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1. Buying Property

Guide to buying property abroad in Mallorca

In general, there are two possible scenarios when you are buying a property in Spain .

Reservation Deposit and Contract

The first step in the purchasing process in Spain is to secure your chosen property by depositing a sum of money, the reservation deposit, with the vendor. This ensures the property is removed from the market and the price fixed for a certain period of time, usually 30 days. It is essential that when travelling to Spain to view properties you have funds available to pay the reservation deposit. This can be in cash or by cheque. A cheque drawn on a Spanish bank account would usually suffice but not a cheque drawn against a non-Spanish bank account, due to the delay in clearing and the uncertainty of the exchange rate. If you are unable to pay the reservation deposit it is most unlikely that the seller will reserve the property for you or take it off the market. This delay could, of course, mean you lose your property. Typically, the amount required by way of the reservation deposit is between 1.500 Euros and 12.000 Euros depending on the total price of the property. At the time of handing over the reservation deposit, a reservation contract should be signed by you and the seller, or your representative, into which the basic terms of agreement are incorporated. These terms can include, for example; the property address, if a garage or storeroom is included, payment terms, estimated date for exchange of contracts and estimated completion date. It is important to realise the reservation deposit is usually non-refundable, unless it is specifically agreed to be conditional upon certain factors happening eg raising finance or even actually viewing the property, if reserved unseen.

At Properties International, we do however in most cases skip this first step and go straight to signing the Private Purchase Contract (see below). This is because we tend to have a very good contact with our owners and unless the owner has another buyer interested, they tend to reserve the property for us while we do all our standard checks and searches on the property. We prefer to always check the land-note, any paperwork, searches, if there are any infractions or debts etc before we let our clients put any money down be it as a reservation deposit or for the signing of the Private Purchase Contract.

Private Purchase Contract (Exchange of Contracts)

Once the reservation contract has been signed, and the reservation deposit paid to the
vendor, there will be an agreed period of time during which your estate agent and /or solicitor will undertake all the necessary searches on your behalf to ensure the vendor is the legal owner of the property and it is free from any debts, charges or encumbrances.

As in the UK, Spain operates a Land Registry system enabling your estate agent and /or solicitor to conduct thorough searches of title, giving you added security and peace of mind. During this period, the detailed terms of agreement will also be negotiated by your estate agent and /or solicitor and incorporated into a Private Purchase Contract, ready for exchange of contracts. On exchange you should expect to pay between 10% and 50% of the purchase price when buying off-plan and, 10% when purchasing a resale property. Your estate agent and /or solicitor will also ensure (if buying off-plan) that the developer is providing a bank guarantee for all payments, as well as a 10-year structural guarantee or something similar on completion. A bank guarantee protects your payments and provides for your money to be returned in the unlikely event that the developer does not finish the property, goes into liquidation, or even where they fail to complete on time and you do not wish to wait. Exchange of Contracts has a similar effect to that in for example England, in that it fully commits both buyer and seller to the purchase at an agreed price (subject only to fluctuations in taxes). Neither party is able to pull out of a purchase after exchange of contracts without penalty. Normally a private purchase contract will have a duration of 90 days before the sale must be completed, but this is also negotiated.

Completion

Formal completion takes place when the title deeds (escritura pública) are signed by the parties before a Notary Public in Spain and the balance of the purchase price is paid over. The Notary is a public official whose role is to act as a witness to the signing of the deeds and to ensure that the parties have complied with the relevant legal requirements in the transaction, such as payment of appropriate taxes.

It is not necessary for you to be physically present at the Notary appointment and you can, instead, grant a formal power of attorney or informal verbal mandate to someone else, for example your solicitor, to sign the deeds on your behalf.

If you choose to give a verbal mandate to someone else, you will have to attend before a Notary in your country or Spain as soon as possible after completion in order to ratify the deeds, as while ownership will have been transferred, the deeds cannot be registered at the Land Registry without ratification. Ratification is simply a process whereby you, as owner, confirm the purchase and give an original signature for filing at the Land Registry. If you choose to ratify your title deeds in Spain, your estate agent or solicitor will make all the necessary arrangements and accompany you to the offices of the Notary. Final registration of the title deeds is likely to take approximately 3 months from the time ALL paperwork is given to the Land Registry.

Post completion

Your solicitor/accountant or estate agent will assist you or arrange for the relevant taxes to be paid and ensure title deeds are registered with the Land Registry. They will also arrange for you to be registered with the Local Authority for payment of local taxes such as rates and rubbish collection. These taxes can be paid by direct debit from your Spanish Bank account. On completion of the purchase of an off-plan property it is unlikely the essential services, such as electricity and water, will be connected. Connection of such services can take up to 4 weeks following completion and it is important, therefore, that you do not make any plans to use the property during that period. If you would prefer not to arrange the utility connections, you can be put in touch with a company in Spain which specialises in providing this type of service and whose fees are likely to be in the region of 150 Euros plus VAT.

The Declared Price

There is a common practice in Spain (often when dealing with resale properties) to show
a lower price on the title deeds than has actually been paid for the property. The
difference will commonly be attributed to fixtures and furnishings, even if in reality the
fixtures and furnishings are not worth that much. The Spanish Tax Office has tried to regulate this practice by assessing the value of individual properties (valor fiscal). The valor fiscal is often considerably lower than the price for which the property is being sold. If the amount declared in the title deeds falls below the valor fiscal, the transaction is likely to be inspected by the Tax Office who can impose heavy fines.

The effect of “under-declaring” the value in the title deeds is two-fold. Firstly, the transfer tax (ITP) payable by the buyer is reduced being payable only on the declared amount. Secondly, the Capital Gains Tax payable by the vendor is reduced as the profit will be seen as being the difference between the amount declared in the title deeds at the time the vendor purchased the property and the amount declared in the title deeds at the time of sale. You should also be aware that if you buy a property with an “under-declaration” your future liability to pay Capital Gains Tax on any profit made will be higher, unless the “under-declaration” is, of course, “rolled-on”. To 'under declare' is not recommened by Properties International and it is recommended that you seek advice of a professional tax advisor or lawyer when deciding your declared price to avoid any problems in the future.

Bank Accounts

One of the first things you need to do when you have decided to buy in Spain is to open a Spanish bank account. When buying off-plan, developers will usually require stage payments to be made through a Spanish bank account and, on completion, the utility companies will require payment of their bills by direct debit. You should be aware that Spanish banks charge a commission to receive funds from overseas, sometimes up to 0.5% of the money being transferred. Your estate agent, accountant or solicitor can arrange for an account to be opened for you, and can negotiate some competitive rates with a local bank, in some cases eliminating commission charges altogether. We also recommend that any transfers are sent by SWIFT or IBAN and that you negotiate a rate with banks on both ends to achieve a good rate.

MORTGAGES

If you need to raise finance to purchase your property, there are several options available to you, both in Spain and in your home country. The main difference between securing finance in your home country and in Spain is that whereas the former can be arranged to finance stage payments, the latter is only available on completion.

If you decide to raise the funds in your country, you can do so for example either by re-mortgaging an existing property or, by taking out a personal loan. In either case, you will need to transfer the funds from a bank account in your country to your bank account in Spain.

Alternatively, you may wish to consider raising the funds for completion through a Spanish mortgage. This is something we recommend at the moment as the spanish banks offer competitive mortgages with low rates of interest, to both non-residents and residents of Spain. Typically, the banks will grant up to 70% of their valuation of the property for a term of up to 20 years. Spain offers several kinds of mortgages including fixed and variable interest rates or, indeed, a combination of both.

Endowment or pension-backed mortgages are not available, although interest-only mortgages are now being offered by some lenders. The Bank will need documentation from you to be able to consider your mortgage application including a bank reference, copy bank statements, copy income tax returns, copy salary slips or, copy accounts if you are self-employed. If you are buying off plan the developer may already have a mortgage in place, which you can simply take-over (subrogate) on completion, subject to your financial status. The mortgage arrangement fees for securing a mortgage offer from a Spanish bank amount to approximately 3% of the mortgage advance. The fees include Stamp Duty, the bank’s commission, legal, notary and land registry fees.

In many instances, the mortgage arrangement fees will be lower if you take-over the
developer’s mortgage on completion and the same if you take over a private mortgage from a private sale.

Costs, Fees AND Taxes

As a general rule, and to avoid any surprises, you need to add approximately 10% to your base purchase price/declared price (Excluding mortgage arrangement fees) to cover all your essential fees and taxes and these are broken down as follows:

VAT (IVA) or Transfer Tax (ITP)

IVA applies to off-plan purchases whereas ITP applies to re-sale properties. Both are
currently 7%. IVA is payable with each instalment, whereas ITP is payable on completion.

Stamp Duty (AJD)

AJD is only payable on the purchase of off-plan properties and is currently 1%, regardless of the value of the property. It is payable on completion.

Plus Valía

This is a one-off tax levied by the Local Authorities and is calculated by reference to the
increase in value of the land since the last sale of the property/land. For most purchases this tax will amount to only a few hundred Euros and is normally payable by the vendor on completion, if it has not been negotiated for the buyer to pay. This will be stated in the private purchase contract.

Legal Fees

Solicitor or accountant fees are normally a percentage of the purchase/sale price plus VAT at Spanish rates. The exact amount however should be agreed before you take them on as your representative. Properties International can advise you on how much it should cost and who we recommend you to use, if you choose to use an accountant or solicitor.

Notary, Land Registry and Gestoría Fees

These are the fees associated with the witnessing and subsequent registration of your
title deeds. Notary fees range according to a scale fixed by law and are between 300 to
1200 Euros. Land Registry fees are generally about 20% less than the Notary’s fees.
Gestorías are official intermediaries between individuals and government bodies, such as the tax office and the land registry. Their fees are generally about 300 Euros plus VAT.

Your representative will liaise with the Gestoría until the land registry has returned your
title deeds. If you already have an accountant representing you, he or she can do this for you and you need not use another Gestoría.