Table of contents
- Immigration as a demand factor in the spanish housing market
- Spanish real estate market predictions
- Buying repossessed property in spain
- Alternative methods to calculate stamp duty on undervalued property
- Other potential hidden charges from repossessed property
- Internet bidding for repossessions
- Converting commercial premises to residential purpose
- Absence of legal barriers
- Older properties that need refurbishment
- Legal complexities when buying an old property
- Other potential issues
- Property taxes
Just as in other european countries, the Spanish property market appears to be taking pause, after eight years of continuous price increases.
On the one hand we have rising interest rates, which look set to continue doing so. On the other, inflation has cooled quite considerably, and certainly to a much greater extent than the European average, with the rate standing at 3.2%, at the beginning of June 2023. However, it is expected to rise towards the end of the year to around 5%.
It might be expected that interest rate increases would be bad news for anyone buying property in Spain, given the likely impact on Spanish house prices.
While undoubtedly this may turn out to be true - given that the short term outlook is for a continuation of interest rate hikes - it is important to remember that Spain has, effectively, multiple property markets.
There is of course the real estate market for the local population, located firmly around major cities. and then there are the international markets dotted around the country, especially around the Costa del Sol, Costa Blanca, the Canary islands, that attract buyers from northern Europe.
With a much larger pool of potential buyers, house prices can maintain their levels, despite a drop in local demand due to changes to variable interest rates and increases in mortgage rates, at least that's the theory. Recent reports from the Organisation of Spanish registrars points to an increase in home sales to international buyers, so this appears to be holding true, for the moment.
1. Immigration as a demand factor in the spanish housing market
Continuing with the them of demand for investment properties from outside Spain, it is worth remembering that Spain still offers residency visas to those who are able to make a real estate investment. of sufficient value.
For such investors, the effect of rising interest rates is probably negligible with the focus being on being able to live and work in Spain and bring their families with them.
2. Spanish real estate market predictions
It is ill-advised to take forecasts by the real estate sector too seriously, since delivering a negative outlook on the fortunes of the Spanish property market is hardly good for business.
It is probably best to use common sense here and assume that, against a backdrop of central banks raising interest rates to combat inflation around Europe, but taking into account that certain parts of the Spanish property market are somwhat immune to local fluctuations in economic growth due to the level of foreign demand, the effects will be mixed.
Property prices are likely to remain static for some time, with prices potentially dropping in certain parts of Spain, due to lower local demand, while maintaining levels in more international areas, unless, of course, there is a slowdown in the world economy.
Following this overview of the Spanish real estate market, it seems that while real estate investors in Spain may not expect property prices to plummet any time soon, they may need to adjust to a new normal of more moderate rises in house prices or indeed, static prices.
That being the case, there is perhaps a greater need than ever to try to find value in the Spanish property market to protect against . Where is such value to be found in the Spanish property market in 2023?
Below we discuss the opportunities that exist to find homes that may be worthy of investment despite a significant drop in the property market in Spain?
3. Buying repossessed property in spain
Since way back in the economic crisis of 2007, Spain’s banks have been forced to take back a huge number of properties on to their books. Of course the banks typically have no desire to take over management of the often under-performing assets that they had made loans against and so these same banks are undergoing an unprecedented stock clearance, with the market consequently seeing a glut of repossessed property in Spain.
The release of these properties on to a market already suffering an excess of supply served to pin prices at a low level and as a result, such repossessed properties can appear extremely attractive to those of us seeking a bargain 'home in the sun'.
However, caution should be exercised when buying repossessed property in Spain, as many can have hidden costs due to the fact that they are repossessed; costs that are not always disclosed by the banks at the time when the deeds are being signed.
Firstly, in Spain every property has an assigned fiscal value which is considered to be the minimum value that may be declared when any fiscal operation is undertaken - for example, a property conveyance. (This value is determined as a result of the ‘catastral’ value - a notional value used for the calculation of taxes - and the region in which the property is located).
Often, the market value, which is ultimately declared on the property deeds, is below the minimum fiscal value, as determined by the competent fiscal authority, above all in the case of any properties embargoed by banks that wish to reduce their stock as quickly as possible.
In such cases, it is possible for the buyer to find themselves in the strange position that, having paid the government stamp duty on the basis of the price paid and declared on the deeds, they receive an additional bill from the tax authority, for the additional tax payable on any difference between the price declared on the deeds and the minimum fiscal value.
4. Alternative methods to calculate stamp duty on undervalued property
The banks do not tend to volunteer this information to the purchaser, with the consequence that the buyer must fund the payment of the additional tax demand, thus increasing the overall cost of the property - in some cases, significantly.
To avoid this outcome, it is simply necessary to check the minimum fiscal value before going ahead with the purchase, so that if this value is above the offered price of the property, there are two options:
Calculate the payment of stamp duty on the minimum fiscal value, regardless of the actual purchase price of the property.
Calculate the payment of stamp duty based on the actual price paid and try to appeal the additional tax demand that the tax authority will send. In this scenario, it is important, if there has been any deterioration in the property, to take photos of the state of the property and keep hold of the receipts connected with any repairs (as opposed to improvements) carried-out so that you can include them with the appeal and thereby try to justify the lower price paid for the property.
5. Other potential hidden charges from repossessed property
Additionally, many banks do not take responsibility for costs incurred while they are temporary owners.
Accordingly, it is particularly important when considering the purchase of a repossessed property to know the current amount of outstanding charges that relate to the property (property management fees, rates etc) and to be sure that the seller has paid any municipal capital gains tax (plusvalía) since any amounts that are outstanding will become the responsibility of the purchaser of the property.
In particular, this latter tax can be significant - another example of the pitfalls of buying property in Spain.
Therefore, in summary, to paraphrase a metaphor: Beware of Spanish banks bearing gifts, as there may well be some unexpected and unwelcome bills that you have to face.
6. Internet bidding for repossessions
For those who continue to be interested in looking for a repossessions in Spain, the Spanish Government has launched a new initiative to help clear the backlog of excess properties built during the property bubble over the last number of years.
The plan involves enabling internet access to auctions of Spanish properties that have been repossessed by the banks here. The website will allow potential purchasers to follow and participate in public auctions of embargoed homes by the banks. The hope is that by providing much greater access and therefore participation in the auctions that better prices may be achieved as well as more properties being successfully sold.
While participation in an auction will require registration, that won’t be necessary in order to follow the proceedings via internet. Registration can be carried out either by electronic certificate or by visiting one of the offices that have been set up for this purpose.
Once registered, in order to take part in an auction, it is only necessary to find a suitable auction that is of interest in the list of auctions on the right-hand side of the page and then register as a bidder on that particular auction.
The auctions proceed by each bidder in turn having a chance to bid, with a maximum time given to each bidder to make their bid. An FAQ section is available to answer most questions that users will have.
In conclusion, while repossessed properties will often represent better value for money - for the enterprising purchaser - always consider the total costs when buying property in Spain and always bear in mind the not inconsiderable property tax in Spain.
7. Converting commercial premises to residential purpose
In a decision by the Spanish Supreme Court, it has confirmed that for owners of properties in urbanisations, in certain circumstances the law of horizontal property does permit the change of use from that of a commercial property or 'local' to a residential property.
The case came before the Supreme Court, having been appealed from the Regional High Court in Almeria. The High court had agreed with the owner of the property that there was no express prohibition in the Community Statutes preventing the change in use and, accordingly, she had the absolute right to convert the property to whatever use she considered appropriate.
The High Court thereby overturned the original decision of the court of First Instance which had decided in favour of the community of owners who had objected to the change in use of the property from an office to a residential apartment.
8. Absence of legal barriers
The Supreme Court agreed with the High Court decision, and it reiterated earlier decisions whereby, if there is no legal barrier - either statutory or as a result of the Community Statutes - then the change in use of a property from residential to commercial, or vice versa, was entirely a matter for the owner of the property to decide alone.
In the situation where there is no statutory or regulatory prohibition in the type of use envisaged by the owner, but it is expressly prohibited by the Community Statutes, or would involve a change in the structure of the property, then a unanimous agreement by the Community of Owners would be required before being allowed to effect the changes requested.
This situation is likely to become more and more common in Spain as the popularity of shopping centres continues to decimate the high street and render properties originally designated as having a commercial use nonviable as they are no longer able to generate sufficient profit and therefore lie empty for long periods of time. The Court's decision may also be relevant to those wishing to use their home as a business.
That all said, this is a common situation that can give rise to multiple problems and substantial losses to the buyer, so it is strongly recommended to engage a local solicitor in Spain to oversee the process.
There may be some critical problems that will change your plans completely. Keep reading and always seek professional advice. The better the deal, the more likely you will need independent legal advice.
9. Older properties that need refurbishment
Due to a central location or architectural style, older buildings in Spain are often attractive to foreign property investors. Such properties can often be presented as Spanish property bargains, available at a relatively low price to catch the attention of foreign investors.
However, a low price when selling Spanish property often masks the potential problems that lie behind the ancient façade. At a minimum you will likely be facing high construction costs to update and refurbish the building, although most investors would expect as much.
However, not so apparent are other issues which we consider below, that a low price may be concealing which which require extra due diligence and, of course, the advice and support from local experts.
This is not to say that the property is not potentially a bargain, but it will be your own responsibility to be informed (see: how to buy Spanish property) and to do the numbers to see if the investment is right for you.
Usually the buyer becomes aware of the property through a Real Estate Agency. In some -areas of Spain they will charge you around 3-5% of the purchase price and they will not provide you with technical or legal information, since their job is to sell property, not to look after your interests.
10. Legal complexities when buying an old property
Many properties from the beginning of the 20th century do not comply with current legal rules. 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 halfway through, such that there's been a division at the Land Registry but not in the Catastro (another public entity involved, learn more here).
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.
11. Other potential issues
Once you sign the pre-agreement contract with the sellers you must have things clear, 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 (suddenly your Spanish property bargain is not such a great bargain!)
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 a mortgage in Spain.
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 the property deeds you will have to check the valuation that the regional authority has applied to 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.
12. Property 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 - in Madrid it is 6%, but is as high as 12% in some areas.
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 buying property 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 issues that can arise.
However, that all said, if you manage to get around these issues and when all is completed satisfactorily, these buildings can provide the greatest enjoyment for foreign investors in Spain.