Potential Traps And Pitfalls When Buying Property in Spain

When buying property overseas there are usually a whole new set of rules and regulations, traditions and traps to learn, understand and watch out for.

Spain is absolutely no exception to this rule and has a tangled web of laws and legislation seemingly designed to trip up an unwary purchaser.  This article examines three areas that a potential property purchaser should be at least aware of before signing on the dotted line for that dream Spanish home.

Firstly there’s a ‘tradition’ in Spain for purchasers to actively but illegally assist the vendor in reducing his overall capital gains tax liability.  Generally speaking the vendor will ask for a far reduced purchase price to be written into the purchase contract and for the purchaser to make up the difference between the contract price and the actual price in cash. 

This has always been par for the course in Spain; in theory it doesn’t affect the buyer, it certainly doesn’t affect the vendor and what the tax authorities don’t know can’t hurt them.  However, this is of course highly illegal and the recently elected new socialist government has begun a complete crackdown on money laundering and tax evasion which will directly target the property market in Spain.

Of course many potential buyers reading this will simply assume that if asked to act illegally all they need do is point out that the new crackdown could result in investigation, fines, even a lengthy prison term and the vendor, estate agent and solicitor involved in the transaction will step back and accept that exact figures are entered onto the contract and taxation be paid accordingly. 

In reality those who refuse to act in accordance with the vendor’s wishes often find that he then backs out of the sale and that they lose their dream property in Spain and possibly their deposit as well.

So, what should someone hoping to buy property in Spain do if faced with such a situation?  Should they accept the vendor’s demands and hand over a brown paper bag stuffed with EUR500 notes?  If they do, the price they apparently purchase the property for - i.e., the amount entered into the contract - will be the price against which any future profits from the resale of the property will be compared for their capital gains tax purposes.  Therefore if the purchaser ever wants to resell the property they too will need to insist that their buyer also agrees to having a reduced sum entered into the contract otherwise they’ll be liable for all the extra capital gains taxation.  Someone somewhere along the line is going to lose out - make sure it’s not you!  Even if you have your heart set on a particular home in Spain we would strongly recommend that you do not go ahead and act illegally even if that means you risk losing the property.

Think very long and very hard about what you’re being asked to do and the potential legal and long term financial consequences rather than your short term thrill at securing a home in the sun.

The next point that is worthy of due attention is the fact that there are many unregistered and inexperienced estate agents operating in Spain.  The fact that anyone can become an estate agent on the Costa del Sol for example has led not only to mistakes in the purchase process being made, but unscrupulous individuals setting out to exploit foreign buyers.

When looking for an estate agent to represent your interests find one with a strong and positive reputation...a reputation they will do everything to protect and therefore one who is unlikely to want to offer you anything less than a first class service.  Furthermore, find an agent who speaks English and Spanish!  It is imperative that your agent understands every minute point about the property, contract, terms and conditions and correctly relates this information to you.

Many estate agencies recommend lawyers to their clients when it comes to contract negotiations, searches etc.  Bear in mind that a solicitor referred to you by your agent may be more inclined to act in the agent’s best wishes rather than your own.  Why?  Because the agent likely refers an awful lot of business to him therefore he will do his best to maintain that relationship first!  This is of course not always the case, but you might be better advised to find an independent lawyer through the recommendation of friends and trusted third parties who have already had significant or at least similar dealings with said lawyer.

Finally, changes in land laws in Spain have been introduced in Valencia and most recently Andalusia and these changes are ‘a good thing’ in theory but the stuff of nightmares for many foreign buyers in the parts of Spain affected by the legislation.

In theory the laws have been introduced to protect rural land, agricultural land, to prevent over development and also to stop private owners from restricting development.  But the laws have been badly implemented, they have been exploited and there are many cases of foreign residents convinced that they have been targeted unfairly because of their nationality.

The intricacies of the law seem open for interpretation and in Valencia so many private buyers have suffered at the hands of developers exploiting the law that the European Union recently ruled the law unreasonable.  As a result a new version of it has been drafted and is awaiting the Valencian parliament’s passing of it.

In Andalusia many foreign owners of rural land on which they were hoping to build a home have lost out to the new laws which restrict the development of such land.  It is absolutely a case of buyer beware, and even more importantly it is a case of the buyer doing their complete homework before making any solid plans for that dream home.  If you’re interested in purchasing a ruin or run down building for redevelopment or you are interested in building from scratch on an empty plot make sure in advance that permission will be granted and that your piece of land in Spain can and will sustain the ambitions you have for it.

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