12 Buying Property from a Builder or Developer
The previous sections of the Guide have generally assumed that you are buying a “resale” property – one that already exists and is occupied by the owner. Now we consider the main differences if you are buying from a builder or developer; and in the next section, if you are having your own property built. The main difference here is that the builder retains ownership until the property is completed.
It is only when the necessary certificates of building completion (fin de obra) and of first occupation (primer ocupación) have been issued, that the escritura for the sale can be finalised and the sale notarised. The buyer does not own any part of the property until the sale is finalised.
There will be a contrato de compraventa, but this will be for the purchase in the future, when the building is completed. This contract will normally provide for advance payments (pagos adelantados). This is acceptable, so long as the contract also provides the guarantee (required by Law 57/68) for the return of any money paid, which is normally through a bank guarantee backed by a bond which the builder has deposited (aval bancario), or an insurance policy (garantia de seguro).
Your lawyer should check that the bond or policy is in force, and that it covers all foreseeable problems. In the event of non-completion, the buyer is entitled under Spanish consumer protection law (Law 57/68 reinforced by Decree 515/89) to the return of all money paid during construction plus interest at 6%. It is a legal requirement that builders / developers include such a guarantee (certificado de garantia) in their contracts which specifically provides for the return of all money paid plus interest. Failure to do so is a criminal offence. The builder may not charge the buyer for providing this guarantee.
Mortgages
The big difference compared to the system in the UK is that, as you do not own the property, you cannot arrange a mortgage to finance these the deposit and other advance payments that may be required. UK and Spanish banks and mortgage brokers can however “pre-approve” your application for when the property is completed and sold, and issue you with a formal letter of intent (subject to completion and valuation), which should enable you to obtain bridging finance with your own bank.
Normally, builders in Spain obtain mortgage finance for the project from their bank. When the property sale is finalised, and the project split up into the individual parcelas, the buyer has the right to “subrogate” (i.e. take the place of) the builder in the mortgage for his particular plot.
The buyer will have to complete an application similar to that for a new mortgage, and go through a similar approval process. If the buyer requires a larger loan than that available by subrogación (typically around 60-70%), this would be treated by the lender as a separate second mortgage.
Traditionally the advantage of this system was that the mortgage finance by subrogación was relatively automatic – a big advantage in the Spanish system, when 20 years ago for example, there was only state-owned Banco Hipotecario which granted mortgages. However, now that the mortgage market is much more open and competitive, and mortgage offers can be obtained anywhere (at least if you are a Spanish citizen with your wages paid into your bank account) there are few advantages of subrogación.
Also, the transaction costs of subrogación are rather less than for a new mortgage: generally there will be no need for a valuation, no registry fee, no stamp duty, and the cost of the notary will be around 40% of that for a new mortgage.
But, some lenders may not accept subrogación if the buyer is non-resident. As a non-resident you have access to a range of competitive mortgage products up to 80% of the property value, with on-line applications, telephone helpline and documentation in English, so again you should not accept subrogación at least until you have spoken with your broker or proposed lenders.
How to check your builder?
Because you are buying from a developer, it is even more important to carry out the relevant “pre-contract” checks (for full details refer to chapter 5); in particular, you (or your Spanish solicitor) still need to:
- 1 Prove that the developer does own the land by checking his escritura.
- 2. Check that there are no loans outstanding by obtaining a nota simple.
- 3 Ensure that the developer has paid his IBI – check the receipts.
- 4 Obtain a certificación catastral, check the plan parcial to ensure that the urbanización itself is registered and to the property is as described to you.
- 5 Check with Urbanismo, the town planning office, to ensure that the development is zoned for building, planning permission has been granted, and that there are no other developments planned nearby that could affect your new property.
- 6 Check the builder's Licencia de Obra (Building Permit).
- 7 Check the builder's Certificado de Fin de Obra (Completion Certificate).
- 8 Check for the Licencia de Primer Ocupación (Licence of First Occupation). If the building is not yet completed, make sure that the contract includes a warranty from the developer that he will obtain and pay for these certificates, and provides penalties if delivered late.
If you and your solicitor are happy with these checks, and proceed to the contrato de compraventa, you should ensure that this contains the following provisions:
- 1The total price for the building, completed and ready for occupation.
- 2 Licencia de Obra (Building Licence)has been granted.
- 3 Certificado de Fin de Obra (Certificate of the Building Completion) granted.
- 4 Licencia de Primer Ocupación (Licence for First Occupation) has been granted.
These documents are essential to obtain an escritura or register for utilities. The builder / developer should be responsible for obtaining these and for paying for them.
- 5 Payment of deposit and advance payments.
If a builder should try to persuade you to declare a value lower than the purchase price – just as for a resale property - do not agree to this, or least, discuss it fully with your Spanish solicitor. Remember that tax inspectors can impose penalties, and that in any case you will probably have capital gains tax to pay if you are non-resident).
If possible, you should appoint your own aparejador (architectural engineer) to ensure that building is in accordance with the plan, the specifications, and satisfactory standards.
Advance payments will only be made on receipt of the architect’s certificate confirming that the relevant stage has been completed in accordance with the specification and to his satisfaction.
Traditional Payment Terms
Normally, 25% is paid as a deposit, with further payments of 25% each when the roof is completed, when the fitting out is completed, and finally when the escritura is signed. If you buy when the construction is at a more advanced stage, it is reasonable that the deposit will be higher.
If you are buying off plan you will probably pay a reservation of around €5,000 and 10%-20% of the purchase price as a one-off deposit, with nothing more to pay until completion.
Low Deposit Purchase
This innovation was introduced to the Spanish market in 2004 and the Property in Spain Network has a wide choice in many favourite Costas and independent solicitors have taken to providing Legal Sureties on Low Deposit properties as well as traditional off plan purchases.
- 6 Guarantee of Completion (certificado de garantia). In accordance with Law 57/68 reinforced by Decree 515/89, buyer's deposit and any stage payments made are covered by an equivalent bank guarantee or insurance bond, and that in the event of non-completion, the buyer is entitled to the return of all money paid during construction plus interest at 6%.
- 7 Completion date for Building. A penalty should be provided for late completion which should be specified as when all building and infrastructure has been completed, and the necessary certificates obtained.
This section of the contract could specify, for example, that for every day that completion is late, the builder will meet all the additional travel and accommodation costs incurred by the buyer, together with a further compensation payment of maybe around €75 to €150 for inconvenience.
Equally, there will be a penalty clause to protect the builder / developer that if you fail to make the payments specified, the contract becomes null and void and any rights or obligations provided by the contract will lapse. If there is any dispute the courts will decide the outcome – you may lose any deposit or other payments made, and the builder could be free to sell the property to another buyer.
- 8 Detailed plan of the Property
Especially if the property construction has not yet started, a detailed plan of the property with dimensions and specification (including quality standards) of the fixtures and fittings, in particular for kitchen and bathroom – this is often annexed to the contract (memoria de calidades). Even if the building is part-completed, you should still obtain this memoria, as it will enable you to ensure that building is up to standard.
6. The builder / developer is responsible for the installation of gas, electricity and water and
sewage. The buyer should be responsible only for payment of the installation of any meters and for the actual gas cylinders, if town gas is not available.
7. The cuota de participación (share of the total costs) in the comunidad de propietarios
(Community of Owners). Even if this has not yet been formed, and no subscription has yet been calculated, your share will be determined by the size and facilities of your property, and this will be known. If the comunidad has already been formed, the contract should specify either the current fees, or the generally expected level of fees for next year.
8. The developer / builder is responsible for the payment of all debts on the land, especially
the IBI, until the escritura is signed.
9. The buyer will only be responsible for the payment of the costs of the escritura de
compraventa, not for the segregación or division horizontal (i.e. the division of the whole plot of building land or urbanization into individual titles), and the declaración de obra nueva (declaration of new building). Both of these must also be notarised public deeds (escritura publica) in order to be legally valid, and before signing the escritura de compraventa, you should ask for proof that these have been registered. They should be paid for by the builder / developer.
10.If possible, you should try to include a provision that 5% or 10% of the construction costs will be withheld for 3 or 6 months, in case any faults should appear. Few builders will be happy to accept such a clause, but if the funds are deposited with a lawyer in a Bonded Client’s Account it may be possible.
In any event, a builder is legally liable for any defects in a new property. Until May 6th 2000, this was a civil law matter: the responsibility was for 15 years after completion, but the only way of enforcing an unresolved problem was to take the builder to court. The new Ley 38/1999 de 5 de noviembre sobre la Ordenación de la Edificación (Building Standards Act) came into force on May 6th 2000, and this provides obligatory protection. Serious defects affecting safety are covered for 10 years and the builder must have insurance cover for this. The policy must be given to the notary, and details of the policy must be included in the escritura, and without this the sale transaction cannot be notarised.
Other defects affecting the habitability of the property (such as for example failure of electricity or water) – but not affecting safety – are covered for 3 years. Other minor defects are covered for 1 year. In the last two cases insurance cover is not required, but obviously if a builder can offer this as an additional guarantee – so much the better.
Once you have bought the property and had the escritura notarised, you need the copia simple in order to register the property (dar de alta) at the Recaudación Provincial for the payment of the IBI, in order then to be able to register for water and electricity supplies.
This could also be included in the contract, although it may be better to ensure that you or your lawyer does this in order to ensure that it is done on time and properly.