Buying off-plan requires a different approach. This is because you are buying from a developer, rather than a private individual, and because the property has not been built yet, which exposes you to an additional set of risks.
Negotiating with the developer
Many estate agents will try and have you sign a reservation contract on the spot if you express any intention of buying an off-plan property you have seen with them. They often imply that the development is selling fast and that you will miss the property, or price will go up, or both, if you don’t commit straight away. This might be true but it is much more likely they are just trying to deprive you of a ‘cooling off’ period during which you might have second thoughts. You would be well advised to ignore this talk and go away and think about it before you take the next step. Whatever you do, never sign a reservation contract without discussing it first with your lawyer.
After a cooling off period, if you decide that you want to proceed then start by trying to negotiate better terms with the developer rather than signing any contracts or making any payments.
Developers are on the whole very reluctant to give discounts but you can be certain they won’t give you one if you don’t ask. Now that the market has cooled significantly (2005) developers are more disposed to negotiate than they were in the past. If you push you might be able to negotiate a 5% to 10% discount off the list price, or better payment terms, or better fixtures, or a furniture package. You should also try and negotiate an agreement, to be included as a clause in the contract you sign, whereby you can withhold 5% of the price at the signing of the deeds, to be paid after a specified snagging period in which the developer has to put right any faults you identify.
It helps if you make the estate agent and developer think that you have seen other alternatives and are basing your decision on the outcome of the negotiations. This is another good reason why you should always visit with several agents, as it can give you more leverage during the negotiations. Note that you don’t have to be in Spain to carry out the negotiations or proceed to purchase. So long as you have a good lawyer in Spain you can do it all by phone, fax and email.
Reservation contract – Documento de reserva
Once you have reached an agreement with the developer you will be expected to sign a reservation contract and pay a deposit, usually of 6,000 Euros. Despite the ubiquitous use of reservation contracts when buying off plan they should be avoided wherever possible, as has already been stated several times. They are usually short and vague documents that give you little protection whilst requiring you to pay a substantial amount of money for nothing more than the privilege of taking the property off the market for 30 days or so. It is less of a problem if the contract explicitly states that your reservation deposit will be fully refunded should you not to proceed, however this clause is not common in these types of contract.
A reservation contract might be only way to reserve a property in a hot market. However in the present market conditions you are unlikely to lose out to another buyer as there is an oversupply of property and buyers can take their time. Some reputable developers will agree to putting in a clause that enables you to get your deposit back if you have a change of heart. In reality some reputable developers return the deposit even without this clause but there are also many developers that don’t.
Regardless of whether you sign a reservation contract the next step is to sign a down payment contract, accompanied by the first down payment, often of 25% of the price plus VAT. You may then have to make a series of further payments as the work progresses, with the final payment when the deeds are signed; on the other hand you might not have to make any more payments until you sign the deeds when the property is completed. It depends upon the payment terms you have agreed with the developer.
Before you commit to a down payment construction contract (which developers and agents often refer to as a private contract or contrato privado de compraventa, though the full name is contrato de compraventa de vivienda en construcción) you should always have your lawyer carry out a due diligence appropriate to buying off-plan. This will be somewhat different to the resale property due diligence described above.
Plans and specifications
It cannot be stressed enough how important it is to have detailed plans (planos) and specifications (memoria de calidades) included in the contract you sign. Many off-plan buyers come unstuck on this issue. The more detail there is in the plans and specifications, the more likely you are to get what you are expecting. Vague plans and specifications give developers a lot of wiggle room that they might be tempted to use to deliver a smaller property or lower quality than you were expecting. If you only have vague plans and specifications you cannot prove that this has happened, even if you know it has. After you have signed the contract and paid your money, the plans and specifications are all you have to prove what the developer’s side of the bargain is, so you have to make sure that they are adequately detailed. Make sure that plans specify the built area (superficie construida), useable area (superficie útil), and total area including common areas (superficie total). Note that in Spain terraces are included in the figures at 50% of their surface area. Also ask to see technical plans that show the functional installations.
As mentioned in the section on visiting new developments you should also make sure, when buying an apartment, that you are given a plan of the building that clearly indicates the apartment you are buying. Otherwise you may find that the apartment you are buying is now in the middle of the 2nd floor, rather the corner of the 3rd floor, as you had been led to believe. Unscrupulous agents and developers use this trick to make all the apartments appear to have the best position, in the hope that clients will then just put up with it when this turns out not to be the case. If this happens to you should always kick up a storm.
People often focus on the property they are buying and forget to pay attention to the developer’s commitment to finish the surroundings. The landscaping of the surroundings will have an significant impact on the quality of life on the development and some developers make grand claims when selling but then cut corners on the landscaping when it comes to delivery. Some buyers, even on the most luxurious developments, have then had to finish the job that the developer failed to do, footing the bill running into thousands of Euros per owner out of their own pockets. So make sure that plans for the surroundings are well documented and, wherever possible, have them attached as an addendum to the contract. You may also wish to confirm that communal facilities you have been promised, such as a swimming pool, are included in the plan authorised by the town hall (cédula urbanística), and are clearly stated in the overall deeds of the project(escritura de la división horizontal).
When buying off-plan you will often be promised certain views. If it is clear that there is land around the development that has not been built on then you should consider checking what can and can’t be built on that land. This can easily be done by checking the plan urbanístico at the town hall. If an apartment block can be built in front of your property, then you have to assume that it will be. Many buyers, both off-plan and otherwise, have been mislead into thinking that the land around them can’t be built on.
If there are any communal facilities, such as a golf course, for which you have been promised special conditions of use, then make sure that these conditions are attached as an addendum to the contract.
Be sure that you understand what infrastructure the developer will put in place, and have your lawyer check the plans approved by the town hall and the plan parcial to confirm this. Developers have been known to cut corners on many aspects of the infrastructure, which can cause ongoing problems with the town hall. If the developer fails to provide an infrastructure that satisfies the town hall then the development may have problems receiving municipal services, which can make life on the development very inconvenient and expensive. Owners of some developments have had to sort out such problems themselves at considerable expense.
Pay special attention to the infrastructure for delivery of utilities such as water, electricity, telephone and gas. Few developments outside of consolidated, built up areas will have a mains gas connection, though this is the least of your worries as most of Spain runs on bottled gas deliveries, which work perfectly well, and are likely to be cheaper if you are not buying a permanent home (you won’t have to pay a monthly fixed charge when not using the property). The big problems are usually with water and electricity, which you simply cannot live without. You have to be sure that the developer will have a mains water and electricity connection before you buy, and don’t take the developer’s word for it either. Have your lawyer check that the development has been fully approved by the town hall in this respect, and that the developer has an approved construction licence (licencia de construcción). In this age of mobile phones and satellite broadband connections one can live without a phone line, though it is of course much better to have one, so confirm that a telephone connection will be available.
Community of owners
The community of owners is usually formed once the development has been sold and most of the buyers have completed. Always check what role, if any, the developer will play in setting up the community of owners and establishing its bylaws. Find out when it will be set up and how you can participate in the process.
Most developers have a prearranged mortgage that you can take over when you complete. Developers save money if you take over this mortgage and are likely to encourage you to do so. You should never accept the developer’s mortgage without checking the conditions against other mortgages.
Make sure that the land on which the development is being built is classified for residential use. Some people have bought on developments and later been informed by the developer that the land was classified for ‘tourist apartments’, which can cause problems for buyers looking for holiday homes or permanent homes. The land classification can be checked with the town hall. It goes without saying that you should never buy on developments where the land is zoned for commercial or other types of use. Developers will not get building permission on this type of land, but that’s never stopped the most unscrupulous developers in gung-ho areas like Marbella.
Check that the plans you are being shown have been approved(proyecto técnico aprobado) and that planning permission (Licencia de construcción / edificación) has been granted by the town hall. This is a very important point so it needs to be repeated and emphasised. NEVER BUY OFF-PLAN OR ON A NEW DEVELOPMENT UNLESS PLANNING PERMISSION HAS ALREADY BEEN GRANTED. Over the last few years hundreds if not thousands of British buyers have made down payments of 30% or more for property on developments that do not have and never will have planning permission. These buyers have been told that planning permission is just a formality that will be obtained shortly without any problems. Years later they are still waiting with their money tied up in a development that will never be built. If they are lucky they will get their money back. This situation is more common on the Costa del Sol than on other coasts. To avoid this problem always have your lawyer confirm that planning permission has been granted for your specific building.
If buying in the Marbella area you may also need check that the development complies with the regional urban plan. Written confirmation of this can be requested from the town hall. Unfortunately, Marbella’s local administration has in the past granted illegal planning permission to a number of promoters, and some of these developments are likely to be demolished now that the regional government in Seville is cracking down on local corruption and illegal developments. Buyers, who are innocent 3rd parties, will receive little by way of compensation.
Developer’s title to the land
Check the land registry to confirm 1) that the land belongs to the developer, 2) that the building project has been inscribed and 3) what debts or charges are secured against this property. Most developer’s use mortgage financing so a debt against the land is not necessarily a problem. Your lawyer will know what problems to look out for.
Stage payment guarantees
The law obliges all developers accepting stage payments for off-plan properties to take out insurance (póliza de seguro) or a bank guarantee (aval bancario) to protect these funds and any interest they earn whilst in the developer’s possession. However this represents an extra cost so some developers either don’t bother with it or cut corners and take out a less than adequate insurance. Before handing over any money to either the developer or agent you should ask to see a certificate from the bank or an insurance company to prove that insurance has been arranged. When you come to signing the down payment contract you should also receive a document from the guarantor specifying that your payments are guaranteed (using your name), and not just client payments in general. If you have any doubts about this ask your lawyer and if necessary contact the bank or insurance company providing the guarantee. Some developers claim that they are ‘in the process of arranging the insurance’. You should not make any payments until they can prove that it is arranged.
Developers are also required by law to isolate your stage payments in a special account that they only use to pay for building work related to your property. Some developers ignore this law and use stage payments of buyers to finance the company’s expansion. This is certainly true of developers accepting down payments for projects that don’t have planning permission. You should find out if the developer has this type of account and, if possible, have a clause included in the contract that commits the developer to comply with this law.
Review down payment contract
Before you sign the contract (or make any payments) you must have your lawyer check the contract to ensure that it is balances your interests and the developers. Many of the standard contracts drawn up by developers are weighted heavily in favour of the developer, and leave the client in a weak position if things go wrong. Some developers offer a vague standard contract, and lack of detail always favours the developer.
Any contract you sign should include the following:
- Detailed description identifying the developer
- Detailed description identifying the buyer
- Description of the project and the land, stating the developer’s title to the land and any debts inscribed with it. The constructor and technical architect should be identified.
- Detailed description of the property you are buying, including plans and specifications.
- The price agreed, specifying the VAT.
- A detailed stage payment calendar giving specific dates or milestones, and the bank account details of the account to which payments should be made. In the case of building progress milestones there should also be detail on how these milestones will be certified (i.e. with an architect’s signature).
- A specific date by which the property will be finished, an extension period (if any), and the financial penalty the developer has to pay for every day of delay beyond this period. The contract should also clearly state that the buyer can withdraw from the contract, receiving a full refund plus interests, if the developer fails to meet the deadlines specified in the contract.
- A clause stating the percentage of the payments you will lose if you fail to complete. You should try and limit this to 40% or less.
- Details of the insurance or bank guarantee arranged to protect stage payments, naming the financial institution providing the guarantee and the policy number.
- A clause stating what information will be provided in the specifications manual (libro del edificio) that must be given to the buyer when the property is completed.
- A clause listing the addendum to the contract.
- A clause stating that the developer will meet all the transaction costs that typically correspond to the developer (for instance, the notary costs of declaring a newly built property known as the escritura de obra nueva y division horizontal, and theplusvalía).
- A clause stating exactly how the costs related to setting up the utilities will be apportioned.
- A clause stating the correspondence address and contact details of both parties, to which all communication must be directed during the life of the contract.
It is difficult to exaggerate how important it is that you sign a contract that protects your interests, and not just the developer’s interests. It is quite likely you will not get such a contract unless you push for it with the help of a good lawyer.
© Mark Stucklin (Spanish Property Insight)