer from the outset (prior to signing a deposit contract). Do NOT hire lawyers recommended by the developer; much less use his own lawyers no matter how reputable (even if free of charge). They are biased and will act only in the developer’s best interests, not your own – you will pay dearly on making this mistake. On following this simple, yet essential, advice buyers stand to sidestep most blunders on buying off-plan property in Spain.
- You should not pay any deposit unless the developer or estate agency have supplied you first with a copy of an approved Building Licence. The reason is because it could void the bank guarantees securing your stage payments; in plain English, you would lose all your money without any legal recourse. More details in my article Law 20/2015: Important new bank-guarantee legislation explained for offplan buyers.
- Reservation deposits are normally non-refundable unless expressly stated otherwise.
- You need to apply for a NIE number (Tax Identification Number for Foreigners). More details in my article: NIE Number Explained.
- You should open a non-resident bank account.
Second Stage: Signing a Private Purchase Contract
Before the 30 days are up you will be expected to sign what is known as a Private Purchase Contract (or PPC for short). In Spanish, this is known as Contrato Privado de Compraventa. In English law we know it as Exchange of Contracts. The PPC will be a long legal contract which will list the buyer and seller´s personal details, a full property description, the agreed sales price, the schedule of stage payments, the buying terms and the time frame to complete before a Notary Public.
Your lawyer will have normally already supplied you with a report on title so you are perfectly aware of the legal situation of the property you want to buy before signing the private agreement. This report on title should cover at the very least the following check list:
- Is the developer creditworthy? Construction track record?
- Does the developer own the land where the property will be built?
- Is there a valid Building Licence issued by a town hall?
- Are there any challenging planning issues overshadowing the development?
- Is the construction site compliant with Spain’s Coastal Law?
Normally on signing a PPC you are expected to make a down payment equivalent to 10% of the purchase price which will be deducted upon completion (stage three). This amount of money is non-refundable.
You will be expected to pay approximately 35% of the final sales price in stage payments. These are deducted at completion (stage three) from what you owe.
- All stage payments (including the initial reservation deposit mentioned in stage one) should be secured by what are known as bank guarantees. I simply cannot stress enough its importance. This document will be handed to you each time you make a stage payment and acts as a safety net on all the interim payments you make until the property is built. This safeguards your money in the event the development is not finished or should the developer file for bankruptcy. Attaining copies of bank guarantees is a top priority for your appointed conveyance lawyer.
- Remember to store safely a copy of all the stage payments you make into a Spanish bank as they will be required upon completion. You may also need them further on should you instigate legal proceedings.
- A developer cannot amend the agreed delivery date of a property worded in the PPC without your written authorisation.
Photo credit: Otherworldly Hotel Marqués de Riscal amid vineyards, Valladolid, Spain. By Frank Gehry.
Third Stage: Completion
One of the particularities of buying off plan property, is that completion normally takes place some two years after signing the PPC (stage two). The reason being is that the property is under construction and you only complete when it is finished.
Completion is the term used to sign the Title Deed which is witnessed by a Notary Public. Additionally, if mortgage finance is required a second deed is signed called a Mortgage Deed. Completion is the time when you pay the balance that you owe, normally 50% of the sales price.
If you need a mortgage loan to complete on the property, it is highly advisable you negotiate a reasonable time frame to secure it i.e. 45 to 60 days. This is particularly true if a borrower is non-resident. A borrower requires an Offer in Principle (or Agreement in Principle) from his lender known as Oferta Vinculante in Spanish.
At completion, you take legal possession of the property which is symbolized by being handed over the house keys.
At completion, you may be surprised to find a great number of people:
- The developer’s legal representative and his lawyer.
- The bank´s representatives (if a mortgage loan is required).
- The estate agent (this is the time when they earn their commission)
- A translator.
- And finally, the Notary himself.
Your lawyer will file and pay the buyer´s taxes and lodge under your name at the Land Registry your new Spanish property.
Congratulations, you are now the official owner of a Spanish property. Enjoy!
- It is strongly advised you do NOT complete before you are handed with a copy of the Licence of First Occupation (LFO, for short). This document ensures the property is above board (normally). Completing without a LFO has associated a number of key problems:
- Primarily, you will not be able to take out a mortgage on the property or re-mortgage 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 (legally) rent a dwelling without a LFO.
- It is strongly recommended you hire a chartered surveyor to carry out a snagging list of the property; this is particularly true of new-build properties. The time to detect and mend all outstanding construction flaws is before you complete at the Notary. Once you complete, you lose your leverage unless your lawyer has practiced a retention. Commissioning a comprehensive snagging report avoids countless problems and is worth every penny in my experience.
- Failure to secure a mortgage loan in time may result in the loss of the 10% deposit. The developer will always offer a buyer to subrogate himself in his position taking on the developer´s mortgage loan. This may not be always beneficial for a buyer.
- It goes against a buyer´s best interests to under-declare part of the sales price at completion (besides being illegal). More on why in my article Taxes on Selling Spanish Property.
- You should immediately replace all the locks of your new property (including storage rooms) as countless people have had access to copies of your home keys during the construction phase. This avoids thefts and break ins during the first months.
- Request an Energy Performance Certificate from the developer prior to completion. Properties with high energy efficiency ratings qualify for tax rebates of up to 20% on their local Town Hall tax (i.e. IBI tax).
Photo credit: Fallingwater (Kaufmann Residence) by Frank Lloyd Wright.
Fourth Stage: Post-Completion
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.
- On owning property in Spain, it is strongly recommended you make a Spanish will. This avoids your heirs a number of problems down the line.
- You should set as a direct debit utilities and local taxes.
- On owning property, you should appoint fiscal representation to comply with your annual Non-Resident taxes.
- If you plan to rent out your property as a private holiday rental some regions have stringent laws on the matter – seek legal advice. Some regions require you to apply for a rental licence or that you register your holiday rental home. Non-compliance may attract humongous fines.
- IBI tax is not normally available to pay until one or two years after completion. However, you will be expected to pay all the backdated taxes since you completed.
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:
- Value Added Tax (IVA, in Spanish): 10%.
- Stamp Duty (AJD, in Spanish): 0.5% – 1.5%
- Fees & Charges
- 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)
- Storage rooms (trastero) and car parks (plaza de garaje) sold individually and legally separate from the main dwelling have a VAT of 21%.
Hiring a seasoned lawyer, in my experience, pays for itself on all the money you stand to save on avoiding the most common pitfalls on buying a property in Spain.
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.
It is important you avoid being pressurized into completing; take your time to fully assess the information you are being given and do not hesitate to ask any questions.
And to close, I stress draconianly not to complete without a Licence of First Occupation.
Because impartial legal advice is priceless.
“Your best work is your expression of yourself.” – Frank Gehry.
Frank Owen Gehry is a Canadian-American architect who won the Pritzker Prize in 1989. He is known for his buildings such as 8 Spruce Street, Dancing House, Port Olímpic, Jay Pritzker Pavilion, the Hotel Marqués de Riscal and the Guggenheim Museum in Bilbao, Spain. He built buildings across the United States and across South America.
Larraín Nesbitt Lawyers, small on fees, big on service.
Larraín Nesbitt Lawyers is a law firm specialized in conveyancing, taxation, inheritance, and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at email@example.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.
Original article published at Larraín Nesbitt Lawyers: Buying Property in Spain from a Developer (Off-Plan Property)
Legal services Larraín Nesbitt Lawyers can offer you:
- Conveyancing – Buying.
- Conveyancing – Selling.
- NIE Number (Tax Identification Number).
- Fiscal Representation (Non-Resident Income Tax).
- Will Service.
- Buying Distressed Property in Spain – 8th August 2011
- Off-Plan Construction Guarantees – 8th November 2011
- 10 Reasons why Your Case Against a Developer may be Thrown out of Court in Spain – 8th September 2012
- Non-Residents: Six Advantages of Making a Spanish Will – 8th August 2012
- Buying Resale Property in Spain – 21st February 2013
- Title Deed Explained – 8th April 2013
- Nota Simple Explained – 8th April 2013
- Licence of First Occupation – 8th April 2013
- Bank Guarantees in Spain – 8th April 2013
- Buying Off-Plan Property in Spain – 8th of June 2013
- Investor Guide to Spain’s Golden Visa Law – 8th November 2013
- Bank Repossessions in Spain – 21st February 2014
- Buying and Owning Spanish Property through Companies: Pros and Cons – 7th March 2014
- How to Buy Commercial Property in Spain – 4th July 2014
- How to Buy Rural Property in Spain – 8th August 2014
- How to Buy Property in Spain Safely – 10th October 2014
- Spain’s Holiday Rental Laws – Explaining the Latest Changes – 8th March 2015
- Supreme Court Rulings on Bank Guarantees – 8th April 2015
- La Complementaria or Bargain-Hunter Tax – 8th May 2015
- House Hunting in Spain – The New York Times. June 2015
- Taxes on Buying Spanish Property – 8th July 2015
- Non-Resident Taxes in Spain – 8th December 2015
- Resurgent Spain: Málaga Sees Strong Sales – Mansion Global (The Wall Street Journal). December 2015
- Snagging List Explained – 28th October 2016
- Buying Property in Spain – 10 Reasons to Hire a Lawyer – 8th November 2016
- Buying Property in Spain from a Private Seller (Resale Property) – 21st of February 2017
- Buying Property in Spain from a Developer (Off-Plan Property) – 8th March 2017
- NIE Number Explained – 8th May 2017
- How to inspect an off-plan property overseas – The Sunday Times. July 2017
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