The Buying Process
The Decision, Due Diligence & Contracts
Now you have visited various properties and made all the pre-arrangements you are ready to make a decision, do the legal checks and set up a contract to formalise an agreement for your property in Mallorca.
Let’s walk you through the buying process.
Make a Decision
There is an important point to make about the mental process of house hunting. Of course, you want to buy the ‘dream’ property, the ideal property, the best there is given your budget. But don’t fall into the trap of searching for the ‘perfect’ property, as it may not exist. To avoid frustration, you should try to find the best property on the market, rather than the perfect property full stop. Perfectionists will always want to see one more property just in case it is the one, but the chances are they will end up with nothing, or have to compromise in the end. So choosing a property always involves making some compromises, but once you have made a decision, act decisively.
If you are buying a resale property, decisive action sends the right message to the vendor, with whom you will have to negotiate the price. Vendors who are keen to sell will value the fact that you are a serious buyer, and can complete without wasting time, so use this to your advantage in the negotiations over price. Always try and find out as much as you can about the vendor’s reasons for selling, and don’t be shy about making an aggressive offer. The research you have done into property prices will be useful in deciding how much to offer, and where to draw the line. But don’t sign anything or make any payments before doing due diligence.
It is important to do some legal checks before signing any contracts or making any non-refundable payments. You need to confirm that the property belongs to the seller in its totality and that it is free of any charges (in Spain mortgages, tax obligations, and other charges are ascribed to a property rather than individuals). In some cases, you may also need to run a number of other checks related to land classification, urban development plans, the condition of the property, maintenance costs, and community obligations.
Your lawyer can advise you on the appropriate level of due diligence in your particular case. In most cases, the following checks are carried out:
Property Registry Report
Check the property registry report (known as the nota simple in Spanish), which lists the owner(s), and reveals if there are any debts and/or charges, such as a mortgage, attached to the property.
Check the title deeds (Escritura in Spanish), a copy of which you should be able to get from the vendor. Amongst other things, you need to confirm that the property is accurately described in the deeds.
When buying off-plan from a developer, or even from an investor selling on an off-plan property, it is sensible to check that the property has the necessary planning permission, given the recent problems with illegal building in Spain. If a newly built property has a licence of the first occupancy (see below), then it is fair to assume that it was legally built with a valid construction licence.
When buying a resale property, planning permission is normally not an issue, though you should always check with your lawyer, as resale properties in some parts of Spain may have been illegally built in their day. However, it is quite common for resale properties in Spain to have extensions or additions that was carried out without planning permission, and which are not registered in the deeds.
Check the latest payment receipts for local taxes (IBI) to ensure that they are up to date, and in some cases check with the town hall (ayuntamiento) that there are no problems with unpaid rates from previous years. The town hall can issue a certificate to this end. Any unpaid rates become the new owner’s liability.
If buying a resale property you might also need to check how much local capital gains tax (Plusvalía) will become due when the property changes hands. In theory, the seller pays this tax, but in some cases, the buyer agrees to pay it. It is important to know how much it is, and who will pay it before committing.
When buying a resale property it may be prudent to ask the seller to demonstrate that all utility bills are up to date, and to specify in the deposit or private contract (if you enter into any such contracts) that they will be up to date at the time of granting of the public deed of sale.
Community bylaws and fees
When buying a property that is part of a community of owners (Comunidad de Propietarios) it is important to know what the bylaws governing the workings of the community are, and what the financial obligations are per period. A copy of the community bylaws can be obtained from the secretary of the community, or the land registry. You may also need to check with the president, or secretary of the community, that the previous owner is up to date with community bills.
Insurance if buying from a developer
Developers who sell property under construction are legally required to arrange bank guarantees to protect any payments made to them before the property is completed. This ensures that you get your money back if the developer fails to complete. Never buy off-plan from any developer who does not provide bank guarantees for all stage payments. Note that developers are also required by law to hold an insurance policy which guarantees for 10 years eventual damages occurring due to defects affecting groundwork, supports, beams, reinforcement bars, retaining walls, or other structural elements.
Licence of First Occupancy
Once again, when buying from a developer, it is important to check that a licence of first occupancy (Licencia de Primera Occupación) has been granted by the town hall before completing. Utility companies will not supply properties without this licence, which is why you should never complete without when. Though some may try, developers cannot force you to complete without this licence.
There is always the option of having a chartered surveyor check a property before you buy. This is advisable if there are any doubts as to the condition of the property. A survey can also be carried out on new build property to confirm that it is delivered in the condition promised.
Prior to completion, there are various types of private contracts you can use to formalise an agreement with the vendor. Whichever one you use, don’t sign or pay anything until you get the thumbs up from your lawyer.
Reservation contract – Documento de Reserva
With this contract, you pay a deposit to reserve a property for a specified period of time – often 30 days. If you back out at the end of this period you typically lose your deposit. If you proceed with the purchase, the vendor is contractually obliged to sell you the property at the agreed price. The deposit is usually between 3,000 and 6,000 Euros and counts towards the final price of the property. Developers often use this type of contract when selling off-plan. Even though the deposit is relatively small (compared to the overall property price), you should not sign this contract without checking with your lawyer.
Deposit Agreement – Contrato de Arras
This contract requires that you pay a deposit – normally 10% of the agreed price – when the contract is signed. If you fail to go through with the purchase you will lose all of your deposit to the vendor. But if the vendor backs out before signing the deeds, you receive back double the deposit. This contract makes it expensive for either side to back out, but at the same time it does leave the door ajar should either side wish to do so. This is the contract you are most likely to be asked to sign if you buy a resale property from a private individual.
Option To Buy Agreement – Contrato de Opción de Compra
This type of agreement gives the buyer the exclusive right to buy a property within an agreed time frame. The option does not have to be exercised, but it is usually agreed that if the option is not exercised, the buyer loses the money paid for the option, which is normally 10% of the purchase price.
Private Sales Contract – Contrato Privado de Compraventa
A contract that specifies in detail (price, dates, contents, etc.), the terms under which the transaction will take place. Unlike a deposit contract, there is no backing out of a private contract unless both sides agree to it.
Completion takes place when you sign the public deeds in front of a notary public (Notario in Spanish), and pay the vendor in full. This is when the property becomes officially yours, though you still have to register your title in Spain’s property register (Registro de la Propiedad).
Signing the deeds before a notary, known in Spanish as the Escritura Publica, has to be done by everyone involved in the sale – buyers and vendors (or their legal representatives). This is normally when final payments are made to the vendor. It is still quite common in Spain (though less common every day) for vendors to ask for a certain amount under the table in cash, which goes unrecorded in the deeds. This is a fiscal fraud and should be avoided. But if cash payments are agreed to, they usually take place at the notary’s office, once the notary has left the room.
As a buyer at the Escritura you need to take along a valid ID document, such as your passport, and payment – such as a banker’s draft – if there are any payments still outstanding. Depending upon the notary and the region, you may also need a foreigner’s identity number (NIE number), which is obtained from the Spanish police. NIE numbers can take several weeks to obtain, so be sure to look into this issue in good time.
The notary will verify the identity of everyone involved in the transaction, and read the deeds out aloud – in Spanish of course – so that everyone present understands the terms of the sale. Your lawyer should accompany you to the signing to make sure that there are no last-minute changes without your agreement. Don’t believe anyone who tells you that you don’t need a lawyer and that the notary will protect your interests.
Within 30 days of the Escritura, you have to pay the taxes related to the purchase, after which you are strongly advised to inscribe your title deeds in the land registry. Your lawyer should help you carry out these formalities.
This article is part of the Comprehensive Guide to Buying Property in Mallorca. Click here for all the steps from defining property needs to the costs of buying a holiday home.
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