This article is aimed to give you tips on buying a property in Spain, so helping you to avoid the possible pitfalls.
Preliminary Steps for buying a property in Spain
Once you have found your ideal property a small reservation fee will be required in the region of 1.000 to 6.000 Euros, which is given to the Real Estate Agent to take the property off the market.
However, as a “caveat emptor” no further monies should be given to any person other than a Lawyer as deposit to be held until a prior inspection of the Title and searches have been conducted which show that the property is registered in the name of the Seller free from any charges and encumbrances and without any planning issues.
To avoid any surprises when it comes to a New Development property, as your lawyer we will carry out all the necessary searches.
We will also recommend that we carry out a survey of the property if it is more that 10 years old, or if it is in disrepair that may lead to questions that there may be structural defects or the installations may not work properly.
The Builder of a property in Spain is liable for any structural defects on the property which occur within ten years from the issue of the Certificate of Completion of Works from the Architect.
As from 6th May 2000, the developer must have an insurance policy to cover any structural defect within the said 10 year period.
This gives additional protection to the buyer, who will benefit on taking out title to the property, as the insurance company will require that all the construction works are supervised by a quality control company.
However, after the expiry of the said period, any remedy from the builder will be nonexistent and therefore rectification of any of these potential problems can only be sought from the Seller.
So in case of old properties, the Survey is very important before you the buyer completes the transaction.
The Private Contract
Once the searches have been conducted and the outcome is satisfactory, we will negotiate the terms of the contract with the Seller or his Lawyer.
There are different types of private contracts to be signed at this stage to secure the purchase of the property and take it off the market.
For example deposit contract, contract of purchase and sale, option contract, etc, whereby the purchaser pays a deposit, normally 10% when the vendor agrees to sell the property.
The completion of the transaction is fixed within a particular time scale, usually four weeks when the balance of the purchase is paid and the Title Deeds of the Property is executed and signed by the parties in the presence of a Public Notary.
The choice of the type of contract is something to be assessed by us your Lawyer taking into account your circumstances and the terms of the negotiation with the Lawyer of the Seller.
Please note that not all private contracts will lead to the same consequences as for instance sometimes the Seller may pull out of the transaction paying compensation.
This is usually double the deposit paid to the Purchaser who may find out that although he may obtain certain economic compensation, this is not what he wanted as he was interested in acquiring a particular property on which he has paid a deposit.
If the Purchaser fails to complete the contract on the agreed completion date, the deposit or option price paid shall be forfeited.
Purchase of Property under construction
When purchasing a property off-plan or under construction an obvious risk is added to the transaction, i.e. that for some reason the property is not started or once commenced is not delivered on the agreed date.
In order to protect the prospective purchaser of any of these eventualities the Lawyer should demand a bank bond or an insurance cover from the developer.
Whereby any amounts handed over by the purchaser plus interest shall be returned to him should the property not be started on a certain date or same is not completed on the agreed date.
In these cases the buyer can rescind the contract and execute the Bank Bond or Insurance Cover in order to obtain his money back plus interest.
The specifications and plans of the property must be agreed and attached to the contract.
If the property is within a Complex, another plan of the Common elements where the gardens and pool must be shown should be attached to the contract.
Completion Title
On the agreed completion date the Title Deeds or Escritura is executed by the parties before a Notary Public and the Title is vested in the name of the Purchaser.
On completion possession is given to the Purchaser and the signing of the Title Deeds in Spain equates delivery of the property to the Purchaser unless otherwise agreed.
In normal conditions the final payment is effected by the Purchaser upon completion before the Notary.
The Tax Fraud Prevention Act creates new obligations when it comes to property transactions. In order for the Land Registry to register a transaction, the Title Deed must include the Fiscal Identification Number (NIF or NIE in case of non-residents) and the means of payment for the purchase price.
If the vendor is a nonresident the law provides for the obligation of the Purchaser to withhold 3% of the purchase consideration to be paid to the Tax Office as a payment on account of the vendor’s Capital Gains Tax liability as result from the sale.
If this retention of funds is not made and paid, the Property conveyed will be affected to the payment of the Capital Gains Tax. This debt will be shown in the Land Registry Books.
The Vendor must produce a Capital Gains Tax Assessment within the next four months from Completion and the said 3% will either be deducted from any Tax to be paid or partially or totally refunded if the amount withheld exceeds the Capital Gain Tax to be paid. Capital Gains Tax applicable to non residents is 19% on the net Gain.
Upon completion the Lawyer must check that all the outgoing expenses on the property are paid up to date and make the corresponding apportion with the Vendor´s Lawyer to this effect.
The Original Title Deed of Purchase will remain in perpetuity at the attesting Notary´s Office who will issue an authorised Copy of the Title Deeds which is the working copy which must be processed by the Purchaser for the payment of the taxes involved and the Registration in the local Land Registry. Payment of the taxes should take place within 30 days of completion and surcharges are applicable there from.
Costs
The costs involved in the acquisition of a property in Spain are different if the property is bought from a developer as 10% VAT plus 1,2% Stamp Duty (in Andalucia) must be paid than if it is a resale as only Transfer Tax is paid at the rate of 7% on the agreed consideration.
Apart from the tax on the transfer the Purchaser must face the Land Registry fees and his own Lawyer fees. The Land Registry fees are based on a scale and ranges from an average of 300 to 1000 Euros and the Lawyer fees varies from 1 to 2% of the purchase consideration.
In addition to the said strictly costs attributed by the Law to the purchaser, Notary´s fees and a local tax known as Plusvalia Tax has to be paid. Although these are the liability of the vendor it is widespread practice that the parties agree, based on a demand from the Vendor, that the Purchaser pay all the taxes and disbursements on the transaction, except the Plusvalia Tax, which must compulsory be paid by the vendor. The Plusvalía Tax is a one time payment local tax which levies the increase in value of the land on which the property has been built since the last recorded transfer of ownership. There are at present two methods for the calculation of this value increase and the vendor can choose whichever is the most favourable. One is based on the ratable value of the property (Valor Catastral) and certain coefficients are applied depending on the time the property has been in the hands of the owner. The other method is based on the gain received and compares the sales and purchase price. On the calculated value increase a tax rate is applied. If taking the second method of calculation there is no gain no tax will become due. It is strongly advisable for the Purchaser that the amount of this tax is checked by his Lawyer before agreeing the demand from the Vendor that the Purchaser pays same.
In summary the Purchaser has to allow for an additional 11% of the Purchaser consideration to meet the transfer costs involved in the transaction.
For those who purchase property in Spain is strongly advisable to execute a Spanish Will.