When buying property in Spain it helps to understand how the Spanish property market works. The more you know about the market the easier it is for you to select appropriate companies to deal with, and avoid some common pitfalls.
In this section we take an in-depth look at the different types of companies you will might come across when buying property in Spain. A happy and successful purchase will depend in part on the companies and professionals you choose to deal with, so this is not a trivial matter.
Most British buyers will work with one or more estate agents when buying property in Spain (whilst the Spanish, especially in rural areas, are more likely to use word of mouth). It is increasingly easy to avoid using estate agents, by for instance going direct to developers when buying on new developments, or contacting private vendors individually via websites that facilitate private transactions. Even so the majority of British people end up using estate agents as these can provide an valuable service if they are ethical, competent and professional. The problem is that many estate agents fail to meet these conditions, and dealing with unethical or incompetent estate agents can expose buyers to considerable risks.
In the past, membership of one of Spain’s two professional real estate associations (API and GIPE) was as a legal requirement for anyone brokering property in Spain. This ensured that anyone legally selling property had the training and qualifications to do so. However in 2000 the Spanish government deregulated the market and, consequently, pretty much anyone can now play the role of intermediary in property transactions. Though it was often ignored the former arrangement did at least encourage companies and individuals wishing to broker property to undergo the professional training in Spanish necessary to become members of API or GIPE. Under the present arrangement many of the British people legally selling property in Spain don’t speak Spanish and don’t understand the conveyancing process in Spain. This undermines the service they provide, increasing the likelihood that buyers will suffer the consequences of dealing with incompetent estate agents.
Another unfortunate reality of the Spanish property business, especially the foreign buyer segment, is that it has attracted people with a timeshare mentality of aggressive and unethical sales. This is no coincidence: as timeshare collapsed freehold property sales in Spain boomed, and many of the people formerly selling timeshare moved into property. All booms have a tendency to attract cowboys looking for easy money, but a business like Spanish property that is: 1) lightly regulated 2) unfamiliar ground for buyers and 3) very lucrative, will attract more than it’s fair share of hucksters.
It is difficult to exaggerate the importance of avoiding incompetent and unscrupulous estate agents when buying property in Spain. Some of the biggest risks that buyers run can be traced back to the competence and attitude of estate agents. Fortunately for buyers there are many professional, competent and ethical agents in the market, but the challenge is knowing how to find them. In a later chapter we will discuss how to evaluate and select estate agents.
The value of estate agents
A good agent can provide a valuable service to British buyers. Estate agents are the main property ‘channel’, which means they put buyers and sellers together. Without agents it is difficult and laborious for buyers to find properties, though the internet is starting to challenge the old order and create new models that put buyers and sellers in touch. For the time being, though, agents are still the dominant channel for British buyers, and buyers go to them for access to a wide selection of properties from many vendors. Buyers can also benefit from the agent’s knowledge and experience of the local property market, as British buyers will usually know little about the market and the process by which property changes hands in Spain. Last but not least, if the buyer is British and doesn’t speak Spanish, a bilingual estate agent can be a great help.
The incentives of estate agents
As well as understating the value that estate agents can offer it helps to know a bit about their incentives.
Estate agents earn a commission from the vendor when they intermediate in a successful transaction. In a resale transaction the agent will usually be paid the commission after the deeds have been signed before Notary, which is when the buyer pays the vendor in full. However in some cases the agent becomes entitled to the commission once a deposit contract (contrato de arras) has been signed and the deposit (usually 10%) paid by the buyer. In this case the agent will earn a commission (taken from the deposit paid by the buyer) even if the sale falls through. So estate agents can have an incentive to push buyers into paying a deposit even when the buyer’s financial circumstances would advise against it.
When it comes to off-plan transactions it is common practice for developers to pay the agency commission when the private sale contract is signed, usually many months before final completion. This gives agents a powerful incentive to pressurise buyers into signing the contract, regardless of the buyer’s ability to finance the purchase. If the buyer cannot then complete the purchase, as sometimes happens, it doesn’t affect the agent as it will be many months later, it will be a problem for the buyer and developer, and the agent’s commission will long since have been paid. This problem often occurs when estate agents convince buyers to invest in off-plan property, assuring them that the property can be sold on without any difficulty for a fat profit. Buyers without sufficient funds are taken in by this line surprisingly often, but then find that they can’t sell on the contract before completion but don’t have the funds to complete. They then lose their deposit whilst the selling agent made a handsome commission. Developers have started to realise that paying the agent’s commission in full at the time of signing the private contract creates perverse incentives for estate agents who don’t have to deal with the consequences.
Many estate agents in Spain are also quite ruthless about pushing developments (and for that matter resale properties) that pay them the highest commissions. The properties that that pay the highest commissions are not necessarily the properties best suited to the client. Buyers who allow one agent to control which properties they see should not be surprised if the selection they are shown is manipulated in favour of the estate agent’s commissions.
When dealing with estate agents one always has to remember that they are paid by the vendor, which means they are not paid to look after the buyer’s interests.
How estate agents should work
Before going on to look at the different types of estate agents that British buyers may be confronted with we should look at the conduct that buyers should expect from good agents. Though not exhaustive the following list covers the main points of conduct that you can expect from good agents.
An estate agent should:
- Be mature and speak good Spanish. Property is one of the biggest investments most people will ever make and the least buyers can expect is to deal with a mature bilingual salesperson. Many of the people selling Spanish property to the British in recent years have been little more than teenagers. They are flown over from the UK by costa agents, promised an easy fortune on a commission-only basis, and then unleashed on unwitting clients despite their total lack of understanding of Spain, Spanish, and the local property market.
- Demonstrate real experience and knowledge of the local property market. When buying something as expensive as property you should expect help from an experienced sales representative who can demonstrate knowledge of the local area and property market. They should have lived in the area for at least 5 years. Look for agencies that are locally based in the area where you want to buy and that have a good selection of properties to offer. Avoid using agencies that aren’t locally based, as they may know less than you about the local property market.
- Respond to your enquiries in a quick and professional manner. Many companies respond slowly or not at all to client enquiries. These companies are best avoided.
- Make an effort to understand your needs and requirements from the outset. This means discussing your requirements in depth.
- Help you to understand what the market has to offer and what you can realistically expect to buy given your budget and requirements. Unreasonable expectations benefit neither client nor agent.
- Provide you with clear and useful property particulars or reports.
- Show you a selection of suitable properties given your budget and requirements. Some agents intentionally show clients highly unattractive properties (known in the trade as ‘put-offs’) in order to make mediocre but slightly more attractive properties (the ones they want to sell) seem wonderful in comparison.
- Be unequivocal about what is included with a property, for instance furniture, and back it up with documentation.
- When dealing with resale properties, agents should have a file with all the relevant documentation on the property. As a minimum this should include the land register filing (nota simple) and a copy of the title deeds. Well organised professional agents will also have receipts of local rates, utilities and community changes where relevant. For new build properties they should have a copy of all the relevant documentation provide by the promoter, for instance up to date price lists, plans and specifications, copies of example contracts and a copy of the building licence. Your lawyer will have to check all of these documents independently but it facilitates the process and reflects well on the agent if they can provide all of this information.
- Be honest, erring on the side of caution, on matters such as rental potential, expected capital gains and the real costs of purchasing property in Spain. Many agents have been known to exaggerate the rental potential of properties and downplay the costs of buying and owning property. And no agents have a crystal ball. All the can tell you is what prices have done in the past.
- Not put you under any pressure during the process. There is a fine line between pressure and well-meant encouragement, and it can be difficult to identify subtle pressure, which comes in many forms. As a general rule ignore all claims by an agent that other buyers are about to swoop and that prices are about to go up. If you feel you are being put under pressure make this clear and if necessary drop the agent.
- Accompany you to the signing of the deeds if you request this.
- Keep you informed of construction progress and the dates when stage payments become due when buying off-plan.
- Make it clear what level of after-sales service they provide. There is nothing wrong with an agent providing very little after-sales service if they are perfectly honest about this and don’t mislead you into expecting help that won’t be forthcoming. In reality you may be better off hiring professionals that specialise in after-sales services that receiving a half-hearted effort from estate agents.
- Be open about the commission they are earning if you ask.