The Off-Plan Market
How to avoid…getting ripped off in making an off-plan purchase
You’ll have seen the wonderful images at the Property Show in Manchester, Leeds, Glasgow or Dublin and you’ll have been very drawn to the idea of getting in early on the ground floor of this fabulous new development on the Spanish costas. And why not? – these developments often present really good value for money and, as you are getting involved early, pre-construction, you are potentially making real savings.
You agree to take an inspection flight, which, in any event, is a bargain weekend in Spain even if you don’t buy an apartment. You arrive at the chosen destination and it all seems to stack up – you are ready to buy…
Whatever you do, obtain independent legal advice on the off-plan property before parting with any cash or a credit card deposit.
We would recommend that you do not use either the developer’s own lawyer or a lawyer who has been referred to you by the developer’s or estate agent’s sales team. There is an obvious conflict of interest and whilst he or she may be highly qualified there will always be a nagging doubt in your mind as to whether you are receiving the best advice. Although this is becoming common practice in the UK market, the levels of regulations, ethics and recourse available to protect you in the UK are not available in Spain.
How to avoid…losing out in the off-plan market
Having received advice from your lawyer that the off-plan development is not at risk from any legal flaws which would prevent it being built, you may now be ready to hand over the 20% or 30% deposit required to secure your chosen apartment, town house or villa.
Before you part with your hard-earned cash there is one further check that your lawyer needs to make.
Most reputable developers will have provided you with a sales pack containing the Private Purchase Contract (which may be in English as well as Spanish), relevant details about the property number you wish to reserve, the complex to be built and a copy of a Bank Guarantee document.
The Bank Guarantee should be from a reputable bank and needs to clearly state that your cash will be held in their accounts and will only be released under certain conditions. In addition, it must provide that if, for whatever reason, the developer fails to build the complex, you will receive your cash back – together with, hopefully, interest calculated on the amount lodged.
We have seen situations where purchasers have been told that a Bank Guarantee exists but they have not asked to see it – and when the property was not built the deposit was lost. So make sure you obtain a copy of the Bank Guarantee and you receive professional advice on precisely what it says.
How to avoid…paying over the asking price when purchasing an off-plan property
Wording in some Private Purchase Contracts may be tricky. Developers often fund their developments by borrowing from banks – no surprise there. The banks think that if they are in play when you come to secure an apartment in a new complex, you will be prepared to take over the existing borrowing on that apartment. In other words, you assume, or take over, the developer’s mortgage. This is as opposed to seeking a mortgage for the completion funds on the open market.
Whilst this may be convenient and although it will always be subject to your financial status there may well be drawbacks.
The assumed mortgage may well be more expensive than you could get on the open market. In addition, in an attempt to dissuade you from seeking your own funding the bank may have imposed a premium or, more accurately termed, a penalty on the developer – usually 1% – for cancelling the funding, which in turn the developer passes on to you under the terms of the Private Purchase Contract. Beware, you may be required to agree that the penalty is added to your costs of purchase if you elect not to take the assumed mortgage. In other words you are penalised by the developer if you choose to seek your funding elsewhere rather than take up the offer from the developer’s bank.
How to avoid…losing your deposit in an off-plan purchase
In 18 months to two years after placing your deposit – if all goes well, and Spanish builders do build quickly – you will be given notice by the developer to complete the purchase. Notice may be as short as two weeks. However, you must be ready and willing to do this, as failure to do so will probably leave you forfeiting your deposit.
Your purchase price will be fixed at the Private Purchase Contract stage, so together with between 10% to 11% of additional costs, which primarily is a purchase tax but also includes lawyers’ and notaries’ fees, you should be clear on what you’ll need to pay at completion.
It is highly recommended that, prior to even commencing your search in Spain, you obtain an indication from a local mortgage broker of what you would be able to borrow given your personal circumstances.
We have seen mortgages approved in Spain within 10 days but that is the exception. It will take between six weeks to two months, particularly if you are seeking one of the more attractive lower rate mortgages, and the more time you give yourself the better.
So plan ahead and give yourself some time.
You’ll need to collate a pack for the independent mortgage broker comprising, as a minimum, the following:
- A copy of your – and any other joint borrowers’ – passport or residence card
- Copies of NIE – a registered number needed for a foreigner to make a purchase in Spain
- The Nota simple – the extract of title from the Land Registry for the property
- The last year’s bank statements showing income or your last two P60s or last tax returns
- An employment contract
- For the self-employed you’ll need copies of your last three years of accounts and bank statements showing the income
How to avoid…being stitched up on completion of your off plan purchase
When called upon to complete your purchase you need to be satisfied that the description of the property you think you are purchasing equates to the property being delivered to you by the developer. In order to achieve this you should ensure, at a minimum, when signing the Private Purchase Contract, that the description of the property, its precise location within the complex, its external and internal finish etc. should be laid out in some detail. Failure to do so may limit your later opportunities to argue that the property is defective in some way.
Once completion has been requested you should view the property and make a complete “snagging list” of any issues or problems that are obvious with the property. Should your developer fail to address these, our recommendation is to give formal notification to the developer – preferably through an independent lawyer – asking them to resolve all listed problems. If they continue to refuse, the solution is for the purchaser to rectify the snags using another contractor and to pay for the work at their own cost. The amount paid should then be claimed from the developer with the ultimate sanction being to issue judicial recovery proceedings if they fail to pay. This may work best particularly where a number of new owners complain and their complaint can be properly co-ordinated through a single lawyer or committee.
There may be other opportunities to “delay” completion but these will usually depend on your precise circumstances.
The “Resale” Market
How to avoid…risking a criminal penalty for paying in “black” or “B” money
Buying in Spain is not just about putting a deposit down and waiting two years for the completed property. Many satisfied clients have bought what are called “resales”, which are pre-owned apartments and houses. The main reasons for this tend to be issues relating to getting better value for money, particularly villa properties. By purchasing older you usually get a much more mature property and garden, with the teething troubles of a new property already out of the way. Additionally, the location may be a little more established where no further building work is permitted.
Often when buying a “resale” in Spain paying “black” or “B” money is mentioned. This enables the seller to evade tax – by artificially reducing the declared price of the property and thus the capital gains tax due. However, the Spanish Government is toughening up its approach to this kind of tax fraud. Let’s make no mistake; however accepted this practice is at a “social” level, it is still in breach of the law and at a personal level the vendor is passing on their part of the tax bill to the purchaser!
The concern, however, is whether you will be able to buy the home you have set your heart on if you refuse to accept this as standard practice. The sensible advice, and the most prudent conduct, is to refuse to deal in such a manner.
Despite putting your “dream” purchase at risk, it is worth avoiding the potential pitfalls from a personal criminal liability and resale point of view. By doing so, gradually the swell of opinion against such sharp practices will reduce the expectation that all buyers are prepared to flout the law.
© Joe Lopez 2005 (Marbella)