8 Tips on Buying Off-Plan in Spain
Raymundo Larraín Nesbitt, June, 11. 2018
Marbella-based Lawyer Raymond Nesbitt gives us an overview on how to avoid the most common pitfalls on buying new-build property in Spain. He introduces his article with a brief overview of the property market.
Article copyrighted © 2010, 2018. Plagiarism will be criminally prosecuted.
The following article has been greatly summarised to avoid unnecessary legal technicalities. The advice given is of a general nature only and should not be construed as tailored legal advice. Seek professional legal advice on your matter – see disclaimer below. The author does not endorse any of the offplan developments mentioned below for illustration purposes only.
Photo credit: courtesy of Stavanger Group, Belfry villas, Estepona
By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Lawyers
8th of June 2018
Brief overview of the Spanish property market
The sales season is upon us.
Resales remain somewhat sluggish, yet off-plan has taken off and is on full cruise mode.
This is reminiscent on how the last property cycle started (1999 – 2007), with offplan spearheading the recovery and pulling in its wake the resale market. Obviously, market conditions are very different now and no one should expect a huge boom as in the previous cycle.
However, hard data suggests we have clearly started a new expansionist super cycle, as I ventured in last Aprils’ article:
- Property prices in Spain (confirmed sales) jumped by almost 10% in the first quarter of 2018 following S&Ps Case-Shiller Home Price Index, according to the latest figures released in May by Spain’s Land Registrars Association (Colegio de Registradores de la Propiedad de España). This impressive figure, all unto itself, is a huge market indicator that flags the real estate market is back on the move.
- The overall number of house sales increased 23% year-on-year in January 2018 according to Spain’s National Statistics Bureau (INE). House sales figures grew incrementally for nine consecutive months. There was a 46% jump from December to January in house sales and the trend remains unabated on the 1Q 2018.
- The construction sector in Spain has increased 6% year-on-year on the 1Q 2018, following the latest figures released in June by Spain’s National Statistics Bureau (INE). This explosive surge in growth is unprecedented since the year 2001. The construction sector accounts for 10.6% of Spain’s GDP in 2018; a far cry from the jaw-dropping 20% figure reached in the apex of the property boom in 2006/2007.
What these three tantalizing figures translate into - without the esoterics - is that Spain has finally turned the corner in 2018 and is firmly set on the road to recovery. British buyers, traditionally Spain’s strongest market, remain subdued with Brexit looming ominously on the horizon. Northern Europeans, mainly Nordics and Belgians, have taken pole position in this new uncharted market.
The fledgling green shoots, which started in 2014, consolidated all throughout 2017 and are gaining traction in 2018. With this off-plan frenzy in mind, I thought it would be a good idea to publish a gentle reminder on the eight tips new-build buyers should be mindful of.
Brick is back. Can you afford to miss out?
8 Tips on Buying Off-Plan in Spain
Hire a qualified registered Lawyer (Abogado)
Beware of intruders who claim to be Lawyers or law firms but are not registered to practice. Unlike Lawyers, they don’t have professional indemnity insurance and lack the legal qualifications to practice. I see plenty of such outfits advertising themselves regularly on popular expat magazines with glossy ads peddling their conveyance ‘services’. They will label themselves with fancy titles such as: consulting firm, legal consultant, iuris consultant, jurist, legal executive, legal advisor, legal assistant, paralegal etc.
In Spain it is very simple, you are either a Lawyer (Abogado) or you are not; there is no in-between. Always ask the person you are dealing with for their Law Society’s number and verify they are registered to practice. If the individual refuses to give you his practising number, walk away. In the last property cycle these intruders wreaked havoc and are now back in force!
Specifically, on buying new-build, it is highly advisable that you retain a seasoned registered Lawyer before you commit yourself signing any document or else paying any amount. Initial down payments, such as holding deposits which strike the property off the market, are non-refundable unless specifically agreed otherwise. If you pull out, you will likely forfeit your deposit.
Many legal problems could easily be avoided on following this simple advice. Don’t be in a rush to hand over your money without having hired an independent Lawyer first; do not allow yourself to be pressurized by intermediaries. Rash decisions often turn out to be expensive mistakes in life.
Our law firm has over 15 year’s conveyancing experience at your service. You can read further here: Buying Property in Spain – 10 reasons to hire a Lawyer
Plot of land under a developer’s name
In the last property bubble, many developers marketed and sold on whole developments without even owning the land.
One should never buy an off-plan unit in a land that is still not registered under the developer’s name. There are far too many associated risks to take a gamble with your hard-earned money.
This is one of the checklist points your Lawyer will do as part of his conveyance due diligence.
The basic recommendation is not to sign a Reservation Contract or a Private Purchase Contract (PPC) unless the town hall where the property is located has issued a Building Licence for the development. You should categorically not buy a property that lacks planning permission, it is only basic common sense.
This is by far the biggest mistake that – unbeknownst to many – a buyer can possibly make. Many problems could easily be staved off on following it. The Building Licence will ensure that the building is above board and the property is not being built in green belt land, for example.
Photo credit: courtesy of Erasur, Cataleya, Estepona
Once your Lawyer has checked the plot of land is under the developer’s name and there is a valid Building Licence issued, it’s time to sign the reservation contract.
The instalments paid while the property is being built can be guaranteed by means of what is known generically as a ‘bank guarantee’. For more information, please read our detailed article on Bank Guarantees in Spain. Bank guarantees only work now if a Building Licence has been issued (further reading in my blog post). In other words, any payments made towards off-plan property that lacks a BL, will be unsecured.
Bank Guarantees are a legal tool devised to secure the interim deposits of prospective off-plan purchasers should their properties not be delivered on time or their developers file for administration. Every payment made towards the property, including the initial holding deposit, should be secured by a bank guarantee.
A bank guarantee is of critical importance, acting as a safety net securing all your stage payments, should the developer fail to complete your property.
Licence of First Occupation
A Licence of First Occupancy (also known as Habitation Licence or Certificate of Habitation and in Spanish, Licencia de Primera Ocupación or Cédula de Habitabilidad) is a certificate issued by a town hall that confirms that a newly-built property fully complies with all planning and building regulations and is ready to be used as a dwelling. A LFO allows off-plan purchasers to dwell in a property legally. You can read more on this subject in our in-depth article on the Licence of First Occupation.
A LFO is important mainly for four reasons:
- It provides a check on the planning legality. A LFO means the developer has built the dwelling in compliance with the original town hall’s Building Licence as well as with all Planning laws. The inspection to grant this licence is carried out by town hall’s chartered technicians who certify that the dwelling complies fully with Health, Safety, Planning and Construction Laws and is deemed apt for human habitation.
- It is required by utility companies to have access to official supplies (water, electricity and gas). Spanish law requires the granting of the LFO to hook up the dwelling to the supply grid.
- Lenders will ask for it if you require finance. Banks will also be asking you for a LFO. Even on selling the property, your buyer will request a copy for his own lender.
- Holiday rentals. If you are looking to buy as an investment (buy-to-let), a LFO is required by regional Tourist Authorities to rent out your place on a short-term. If your property hasn’t attained a first occupancy licence, you will not be able to legally rent out your house and may be landed with humongous fines if caught red-handed. The fines for non-compliance are six figures in some regions of Spain.
Be wary of anyone downplaying the importance of a LFO claiming it is unnecessary. In general, I advise you not to complete without a Licence of First Occupation.
A NIE number is a Fiscal Identification Number for foreigners and is required, among other things, to buy property in Spain. More details in our article: NIE Number Explained.
Before you complete on a newly-built property you should always do a snagging list of the property. You can either draw up a snagging list yourself or else appoint one of the many reputable companies that may carry it out on your behalf.
It goes without saying that Lawyers do not carry out snagging lists! This is why we strongly advise you to hire a chartered surveyor. Ideally, your surveyor should be a fellow of the Royal Institute of Chartered Surveyors (RICS), so you are guaranteed they work to British standards. You should know that Spanish survey reports are very different from our own.
For post-completion flaws and their repair, please read our article on Off-Plan Construction Flaws: Know Your Rights so you learn what your rights are and how to defend yourself once you have completed on a new build property. Post-completion, building flaws may become apparent which were either not picked up during the snagging list or else are new.
Photo credit: courtesy of Real Capital Solutions, Arboleda villas, Estepona
Post-completion: dealing with property taxes, utilities, community fees & other
Once you have acquired your new Spanish property, you will have to face all the associated running expenses. Make sure you have carefully budgeted for this to avoid unpleasant surprises! Some of the luxury gated communities with lush tropical gardens and beautiful infinity pools that dot the Spanish coastlines may have steep maintenance expenses.
You should open a Spanish bank account if you haven’t done so already. Utility companies do not accept overseas payments and only accept standing orders against your Spanish account.
You should set at least as standing orders all the following:
- IBI tax. Paid once a year (akin to the UK’s Council tax).
- Rubbish collection tax. Paid twice or once a year depending to your town hall.
- Utility bills (invoiced quarterly in the case of water and monthly with electricity).
- Community fees (only if you’ve purchased in a Commonhold). Usually quarterly but may vary.
The particularities on buying off-plan are for example that IBI tax will not be usually readily available to pay until two years after you’ve purchased the property, maybe even more. You will be nonetheless held liable for those two previous years on the backdated IBI tax. Failure to pay IBI tax may lead to your house being auctioned off to recoup the debt. More on these taxes in our article Non-Resident Taxes in Spain.
You are also liable to file Income tax on owning property in Spain every year for which you need to appoint Fiscal Representation. Even if you do not rent out your property, you still need to pay this tax every year as a non-resident. We have a very competitively-priced taxation service, ask us.
If you do decide to lease your Spanish property as a holiday rental, given the spectacular rental boom Spain is undergoing over the last two years, we offer a Holiday Rentals Accounting Service (HRAS).
We can reduce your landlord tax bill by a minimum of 40% - or your money back! Ask us.
To close, we cannot stress enough how advisable it is that you make a Spanish will to dispose of your Spanish estate. This will not preclude any other will made in your home country and is limited exclusively to your Spanish assets. A Spanish will saves your beneficiaries time, money and hassle at a time of bereavement as it greatly streamlines the Spanish succession procedure. Contact us on our will writing service.
We offer the most competitive fees in the market.
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Larraín Nesbitt Lawyers is a law firm specialized in conveyancing, inheritance, taxation and litigation. You can contact us by e-mail at email@example.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.
"Podrán cortar todas las flores, pero no podrán detener la primavera." — Pablo Neruda
Ricardo Eliécer Neftalí Reyes Basoalto (1904 – 1973). Brilliant Chilean poet. Since a young age he proved to be extraordinarily gifted with the Arts writing all manner of poems. Nobel Prize winner for Literature in 1971. Due to his international high-profile and strong political beliefs, which he passionately defended, was suspected poisoned on the orders of Dictator Augusto Pinochet only days after his nefarious coup d'état. Among his timeless classics, 20 poemas de amor y una canción desesperada stands head and shoulders above the rest. The Colombian master novelist Gabriel García Márquez once called him "the greatest poet of the 20th century in any language."
Article originally published in Spanish Property Insight: 8 Tips on Buying Off-Plan in Spain
Legal services Larraín Nesbitt Lawyers can offer you
- Conveyancing – Buying from €995
- Conveyancing – Selling from €795
- Non-Resident Income Tax (Fiscal Representation) from €90/year
- Holiday Rentals Accounting Service (HRAS) from €100
Buying Off-Plan Property in Spain – 8th of June 2013
House Hunting in Spain – Interview with The New York Times. June 2015
Resurgent Spain: Málaga Sees Strong Sales – Interview with Mansion Global (The Wall Street Journal). December 2015
Buying Property in Spain from a developer (Off-Plan Property) – 8th March 2017
How to inspect an off-plan property overseas – Q&A with The Sunday Times. July 2017
Buying Property in Spain – 10 Reasons to Hire a Lawyer – 8th November 2016
Non-Resident Taxes in Spain – 8th December 2015
Non-Resident Income Tax – 8th December 2017
Please note the information provided in this blog post is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. Voluntas omnia vincit.
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