Potential Pitfalls of buying an old property in Spain

  • Olga
    For the last 20 years, Olga has practised law in the Madrid region. She specialises in real estate transactions, contract law, immigration and civil law (family law, inheritances) including administrative processes. Olga speaks almost perfect English, having spent several years in the UK.

An attractive property investment in Spain – often as a result of location and architectural style – is to purchase an old building. As a result of all the problems that the buyer could face the property may well have a very low price to catch the attention of foreign investors, the price can be even better if the building has a joint ownership as a result of an inheritance.  I am not saying this will not be a bargain, but as it will be your own responsibility to be informed and to do your numbers to see if the investment is right for you, it is strongly advised to obtain the advice of relevant professionals to ensure your eyes are open when you take on such a challenge.

It is still very frequent that one becomes aware of the property through a Real Estate Agency. In some areas of Spain they will charge you around 3% of the purchase price and will only provide you with generalised information,  since their job is to sell property, not to look after your interests.

Potential Pitfalls

Many properties from the beginning of the 20th century do not follow the current legal system. For example, some of them do not even comply with the urban development plan and once you purchase the property you could receive claims from the local authority to make you demolish part of the building to adjust to that plan.

Other properties haven’t passed the technical building inspection (ITE) and there could be fines for that. Be aware that as well as looking for an architect to solve this problem, (which will most likely be the highest expense to get all the necessary work done) you could face any fines that were not paid by the vendors.

It may also be the case that the building has not been divided into any separate plots for the purposes of the horizontal property laws – or often it has only been done half way through, such that there´s been a division at the Land Registry but not in the Catastro (another public entity involved). So this may be a further process that may need to be carried-out after the purchase of a building or you will not be able to sell any individual apartments independently. Most of them don’t have a community of owners constituted, which you will need in the future, especially if you are not living in Spain.

Once you sign the pre-agreement contract with the sellers you must have things clear or otherwise you will lose the money that you have left to reserve the property which, if doing so through an estate agency will be quite a significant amount. Be careful to negotiate a date by which completion should take place that you will be able to stick to.

In order to make any purchase you will need to have an NIE in Spain which will be your tax identifier number and also consider whether to buy as an individual person or through a company. We suggest that with the current law, depending on the circumstances, it could be more beneficial to buy as an individual especially if you are planning to rent out the properties as you could have interesting tax deductions paying a personal income tax rate of 19.5% of your net incomes. Be quick to obtain a mortgage, check in all Spanish banks to see who gives you the best one, bear in mind you will have to pay for the property valuation as well as for the costs of the mortgage itself. You will also have the cost of transferring your own money to Spain and we strongly advise you to use a reliable currency exchange company that could help you to save money.

When signing your sales deeds you will have to check the valuation that the regional authority has applied tor the building. This might be higher than the actual price that you are paying and could lead you to future claims from the taxman . All this could be sorted out if you introduce an additional clause at the notary specifying that the price you bought was lower due to the poor state that your building had and keeping all the architects invoices as well as all the rest of the expenses that you have had to face to be able to defend yourself from this type of fiscal claim.

Taxes

Once the purchase has been completed and the deeds have been signed at the Notary, you will have to pay the notary fee and pay the transfer tax or ITP (Impuesto de Transmisiones Patrimoniales) which will depend on the region you are buying in – here in Madrid it is 6%. Your deed has to be registered at the Land Registry which has its own inscription fee too.

Owning the property involves paying a local property ownership tax called IBI which you should know in advance if it has been annually paid or otherwise you will have to assume the debt. The shared expenses of the building will also have to be paid by you and especially if you are planning to rent out the apartments we suggest you have an insurance company covering any problems that your apartments could have in the future.

When contemplating a property purchase in Spain it is always a good idea to arrange for independent legal advice, however with old buildings it is absolutely mandatory given the number of potential pitfalls. However, when all is completed satisfactorily, these buildings can provide the greatest enjoyment for foreign investors in Spain.

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