If you can’t sell it, you can always auction it

Raymundo Larraín Nesbitt, July, 21. 2018

Admonitory blog post on the perils of Spanish public auctions.

Blog post copyrighted © 2018. Plagiarism will be criminally prosecuted.

By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Lawyers
21st of July 2018

 

Crass mistake. Indulging in the idea that if you can’t sell your home, you can always auction it off is a recipe for disaster. If you think for one moment a lender will pay you the locked equity buried in your home, you need therapy. I’ve already had two people making this grievous mistake over the last six months. I thought it was worthwhile writing a short blog post to warn other borrowers.

For illustration purposes, I am going to take a real-life example. Mrs Osiris has a second home, a Spanish property with a real market value of €400,000. She is resident in the United Kingdom. She has a loan for €130,000. Her tenants stopped paying the rent over the last three months which she used to offset her monthly repayments. As a result, she has fallen into arrears with her lender. Unable to sell her property, she decides it best for her lender to repossess and auction it off. She is under the (false) impresssion she will be paid off the balance of the equity post-auction (at least €200,000 in her mind).

 

The Trials of Osiris

 

Mrs Osiris is blissfully unaware of the intricacies on how Spanish law works and unbeknownst to her she is in for a rude awakening.

  1. The first mistake she makes is that she (wrongly) assumes that the starting value for the auction of her home equates to the market value (€400,000). I have already explained in previous articles and blog posts that lenders set an auction value in every Mortgage deed. They command their own bank valuations, which are already well-below the market value. The appraisal comes up as €320,000 (or 20% below the real market value). Lenders - ex Art. 682 LEC – can then set a value, strictly for auction purposes, in the Mortgage deed which can be up to 75% of the appraisal report. So, as a recap, this property that had a market value of €400,000 is valued 20% below the RMV and then suffers a further 25% reduction leaving it as a starting auction value of €240,000. More on this here: Bank valuations vs. market value

        The starting value for auction purposes set in Mrs Osiris’ Mortgage deed is: €240,000.

  1. The second mistake she makes is that she forgets to deduct all the associated costs, fees and legal interests of a repossession procedure, which easily are in the region of €50,000.
  2. Her third mistake is that she is unaware on the ‘perverse’ auction mechanics. More on this here: Bank Repossessions in Spain. On the first round usually no one bids. So, on the second round – by law – the value drops to 50% because this was her second overseas home (not her place of permanent abode).

Drop of the gavel

After the auction is over, the lender has adjudicated itself Mrs Osiris’ home for only 50% of the initial auction value, that is 50% * €240,000 = €120,000.

But as you recall, Mrs Osiris owed her lender €130,000 as principal of the loan plus a further €50,000 in associated repossession expenses. Total debt = €180,000.

As you can see, there is a shortfall of €60,000.

Meaning she shockingly STILL owes money post-repossession despite having a ‘buffer’ of 200k equity locked in her property!

Lenders don’t lose money, and if they do, taxpayers are always there to bail them out.

Reality check

Mrs Osiris was expecting a fat cheque of €200,000 in the post from her lender...

All she gets is a nasty letter reminding her that she still owes €60,000 post-repossession which interests are mounting up exponentially over time…

Image result for trials of osiris moon of osiris

Of cinders and regrets

Never make false assumptions on Spanish legal matters – you will regret it.

If you think a lawyer’s advice is expensive, just wait until you start dealing with a lender unrepresented…

Had Mrs Osiris spoken with a lawyer, she could have avoided the above nightmare scenario altogether walking away scot free with at least €100,000 in her pocket. She should have sought legal council when her tenants first started falling into arrears.

She is now being chased for the ‘shortfall’ post-auction. She is being blacklisted in Experian, and other credit-rating agencies, which will seriously hamper her borrowing ability going forward in the UK or elsewhere. Her doctrine of passing is a harsh lesson in life and a stark warning to other borrowers.

"Dura lex, sed lex."

Roman civil law maxim meaning that, however regrettable the outcome of a legal matter, the law must be upheld.

 

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Larraín Nesbitt Lawyers is a law firm specialized in taxation, conveyancing, inheritance, and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

 

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