SPANISH ESTATE AGENTS – THE DANGERS OF A BUYER’S PREMIUM

A while ago, I commented on sales commissions for estate agents in Spain. At the time, what I had no space for was a critical warning to any buyer of Spanish property to be very careful about ‘buyer’s premiums’.

‘Buyer’s premiums’, over the years, have been nothing if not contentious - not least because invariably they have taken unwary foreign buyers by surprise. Indeed, as far as surprises go - few can be as unpleasant as finding that you are unknowingly liable to pay a ‘buyer’s premium’. These can be substantial and can badly destabalise your finances, particularly if you are stretching your budget to buy a property in Spain. Certainly, any benefit derived from the low prices produced by the Spanish property crash could be quickly lost...

So far as I know, ‘buyer’s premiums’ are unknown within conventional UK estate agency although they are commonly used in auctions. In effect, a ‘buyer’s premium’ is an amount that a buyer pays to a broker or auctioneer when he purchases something. Normally, at the same time, the seller will also pay the broker or auctioneer a fee – the two sums amounting to the broker or auctioneer’s full sales commission on a transaction.

In Spain, it is not uncommon to find that you could be liable for a ‘buyer’s premium’ when you purchase a Spanish property. Spanish buyers, particularly in urban areas, are used to paying 1.5% commission to a Spanish estate agent if they buy a property - knowing that the seller will also pay the agent 1.5%. There is nothing wrong with this and both parties are invariably fully aware of this deal and accept it as a matter of course.

The problem is that foreign buyers are sometimes ‘tricked’ into paying a ‘buyer’s premium’. Worse still, the ‘buyer’s premiums’ can be a good deal more than 1.5% and, in my experience, can reach 5% of a Spanish property purchase price. Of course, 5% on a 300,000 Euros property is 15,000 Euros – a lot of money!

I say ‘tricked’ because for a ‘buyer’s premium’ to be enforceable there must be written evidence that a buyer willingly agreed to pay the ‘premium’ to the Spanish estate agent concerned. However, invariably this evidence does exist, is available in written form and signed by a buyer.

So, you may ask, what is the problem?

Well, it is the classic one of foreign buyers (or people generally) signing a form/contract that they either did not read properly or did not fully understand.

In the case of ‘buyer’s premiums’ the agreement concerned is most often in the shape of a ‘standard’ form. This form, in essence, commits a buyer to purchase a particular property (if the buyer decides he wants the property!) only from the agent who shows him that property first. This is fair and protects an agent from showing a client a property in Spain which the client then buys from another agent - or directly from the owner (thus cutting out the ‘primary’ agent).

The trouble is that this ‘standard’ form/agreement can sometimes have a clause in it that states that if you (the buyer) purchase a property in Spain from the agent concerned - then you also agree to pay a ‘buyer’s commisssion’ of x% to the agent concerned.

Unfortunately, frequently this very important clause is ‘hidden’ within the depths of the ‘buy only from the agent concerned’ agreement. In fact, I have been shown an example by an agent (an Englishman working for a Spanish inland agency) who proudly explained how the English translation of this clause was deliberately poorly translated - so as to ‘effectively’ conceal its true meaning.

Certainly, the last thing that you expect in any mundane, ‘fair-looking’ agreement is a clause of real importance half-way through the contract. So, almost understandably, potential buyers have a habit of signing this type of agreement with their ‘friendly’ agent without a second thought.

Needless to say, every single person I have met who has paid a buyer’s commission in Spain (100% of them) only realised thier liability when they were ‘reminded’ (clearly and unequivocably) of their liability to ‘their’ agent – after they had already paid a 10% deposit for their desired property to the sellers.

As a buyer you are then faced with only two options: lose your 10% deposit and walk away from the property you are buying or pay (say) 5% in ‘buyer’s commission’ and keep the validity of your 10% deposit and your on-going purchase?

In my experience, everyone liable for a ‘buyer’s commission’ paid it - albeit through hate-filled, gritted teeth!!

The answer, of course, is devastatingly simple. Never, ever sign anything whatsoever (irrespective of the pressure) without your Spanish lawyer present and having read a full and proper translation of any document that you have been asked to sign. If you break this cardinal rule – then, frankly, you deserve everything you get.

I should qualify the above, as I do in my 'Move Safely' book, by saying that the majority of estate agents in Spain do not charge ‘buyer’s premiums’. However, there are certainly those that do – so be very careful if an estate agent in Spain asks you to sign something!!!1

ESTATE AGENT'S SALES COMMISSIONS IN SPAIN

Last week, I noticed an article in a major UK daily paper commenting upon the fact that estate agent’s commissions in Spain are ‘much higher than in Britain’. Indeed, the article pointed out that an ‘agent selling a property in Spain could earn up to five per cent of the sale value’.

I doubt that I was alone amongst expatriots living in Spain who expressed surprise at the moderation of the article writer. 5% sales commissions may seem exhorbitant in UK terms but in Spain they are far from exceptional. In fact, sales commissons of 10% are not unknown and a couple of times I have been offered sales commissions of 18%! The latter were by developers selling new build apartments around golf courses along the south east coast of Spain.

Incidentally, there was nothing underhand or secretive about the offers of 18% sales commissions. On both occasions the offers came formally by e-mail and an e-mail that would have been circulated to many other people in the industry, few of whom would have been unduly surprised by the amount. The offers were genuine and would have been honoured had a buyer been introduced and bought a property.

Of course, few buyers would be comfortable knowing that possibly some 5 % -18% of their Spanish property purchase value comprised (effectively) a sales commission. Indeed, I suspect that many British buyers would refuse, on principle, to buy a property on that basis.

In fact, property sales commisions vary considerably throughout Spain with the least amount normally around 3% of a given sale price (albeit that this is sometimes made up by both the buyer and seller paying 1 ½ % each to an estate agent). Alternatively, sales commissions for cheap properties can be commonly a straight 6,000 Euros (which equates to around 1,000,000 old pesetas) - sometimes irrespective of whether a property’s sale price is 25,000 Euros or 150,000 Euros.

Finally, some sales commissions are dependent entirely upon what an agent can obtain over a given minimum sale price. So, for example, a seller may say he wants 250,000 Euros from the sale for his property and allow the agent to sell the property for anything above that figure that he can make. If the property sells for 280,000 Euros - then the commission for the agent will be 30,000 Euros.

To some extent, estate agent’s commissions on Spanish properties can be likened to any business transaction where the businessman (the estate agent, in this case) tries to get the maximum possible out of the deal before him. There is nothing intrinsically wrong with this - although neither buyers nor sellers tend to ‘like’ the thought of (in UK terms) sometimes outrageously high sales commissions.

Certainly, if you are a buyer you should be alert to the way that estate agents work within Spain and the possibility that (on occasions) their sales commissions may distort the true value of a property. Equally, it is only commonsense to be wary of Spanish properties where high sales commissions exist. This can be an indication that something may be ‘wrong’ with the property concerned. If something is easy to sell - then it follows that there is little logic or need for a seller to offer a broker or estate agent a very high commission!

Of course, it is is not always easy to find out the sales commission being offered on Spanish properties. However, it is not impossible and a little probing can often reveal something close to the truth – even if it means, for example, contacting a development company (possessing a property in which, perhaps, you are interested) and pretending to be a potential agent. With private sellers, the answer can be to ask the seller directly. They may tell you and - in fairness - many estate agents will do the same, if requested. By no means, is an estate agent’s sales commission always a darkly held secret.

In fact, in my book ‘How to Sell your Spanish Property in a Crisis’ I urge desperate sellers to offer high commissions, well beyond the norm, to their Spanish estate agents. It is the best possible way of incentivising the sale of a particular property and is neither underhand - nor meant as a way of cheating a buyer. In this case, no moral criticism can be cast at a seller - who is just, understandably, exploiting one of the most effective tools in his sales armoury.

At the end of the day, as a buyer, you need to assess the value of a property on its intrinsic worth compared to other similar properties - irrespective of the sales commission element. Finding out later that a large sales commission made up a significant proportion of the overall price of your Spanish property should not matter if your purchase (all things being equal) was bought at the correct overall market price.

The only caveat to all of this is that the stakes for estate agents in Spain can be very high indeed compared to similar priced properties in the UK. To state the obvious, the sales commission on a 300,000 Euro property @ 5% is 15,000 Euros and @ 10% is 30,000 Euros. With 30,000 Euros p.a. being a good middle management salary in Spain, it is easy to see how a Spanish estate agent’s objectivity can be quickly lost in the temptation to make terrific money quickly...1