Home » MARKET HISTORY: Off-plan property boom was like a Ponzi scheme that lulled buyers into false sense of security

MARKET HISTORY: Off-plan property boom was like a Ponzi scheme that lulled buyers into false sense of security

A forest of cranes on the Costa del Sol, 2007

In this article – part of a series looking back at the Spanish property boom and bust – I compare the off-plan investment mania of the time to a Ponzi scheme that lulled latecomers into a false sense of security.

Off-plan investment and land speculation – which are linked – were at the heart of the Spanish property bubble, and it was particularly bad on the Costa del Sol, where many of the buyers were foreign, led by the British and Irish.

As the Spanish real estate boom got going (driven by factors I explained in my last article: What factors inflated the Spanish building boom that caused so many off-plan investors to lose their money?) buyers started focusing on off-plan property for the following reasons:

  • Much of the existing housing stock at the time was not of good quality, making off-plan look more attractive in comparison. Brand new homes with all the latest designs, fixtures, and fittings are appealing to many buyers
  • New projects with multiple units, glossy brochures, and high commissions are an estate agent’s dream. It’s easier to sell off-plan dreams than shabby old homes full of someone else’s possessions
  • Off-plan payment terms with deposits and stage payments make it possible to invest in one or more units without having to stump up the full amount at the start
  • Off-plan buyers were convinced they were getting a discount for buying off-plan, and were also convinced by agents and developers that prices would rise and leave them sitting on a hefty capital gain at completion time
  • Off-plan investors could engage in ‘flipping’, or selling on their contracts to another buyer for a profit, often cash-in-hand.

Flipping off-plan property

How does ‘flipping’ work? I’ll use a simple example to illustrate. Say I reserve an apartment with a list price of €100,000 off-plan. I pay a 10% deposit and then another 20% in stage payments, with 70% to pay at completion in two years. If I sell the contract on to another buyer before completion valuing the property at €150,000, the new buyer pays me €50,000 cash and the outstanding amount to the developer at completion (or tries to flip it on to another buyer). I will have invested something between €10,000 and €30,000, and got back €50,000, perhaps in a year or less. Play that game successfully with multiple units and you can make a lot of money very fast.

Off-plan Ponzi scheme

In the years leading up to about 2003/4, the first wave of off-plan investors did indeed make big cash profits. It was like a Ponzi scheme, and they were the first ones in. Early off-plan investors who bought multiple units and flipped them on to the next wave of buyers got the full upside of fast rising property prices at a fraction of the costs, and many of them leveraged up to the max to take advantage of this get rich quick scheme. Right place, right time, and those who went in hard made a fortune.

True lies

Some agents used true tales of fabulous profits made by early-birds to encourage subsequent waves to follow in their footsteps. It all sounded so convincing. You could use equity release to get money out of your house back home where it always rains, reserve multiple units off-plan on the sun-kissed Costa del Sol, flip them on to the army of buyers coming behind you, bank huge cash profits (why involved the tax man in this private affair?), maybe keep a couple of units for yourself to use and rent out for 32-weeks/year for a tidy rental yield that pays your running costs and some, all whilst eating and drinking lots of delicious and cheap Spanish food and booze, feeling great. Off-plan investors were wined and dined on inspection trips, and I’m sure that didn’t help them think straight.

Developers were taken in by this too. It made them believe demand was much higher than it actually was. When the boom got going they saw their projects sell out in no time at all to buyers falling over themselves to reserve multiple units. Long lead times and the awful, unresponsive planning system ensured scarcity that drove up prices even further. Land speculation went crazy. The business of residential development attracted many new entrants, many of them who did not belong in the business. The Costas started to look like a forest of cranes, and there came a point where there were just too many crappy projects on the market to sell.

The music stops

Building for off-plan buyers on the Costa del Sol in 2009, long after they stopped coming

And just like any Ponzi scheme, there also comes a point when the next wave of buyers don’t show up. Things started going wrong in Marbella earlier than other places because of the massive town planning corruption scandal and ‘Operation Malaya’ police bust of 2005 that left the municipality with 30,000 illegally built homes. I’m guessing here but, Marbella apart, I think the wave of buyers who invested off-plan on the Costas from 2004/5 onwards were the unfortunate ones. Flippers were left holding the baby, and genuine buyers overpaid for developments in a market where quality had been going downhill for quite a while.

As I remember it, off-plan demand was already cooling rapidly before 2007, when we felt the first tremors of the financial crisis. But 2007 was also a record year for Spanish housing starts, with more new homes built than much of the rest of Europe combined. Demand was going down fast, whilst new projects were launched in mind boggling numbers. Looking back it’s easy to see a bubble that was going to burst one day anyway, but the financial crisis ensured it turned into an economic catastrophe. The Spanish home building industry started collapsing in 2008, and almost a decade later it is still just a shadow of it’s former self.

It wasn’t all bad. One friend of mine bought off-plan in a project in Pals, on the Costa Brava, I think it was in 2007. When the crisis hit and the developer folded, her bank guarantee was honoured, and she got her money back about a year later, making a tidy profit on the exchange rate. Then in 2012, when the pound had recovered some ground, yet Spanish property prices were on the floor, she bought a townhouse in Begur for a bargain price you wouldn’t get close to today. The off-plan disaster worked out well for her.


Paradoxically, off-plan investing seems safest when it is riskiest, and riskiest when it is safest. The worst time to buy is at the peak of the boom, when everyone says it’s a good idea, yet a crisis lurks just over the horizon. The best time to buy is in the depths of the crisis, when everyone says you are mad.  Around that time I advertised a development in Ibiza called Les Terrasses de Cala Tarida, and I know some of my readers bought there as a result. They are now sitting on spectacular capital gains if they haven’t sold already.

So where are we now on the continuum from boom to bust and back again? In coastal hotspots, and big cities like Barcelona and Madrid, recovery started about three years ago, and if it’s true that property market cycles last seven years I guess we still have a few good years ahead before we get near another downturn, or another bubble for that matter. And so far I haven’t heard stories of off-plan flippers back in the market, though I can’t swear it’s not going on. If developers have learnt anything, they won’t allow it.

Recovering off-plan deposits and stage payments

The biggest victims of the last boom’s off-plan mania were investors who lost their deposits and stage payments when developers went bust before completion without bank guarantees in place. Those unfortunate people lost every penny invested. Belatedly, however, there is good news for them. Thanks to a change in the law they can now take the developer’s bank to court and get their money back with the help of Spanish Legal Reclaims.

Spanish Legal Reclaims – Get Your Money Back

spanish legal reclaims

This series of articles on the Spanish boom and bust is sponsored by Spanish Legal Reclaims, legal advisors who specialise in helping recover off-plan deposits and stage payments.

SPI Member Comments

Thoughts on “MARKET HISTORY: Off-plan property boom was like a Ponzi scheme that lulled buyers into false sense of security

  • SurveySpain says:

    It was the taxpayer who eventually paid for the boom. They rescued the banks who had lent to the speculators. They also lent to the developers and builders, based on development appraisals based on demand based on the deposits paid by the speculators out of the money they borrowed from the banks! Now, perhaps, there is justice as the banks, whose business is to judge risk of repayment of loans and who got it so badly wrong, are now having to repay some of the borrowers. Though again it will be everyone with a bank account who will pay as banks increase their charges to cover the costs of these repayments.
    Is it happening again now? There is certainly a great many developments being started and finished, but the individual buyer speculation doesn’t appear to have started yet. It will though as agents and developers use the examples of your friend and Ibiza clients and the money they have made and ‘sell’ that possibility to new buyers. But they have missed the boat. As is said, “when you can see the band wagon coming along, it’s too late to jump on it”. The only people to make a profit will be the people selling to it.
    Also, things have changed. Developers make it a condition of the contract that they cannot be flipped, as that means that they are having to sell the remaining units in competition with the ‘Flippers’. In addition, the taxman is much more aware of what’s happening and will catch people ‘flipping’. There will be a record in the developer’s books of a contract to the Flipper, with their DNI/NIE/Passport No., and they’ll find and fine the Flipper as well as charging the tax. If they hold on to the property and then sell, the acquisition, finance, holding and sale costs amount to 30% or more, so the property price has to rise by that amount just to get the money back, without a profit.

  • I could be very wrong, and I haven’t been in Spain for a year now, but it has long been my understanding that what I understood to be a Contract Cession – Flipping – was actually made illegal post 2007, certainly that was my understanding in Andalucia but perhaps different regions have different laws?
    So, that now, if you buy pre licence, off-plan etc with a reservation, you have under law to go to full completion / escritura in your own name – you cannot sell on your ‘in process’ interest to another party.
    My understanding is that Cesssion – simply isn’t allowed under the law any more – which seems to me to have been one of the very few proactive actions, after the times of which you speak, which were truly horrendous not only in hindsight but at the time also, which has made this and your other articles a fascinating read, as you are the only person I know how has clearly and calmly explained it all as it was. Look forward to next months article!

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