It pays to be organised when buying property in Spain. Here is an overview of the steps you need to take to go about buying a resale property in Spain in an organised way.
Once you identify a property that you want to buy things get serious. If you were to give up at this stage you would lose nothing but the time and money spent so far on the search. Irritating as this might be it would have no lasting consequences. However if you proceed to buy and get the purchase wrong you run the risk of losing a substantial amount of money, either through capital losses or extra costs, and you could end up with a property in a foreign country that is nothing but a burden to you. But if you get the purchase right, which means buying the right property for the right reasons and in the right way, you will end up with a property that enriches your life, both financially and in terms of enhancing your happiness and quality of life. Since that is the whole purpose of your purchase – to enrich your life – you need to get everything right during the buying stage.
All of the serious problems that foreign people run into when buying property in Spain are avoidable and are caused by a lack of understanding of the process and the risks. It follows that you can avoid these problems if you understand the conveyancing process and go about purchasing in the correct way. And as you approach the buying stage never forget that correcting mistakes made in the conveyancing process can be difficult and expensive, so do everything in your power to get it right from the start.
No matter how well you understand the process there is no substitute for seeking help from qualified professionals, as much of the work can only be done successfully by a qualified Spanish lawyer. Furthermore whilst we cover the main issues that are likely to affect all buyers it is important to realise that every case is different and there are exceptional issues that might need resolving in your case. Only a competent and independent lawyer can advise you as to what is necessary in your case.
Due to important differences in their respective conveyancing procedures we will look at resale properties and off-plan properties separately. First we will look at the conveyancing process when buying a typical resale property, and then point out any differences that need to be understood when buying off-plan.
Buying a resale property
Overview of process
An overview of the conveyancing process in Spain is as follows. You make an offer and then negotiate with the vendor until you reach an agreement, after which your lawyer will carry out the necessary due diligence and check the appropriate contracts. Once you get the okay from your lawyer – but never before – you sign a private contract with the vendor and make an initial payment as specified in the terms of the contract. This is the point of no return after which backing out becomes difficult or impossible without significant financial loses. You will then have time to prepare for the signing of the deeds before Notary – normally between 1 and 3 months – in which time you make arrangements such as getting your funds in place. Come the appointed time you sign the deeds before Notary and take possession of the property. The final stage involves inscribing your title in the property register, paying any relevant taxes and setting up utility connections.
In reality you may find that some stages, for instance negotiations and due diligence, can be done in parallel (at the same time) rather than in series (one after the other) or that the whole process seems to be a lot more messy. However it is important to understand the ideal sequence of events and the logic behind this, which is essentially to protect your interests. Perhaps the most important point of all is that you should never sign contracts and make any non-refundable payments until you get the all clear from your lawyer after an adequate due diligence.
It is worth pointing out that, in general, you need to take more precautions when buying from a non-resident than when buying from a vendor who is resident in Spain. It is relatively easy for non-residents to leave Spain without settling their outstanding debts, such as taxes related to the property, and some of these debts can become the new owners problem. The tax authorities and other debtors can pursue Spanish residents for their debts, but as it is far more difficult to pursue foreigners in another country they tend to go after the vendor’s previous asset – i.e. your new property.
Preparing to make an offer
If you find a property you want to buy you will need to make the vendor a serious offer, which will be the basis for your subsequent negotiations. But before making an offer you should prepare your negotiations strategy and identify and prioritise the information you will need to proceed with the negotiations.
Review your budget
Unless you have more than enough money to buy the property it is always important to review your budget (based on the property in question) before you proceed to make an offer. You may be able to negotiate the vendor down from the asking price but don’t count on it, and don’t make an offer you can’t afford. People often find that the property they set their hearts on is the one that most stretches their budget, and if this is the case you should go over your finances once again and identify if there are any unknown variables that might put the property out of your reach. This is a very important point as if you are over optimistic about your finances when you pay an initial deposit you may lose your deposit if you can’t then complete.
Be realistic about all the transaction costs if you wish to avoid unpleasant surprises. People often use a 10% rule of thumb for estimating the transaction costs but this might over or under-estimate the costs in your case by up to 2%. Try and estimate the costs as accurately as possible before you start the negotiations as they may have a bearing on what you can afford to pay. Also, never forget that you will have to furnish the property, so keep the costs of this in mind as you proceed.
If you need a mortgage to help finance the purchase this will have an big impact on the price that you can pay. Though 80% mortgages are possible it is more likely that you will only get 70% of the value, and the mortgage valuation that determines the amount you can borrow may be disappointingly low. If you need to use a mortgage you must consult with a good mortgage broker before you make an offer, and then proceed on the basis of conservative assumptions. You will also need to have a valuation carried out before you know exactly how much money the bank will lend you, so if you are using a mortgage you need to include this issue in your negotiations agenda.
Be realistic about the need for refurbishments. For obvious reasons you should avoid buying a property that you can’t afford to refurbish property, which means thinking about this issue before you make an offer. If you judge that significant refurbishments will be necessary, but you don’t know what they will cost, then you will need to build this into the negotiations agenda.
Survey & valuation
If you want to have the property surveyed or valued before you commit you will need to build this into your negotiations agenda. Though an extra expense it is always a good idea and may put you in a stronger negotiating position, which is why many vendors reject the proposal. Unless you are absolutely convinced that the property is in excellent condition you are strongly advised to have a survey carried out. Decide at this stage whether it is something you wish to push for.
As was explained in the chapter on getting ready to buy you should have already selected an independent lawyer to work with. As there is still a chance that the negotiations will come to nothing you may wish to wait before hiring this lawyer and making the first payment. However the sooner you get your lawyer involved in the checks the better. If you are confident that you will proceed to buy then now is the time to hire your lawyer, which means starting to pay legal fees. In any event you will have to do this at the very latest once you have reached an agreement in principle with the vendor and before you sign any contracts.
Negotiating with the vendor
Going into the negotiations you should have your agenda, objectives and strategy clear.
Your agenda should cover all the issues you want to bring into the negotiations. Your objectives are what you want to achieve, for instance your target price and the maximum price you are prepared to pay, and you strategy determines the rational behind your starting offer and the speed and size of any increments you will concede. You should base your strategy on what you know about the property, the state of the market, and the vendor (nationality, personal circumstances, hurry to sell). With the best preparation in the world, however, there is no escaping the fact that rising markets favour the vendor (they are more inclined to wait for a better offer than yours) whereas falling or stagnant markets favour buyers (as vendors are less confident that they will get a better offer any time soon). This is as true of Spain as it is anywhere.
Generally speaking Spanish vendors can be the hardest to negotiate with. The Spanish tend to take a bloody minded attitude to the price they want and hold on until they get it, no matter how long that takes. As a group they are also in a better position to hold out than is typical of foreign vendors, who may be more impatient to liquidate their assets in Spain. The Spanish also tend to demand higher under the table cash payments (to avoid taxes), which buyers need to avoid or minimise.
Negotiations over price are not helped by the lackadaisical way in which properties are valued in Spain. Vendors often name the price they want based on what little they know of the market. They may have heard that Pepito Perez sold his house down the road for X so they ask for X plus 20%, convinced as they are that their property is much more attractive. Many estate agents in Spain simply accept the vendor’s price rather than argue for a more realistic one. All of which means that asking prices can be somewhat arbitrary, so it is important for buyers to have a reasonable idea of going market prices to guide them during negotiations.
Estate agency commission
Estate agents’ commissions are another important issue to bear in mind when formulating your negotiations strategy. In the UK estate agents earn a percentage of the transaction price but in Spain vendors sometimes present estate agents with a non-negotiable net amount that they want from the sale. They then leave it up to the estate agent to charge whatever commission they can get away with on top of this figure. Estate agents, who normally control the negotiations by virtue of intermediating between both parties, sometimes add on 10% or more, in the hope that they will end up with 5% or more. So, in some cases buyers assume they are discussing the price with the vendor when in reality they are simply negotiating the size of the commission with the estate agent. Spanish vendors are more likely to ask for a net amount whilst foreign vendors are more likely to agree a percentage fee of the final price with the estate agent (as they do at home). So if the vendor is Spanish there is a chance that the estate agent has a powerful incentive to defend the highest price possible, as every Euro above the vendor’s net amount goes straight to the commission.
The practise of adding a commission on top of a net price is far less common these days, as the Spanish property crash reduced the power of vendors to set the terms. These days a standard commission as a percentage of the sale price is far more common.
In the bad days of the boom years (2000 – 2007) when it became popular for foreigners to buy in rural areas, some agents were known to charge commissions as high as 35% on cheaper properties.
Issues to negotiate
The key issues to negotiate with the vendor are as follows:
For obvious reasons you want to agree the lowest price possible.
The undeclared value
The amount of the price (if any) to be paid under the table and not declared in the deeds, often called ‘B’ or negro. This used to be a common practise in Spain, especially with Spanish vendors, with as much as 50% of the sale price undeclared and paid in cash, though 10% to 20% was more common. Since about 2010, however, the practise went into steep decline. Anti-terrorism and money laundering drives by the authorities now make it difficult to handle large sums of cash. And since boomed turned to bust and buyers took control of the market, you don’t generally have to accept any undeclared payments if you don’t want to. The best advice is to refuse to pay any of the price in cash that is not declared on the deeds. As a buyer, you want the full price to be declared on the deeds.
Many vendors, especially Spanish vendors, still ask for a percentage of the price in cash (referred to as ‘B’ or negro) but you should resist this as far as possible. It is a fiscal fraud that mainly benefits the vendor whilst the potential liabilities accrue to the buyer. Unfortunately it is still a common, if declining, practise in Spain, and sometimes it is just not possible to buy the property you want without paying a percentage under the table. 5% to 10% of the price may be manageable, but the more you pay, the greater the risk you take. Never agree to pay any B-money if the property has sitting tenants, and be very careful before agreeing to any B-money if you are taking out a mortgage. The overall message is avoid paying any part of the price under the table if at all possible.
Which contract to use
The type of contracts you will sign before the deeds (more detail below in the section on contracts). You may agree to skip the private contract altogether and go straight to the deeds.
Before you sign a private contract you will need to agree a deadline for signing the public deeds before Notary. It is common to agree a deadline of 1 to 3 months after signing the private contract. Anything less than a month makes it almost pointless signing a private contact and you could consider proceeding straight to signing the deeds before Notary
IBI payments in the year of sale
Payment of the local rates (Impuesto sobre Bienes Inmuebles – IBI) in the year of sale. This can be a complicated issue depending upon how the local authority charges the rates (annually or quarterly) but fortunately the amounts at stake are usually no more than a few hundred Euros. If the vendor agrees to pay the IBI for the year then you need to reimburse the vendor for the months that correspond to your ownership. However if you agree to pay the IBI for the year then you can deduct the IBI that corresponds to the vendor from the price of the property. The important point is to clarify this issue with the vendor in advance. Note that from the summer of 2016, vendors can pass on a pro rata share of the IBI council tax to buyers even without any prior agreement.
Who pays the Plusvalía
The plusvalía (Impuesto sobre Incremento del Valor de los Terrenos de Naturaleza Urbana) is a municipal tax on the increase in the value of the land upon which the property is situated. For an apartment that has recently changed hands this tax will be low. However for a detached property with land, in a prime residential area, that hasn’t changed hands for many years, the plusvalía could be quite substantial.
Though by law this tax corresponds to the vendor (who has owned the property whilst the land appreciated) buyers sometimes agree to pay it. However this is nothing more than a surreptitious way for the vendor to increase the asking price so you should resist any attempt by the vendor to get you agree to paying the plusvalía. If the vendor is a Spanish resident then you don’t need to discuss the question of the plusvalía unless the vendor brings it up. You can just assume that the vendor is going to pay it, unless otherwise agreed, and make sure your lawyer confirms that the private contract you sign states that the vendor will pay the plusvalía. However if the vendor is a non-resident then you definitely need to bring up the matter with the vendor. If a non-resident vendor leaves Spain without paying the plusvalía then the debt is attached to your property and you have to pay it. Therefore you have two options when buying from a non-resident: 1) Have your lawyer accompany the vendor to the town hall to pay the plusvalíastraight after the signing of the deeds, or 2) agree that you will pay theplusvalía, and deduct it from the payment made at the signing of the deeds. The second option is the best from your perspective. Whatever you agree it always helps to know how much the plusvalía will be. Your lawyer can either calculate it or ask the town hall.
Any interior or garden furniture that is included in the price. If you agree to buy anything over and above the fixed elements of the property then this needs to be agreed and listed in an inventory that forms part of the contract you sign. Be warned that upon taking possession, some people have discovered that what they thought were fixed elements (for instance fixed bathroom cabinets and shower equipment) have been ripped out. Few vendors are so tacky as to do this but it does happen, albeit very occasionally. Just bear it in mind and clarify the situation if you judge that there are any attractive fixed features that could be easily removed.
Access to the property before reaching an agreement
If refurbishments are key to your decision and you need to have them costed (and, in some cases, checked with the town hall) before you can proceed, then you will have to negotiate access to the property for an architect and or builder. Likewise if you want to have a structural survey carried out. There are no easy answers to this and it all depends upon the attitude of the vendor. However if you are supported by a ‘can do’ estate agent, and if its clear that you are serious, then you should be able to reach an agreement on this issue. If the vendor will not agree to an architect’s visit before you make an offer you should at least talk to an architect and describe as best you can the property and the refurbishments that you imagine will be necessary. It’s not much to go on but it may give you at least some idea of the magnitude of the costs you will face.
If you need a mortgage you might not be able to commit to a price until you know how much the bank will lend you. But before deciding how much it will lend you the bank will insist on carrying out a valuation, which means sending an valuer (tasador) to visit the property. The problem is that many vendors will refuse to allow a valuation before you have signed a private contract that commits you to a price, as they fear a low valuation being used against them in the negotiations. If you need a mortgage you should start off by asking the vendor for permission to arrange a visit from a tasador. If they refuse then you will have negotiate a clause in the private contract that makes the agreement conditional on the mortgage you can obtain. The worst scenario is if you commit to a price, pay a deposit and then find that you can’t complete due to mortgage problems. If this happens, and you do not have a conditional clause in the contract, you may lose your deposit.
The deposit payment method
If you sign a private contract that involves you paying a deposit of, for instance, 10% of the price, then you need to agreed a payment method that is acceptable to both you and the vendor.
The options are as follows: 1) Pay the funds to the vendor, 2) Pay the funds to the estate agent, 3) Pay the funds to the vendor’s lawyer, 4) Pay the funds to your lawyer.
Paying the funds to the vendor will of course suit the vendor nicely, but if the vendor were to back out of the sale this could make it more difficult for you to get your deposit back. Therefore don’t do it. It is better to pay the deposit to a 3rd party, such as a lawyer (yours or the vendors, but ideally yours), who can be expected to pass the deposit on to the appropriate party according to the contract and the outcome. In reality it is quite common to pay the deposit to the estate agent, which is not a problem if the estate agent is professional and trustworthy. What is a problem, though, is knowing which estate agents to trust. Therefore in most cases you should avoid paying a deposit to an estate agent.
Whichever 3rd party you pay the deposit to, try and ensure that they have a bonded escrow account that provides you with extra protection. Unfortunately few lawyers or estate agents in Spain have such accounts, so you may have to make do without this protection. Whichever method you agree with the vendor make sure you have the necessary bank details to make the payment on time.