Buying Off Plan

When thinking about purchasing a property off-plan it is worth understanding that Spanish law has several good provisions that protect you. You will be advised accordingly, but for your general reference here are the following acts and provisions that have been created to protect your interests.

The Consumers Protection Act 1984

(Ley 26/1984 de 19 de Julio General para la defensa de los Consumidores y Usuarios), extended by General Contractual Conditions Act 1998 (Ley 7/1998, de 13 de Abril, sobre Condiciones Generales de la Contratación).
These acts state that the clauses and terms in a purchase contract should be:

1. Clear and directly understood,
2. Written in good faith and not unfair (e.g. conditions that rescind responsibility or create an unfair situation)

Any clause that contradicts the above requirements will be interpreted to the detriment of the drafter or will be considered null and void (by the Spanish courts) and as never having been inserted.

The Royal Decree 515/1989

This decree sets out specific requirements which must be included in the purchase contract provided by a developer such as, registration details of the developer in the Mercantile Registry, the plan of location of the property and plan of the unit itself, a reference to the materials used in the construction of the unit, details of registration of the building in the Land Registry, details of the bank guarantees and insurance policies, etc.

Spain’s Building Act

Article 19 stipulates that the developer and the contractor have to take out three insurance policies. The first covers minor defects that affect finishing or final details for the first year, the second covers damage to constructive elements and habitability conditions for the first three years and finally a ten year guarantee that covers serious structural damage that directly compromises the resistance and stability of the building.

Bank Guarantees 57/1968 Act

This is the most important protection that covers your deposit monies (normally held in an escrow account) while your property is being built. The 57/1968 Act was drafted to guarantee advanced payments paid over to building developers. These guarantees may be in the form of bank guarantees or insurance policies, which the developers should have ready at the signing of the purchase contract.

It is your right to demand this cover and we can make this request at the time of paying the reservation. It costs the developer around 1% of the purchase price of the property to initiate the policy or guarantee. It’s worth noting that there are in fact two guarantees involved in your protection, the first is the general guarantee on the building as a whole, and the second is the specific guarantee for your property which ties in with the ‘The Law of Horizontal Property’ (Law 49/1960 and amended by Law 8/1999) and is the most relevant to your protection. We always check that both are in place, that they are in accordance with each other and that you are not being charged.

As set out by the Royal Decree 515/1989, the standard purchase contract should include the following clauses to incorporate the protection imposed by the guarantee or policy:

1. The obligation of the developer to refund all payments paid in advance, plus 6% annual interest, in case the developer does not commence the works of the proposed property on schedule as per the contract signed with the consumer, or does not complete the construction of the proposed property on time, or the license allowing occupation of the property is not granted.
2. Defines the guarantee and its provisions and indentifies the guarantor (bank or insurance company).
3. Defines the account information where advanced payments are to be paid.
4. On signing of the purchase contract (coincides with payment of funds), the developer will be obliged to hand over the relevant guarantee documentation.

Should the developer default on the terms of the purchase contract you have two choices:

1. Demand refund of the monies added with an annual 6% interest increase
2. Grant the developer an extension to fulfil their commitments as per the contract.

Documentary evidence of the occurrence of any of the events mentioned, together with the original guarantee documentation enables you to execute the guarantee or insurance policy. Failure by the developer to adhere to any of the terms of the guarantee and their refusal to refund monies will be deemed as criminal misappropriation by the Spanish Courts.

Here is a summary of some of the more important points that we feel will help you make the right off-plan property choice.

1. Mortgage costs: If there is a mortgage on the property direct from the developer, the contract should mention that if you decide not to subrogate the costs of cancellation will be entirely borne by the vendor/developer.
2. Notary costs: Although the existing legislation does not envisage these costs, check that the Notary costs which arise when you complete are to be paid according to the provisions of the Spanish Civil Code and that the plus valia tax is also paid by the developer, since according to the law it is their cost.
3. Investment: If you are looking to invest in Spanish property ensure that you have the right to resell the off-plan property prior to completion, and that there are no terms in the purchase contract that prevent you from doing this.
4. Protection: Ensure  a check has been made to ensure that the bank guarantees or building insurances are in place to protect your deposit money.
5. Background checks: Ensure that a full company check on the company responsible for providing the bank guarantees and insurances has been made and check that the developer is building in line with the permissions and licences prescribed by the Town Hall.
6. Payment and accounts: Ensure that your deposit monies go into a bonded client account so that the developer does not have access to the funds until completion of the property and the signing of the title deed

Bank guarantees and insurance cover to protect your investment
Purchasing off-plan is generally considered to be quite safe, as all developers by law must offer a Bank Guarantee to protect the client’s deposit money. The deposit is held in an escrow account and will be refunded should any problem occur that prevents development from being completed

Better value for money

Provided you get in early enough it is sometimes possible to secure a property at a significant discount compared to the prices of the properties at completion. Upon completion, you also have a brand new property that has never been lived in.

Better build qualities

Build qualities in Spain have generally improved over the last ten years with wider cavity spaces, better insulation, qualities and features as properties are now being built for year-round occupation.

Favourable payment terms

Off-plan properties generally have interesting payment terms, typically 20 – 40% down-payment and with the rest to be paid on completion. Sometimes a smaller deposit and a staggered payment system can be arranged. This makes an off-plan property easier to buy than a resale property bought at the same price.

Not getting what you ordered

The down side to buying off plan is that you cannot assess the final qualities and views from the property until the project is complete. The development may deviate from the plans slightly or another development may be built in front of your property thus blocking your view.

Building Insurance

By law all new build properties must be sold with insurance cover that covers the property for structural faults for the first ten years.

Tax avoidance and investment

The off-plan property market was the main reason why so many people invested in Spanish property over the past ten years. Presently a potential investor has two options, he can wait until completion, pay the balance and then remarket while renting the property, or he can sell on his contract prior to completion of the property to maximise returns.

Selling Off Plan Property

Selling your property before completion

If you bought off-plan you can try and resell prior to completion provided your purchase contract allows you to do this. Selling on or ‘flipping’ the purchase contract prior completion used to avoid taxes and costs. The tax office is now clamping down on existing laws that were not previously enforced. They are currently taking a close look at the profits associated with investment buying and are looking to penalise the private vendor as well as the developer during a property purchase contract transaction that has not followed procedure. All exchanges of private purchase contract require to be registered at the Land Registry with a Modelo 600 form that states all the purchase costs and profit details of the deal. The vendor/investor is liable to a transfer tax of 7% of outlay and 7% of the declared profit.

Selling off-plan is harder than selling a resale: an unfinished property does not give the potential purchaser the option to see what they are buying, and the developer will not be interested in marketing your property while he still has his own product to sell. The main opportunity for resale usually occurs when the development is in its final stages of completion, the property and community areas are nearly finished and the developer has very few units left. If you bought early enough, in a choice location (i.e. corner plot, largest plot, best views, best features, biggest build size, etc.) and on desirable development you stand a good chance of reselling. In this case your agent will be your best ally as he will be familiar with the development and your particular unit and will be a likely source of clientele.

Selling on or ‘Flipping’ a purchase contract prior to completion is only as viable as the property’s resale potential so do your research before you invest. Developments with the highest resale potential are those with limited product availability, good features (location, view, etc), a good value per square meter built (this varies from area to area so do your research), a desirable location and a long build out phase to provide the maximum timeframe in which to resell.