Buying Off-Plan (unfinished) Property (Real Estate) in Spain

Many people like the idea of buying property before it has been completed. There are good reasons for doing so. But what about the risks? What are they and how can you control them? This guide looks at those issues.

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This guide covers…

This guide is about buying off-plan property in Spain. In particular, it’s about buying off-plan property in the area of Andalusia/Andalucía – which contains the Costa del Sol. See a map here. Please note that certain aspects of the law in Spain vary from one “autonomous community” (comunidad autónomalightbulb image - click here for more information on this subject to another.

It is supplemental to our general Guide to Buying a Property in Spain and covers only the issues specific to off-plan property. Ideally, you should read that guide before this one.

By ‘off-plan’, we mean any property which you buy before it has been physically completed and where you pay more than 10% of the price before you take delivery of the keys and legal title. It is special because of the additional financial risks to which you can be exposed. After all, you are likely to be paying over a lot of money before you receive legal ownership of the property and its keys.

Property in the course of construction but where you pay no more than a 10% deposit until it is delivered to you can be treated as ‘new’ property because you are not exposed to those risks to anything like the same extent. See our Guide to Buying a New Property in Spain.

Introduction

In the boom years of the property industry – roughly from 2002 to 2007 – buying property ‘off-plan’ was extremely fashionable and extremely common.

This is because people were persuaded that there was money to be made by doing so. They were told that prices were rising so quickly that, by the time the property was finished, it would be 20% or 30% or 40% more expensive than it was today and – in any case – you probably wouldn’t be able to find a newly built property to the exact specification that you wanted.

Some people were even told that rather than reserve one off-plan property in an area where they wanted to buy they should reserve (and pay deposits on) four or five. By the time the properties were built they would (they were told) have risen so much in value that you could sell four of them and the profit you would make would pay completely for the one you were keeping.

Needless to say, this falls into the category of, “If it sounds to good to be true, it probably is,” and, whilst a few people managed to pull off this miracle, most didn’t.

Some of the spiel was (often but not always) true whilst the market rose sharply but, when the ride stopped, a lot of the people who had bought off-plan properties found they were in trouble as the developers went bust in droves and/or they were committed to buying properties at way over current value and with no means of paying for them. So they lost their deposits.

Video guide to off-plan real estate in Spain

You can get a quick overview of buying off-plan property in Spain by watching this video interview (below) with Spanish lawyer Miguel Manzanares. Learn more by scrolling down and reading the guide he has written with us.

The benefits of buying an off-plan property

There are still some benefits to buying off-plan property.

From the buyer’s point of view, there are three main benefits.

The first is the potential to benefit from rising prices in the way described above.

The second is that you can often negotiate changes to the standard specification with the builder. For example, you may want your bedroom to be a little smaller and your bathroom to be bigger, or to convert one of the bedrooms into a dressing room, or to have a separate dining room rather than a large kitchen-diner.

The third is that you should have a better range of properties available to you, especially in a sellers’ market, than you would if you waited for the properties to be finished. By that stage all of the ones in the best locations or with the best views could well have been sold.

From the seller’s point of view, there is one massive advantage. He can use your money to build the property. That saves him a lot in project finance costs – on which he will typically pay, perhaps, 20% per annum in many cases.

The disadvantages of buying off-plan

There are few disadvantages from the seller’s point of view, but from the buyer’s point of view there are several:

  • It is often difficult to know what you’re buying
    Most people are not good at interpreting plans. This is particularly so if the plans are measured in metres and they are used to dealing with feet and inches! Your large living room can turn out, in reality, to be very poky.
  • The quality of the workmanship may not be what you expected
    Your contract will, no doubt, contain certain clauses setting out the quality of work and the quality of the fixtures and fittings you can expect but they’re usually too vague and often open to debate. It is not uncommon for you to feel that what you have been delivered is inferior to what you were shown or promised. This may give rise to certain rights on your behalf but it is always time consuming and inconvenient to have to deal with this sort of situation. This is even true where you have been shown a similar property as a show house and think you’re buying an identical unit. Surprisingly often, your contract will not make reference to the show house by saying that what is delivered to you must be equal in size and quality to the show house.
  • Delay
    It is quite common for building projects to be delayed. Sometimes this is because the builder misjudged the time needed to complete the project and sometimes it can be for reasons outside the control of the builder such as strikes at the port or the non-availability of some essential components. In the worst cases these delays can go on for months or even years.
    It is very important that your contract should contain a completion date and a clause stating that builder will have to pay you compensation if he goes beyond this date (unless it is for reasons beyond his control) and that if he goes beyond a fixed later date you will have the right to cancel and have all of your money returned to you.
  • The builder may go bust
    If the builder goes bust before he finishes work on your house you will have a whole host of problems. Even if you’re protected by the law and you don’t lose any money, getting your house finished will usually take months and a lot of time and effort. This is because other builders are usually reluctant to get involved in half-finished projects because they never quite know what they’re going to find and so how much it is going to cost to finish the work. Unfortunately, when developers are going bust they often start cutting corners and so the new builder can find that work that is apparently finished is substandard and has to be done again.Fortunately, in Spain you are protected against losing your money (see below) but you will almost always find that, if the builder goes out of business, you will face some additional cost and some loss. Although the law has required this protection for nearly 50 years, until recently the protection often did not really work in practice and – when the crisis of 2007 came along – many found that the guarantees that they had been given were ineffective.
  • General problems associated with new properties
    You will, in addition, face all of the issues that face any buyer of any new property. See our Guide to Buying a New Property in Spain.

Financial guarantees in Spain

The law gives considerable protection to people buying off-plan property in Spain. It did not work well in the last crash but it has been toughened up quite a lot since then.

If the builder takes a deposit and/or stage payments, they must be guaranteed by an insurance company and they must be received into a designated account.

The builder is entitled to take additional payments from you as ‘stage payments’. These payments are usually made as the building work progresses. This is the usual process in the case of off-plan properties in Spain.

A typical schedule for payment would be:

  • 10% deposit when you sign the contract (assuming work has already started)
  • 10% when the foundations of the property have been constructed
  • 20% when the walls have been finished
  • 20% when the roof has been put on the property and it is watertight
  • 20% on the structural completion of the property
  • 20% when the property is delivered to you and you take legal title to it

Normally these funds can be released to the builder on the strength of an insurance guarantee. If the builder doesn’t deliver the property by the agreed completion date, the insurance company must either finish the project and deliver it to you within 90 days or it must return to you all of the stage payments that you have made.

Of course, you – through your lawyers – must make sure that these guarantees are actually in place.

Mortgages

If you want to take out a mortgage on an off-plan property, you will have a cash-flow problem.

No bank will lend you money to pay for the stage payments. This is because you don’t own anything over which they can take a mortgage at this stage. You only have the benefit of a contract under which the builder has agreed to sell you the property when it’s finished. They will insist on waiting until you get the legal title to the property and then, at the same time as you get that title, they will release the mortgage money to you and take the protection of a registered mortgage (legal charge) over the property.

Conclusion

Buying property off-plan was incredibly popular. It is now less so but it is creeping back into the system.

There is nothing wrong with that and buying off-plan does allow you to choose exactly the property you want in exactly the place you want – but you do need to make sure that your lawyer is protecting you by putting all of the necessary clauses into the contract and that all of your payments are guaranteed by an insurance policy.

Further Information

Please contact the author if you would like any further information. See the sidebar for their contact details.

You may also want to read:

Buying Off-Plan Property – a short guide from Landlord Blog

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