SPANISH PROPERTY – A BRITISH PUZZLE!

This is an odd time for Britons as far as Spanish property is concerned. The massive fall in the value of Sterling against the Euro, over the past two years, has really complicated everything. This is as true for those currently owning property in Spain who want to sell - as it is for anyone who wants to buy a Spanish property.

The conundrum, of course, is: what will Sterling do in the mid-term? This may seem an esoteric question but any significant change in the strength of Sterling could be profound for both Spanish property buyers and sellers alike.

At the moment, the fall in Sterling for current owners of property in Spain has been a mixed ‘blessing’. The bad news is that Sterling’s fall against the Euro has reduced any UK derived income by around a third (if we take 1.40 Euros to the £ as the old ‘benchmark’). This has devastated the finances of many people, particularly those relying upon a fixed Sterling income.

Indeed, Sterling’s weakness has made continued life in Spain almost impossible for some Britons - who have been forced, often reluctantly, to place their Spanish property for sale. This is, invariably, so that they can return to the UK and regain the purchasing power of their Sterling income or re-enter a job market less shattered than Spain’s.

Obviously, the sheer amount of Spanish property for sale on high density British estates has also acted to reduce the sale prices of all the surrounding properties. This is the cruel operation of the ‘law’ of supply and demand and has acted to further exacerbate the position of any desperate Sterling seller.

Within all of the bad news for British sellers of Spanish property, there is one factor that is good news – although it has an obvious danger. The Euro is now strong. Indeed, a British seller (intending to return to the UK) can drop his sale price by around 30% with impunity (unlike his European and Spanish counterparts) – given that the Euros he will receive upon his sale will (depending upon when he bought) make up for this price drop.

In other words, if someone bought a property in Spain for 300,000 Euros with Sterling at 1.40 then it cost them £214, 285. Now, give or take, they can sell the same property for around 235,000 Euros and still get their money back – leaving aside taxes and expenses etc.

However, of course, this situation will last only as long as Sterling remains weak against the Euro. If Sterling starts to rise then a British seller’s unique latitude to drop his price ‘artificially’ will be eroded. Of course, the purchasing power of his UK derived income will rise but, in my experience, once someone wants to sell then their mind is made up. Indeed, few people remove their Spanish property from the market once embittered by a life in Spain that simply did not work out - irrespective of the fact that the main cause was the volatility of exchange rates.

That said, for a Briton who wants to buy Spanish property, the strength of the Euro has not been helpful. As the example above shows, in effect, there has been no price change at all - if someone tries to sell his property at 235,000 Euros now instead of its 300,000 Euros price tag a couple of years ago. Whilst the price reduction may look good – on a closer analysis, to a Sterling buyer, it amounts to no drop at all, despite the property crash. So, most Britons can still find Spanish property to be expensive, unless it has been discounted by a seller way beyond 30%.

Of course, the ‘winner’ in all of this is a non Sterling European (with cash) who wants to buy Spanish property. He is in as favourable a position as his Euro compatriots, trying to sell their property in Spain, are disadvantaged. Indeed, Euro sellers must be appalled to see the sale price decreases the British can afford to make!

So, what does all this mean?

Well, as a British seller, intending to return to to the UK, it means that you must keep an ‘eagle eye’ on the respective strength of Sterling and the Euro - and then be proactive to change your sale price continually, as appropriate.

Certainly, if you really want (or need) to sell your property in Spain then you must take advantage of the Euro’s strength right now. This just may(!) be a golden opportunity for you to be able to drop your price (on the face of it) to absurd levels - without suffering too badly. Indeed, my ‘gut’ instinct is that you should act fast and decisively to do this, because Sterling may just go up and hold its position. If this happens then you may have lost an almost unique chance to sell on price alone – which, at the end of the day, is what tempts most buyers.

On the other hand, if you have Sterling and want to buy Spanish property then this is possibly a time to ‘watch and wait’ to see if Sterling strengthens. Alternatively, it is the near-perfect time to look for property in Spain on high density ‘British’ estates. These, for the reasons stated above, are far more likely to have superb distress prices than their Spanish or European counterparts.

Finally, what will Sterling actually do over the mid-term? Frankly (as of early 2009), I have no idea at all! That really is an esoteric question and probably a puzzle to us all. All I know is that its movements have very significant implications for us Britons and property in Spain...

SPANISH PROPERTY – BEACH APARTMENTS IN SPAIN

Even in this dreadful recession, it is hard to imagine that the desire for apartments in Spain from North Europeans will subside. It is one type of Spanish property that will always be popular. Certainly, few things are more more desirable than owning a low maintenance, low cost (and safe) holiday home. Indeed, to have somewhere convenient and familar for breaks away in the sun is, surely, one of life’s ultimate luxuries?

The problem, as everyone knows, is that the Spanish property market is in crisis, which has been largely due to massive overbuilding. This is true of every sector – not least that of new apartments in Spain.

So, what makes one apartment in Spain better than another? How should you assess what you are buying - and how can you purchase something that will retain its value or (over time) become a sound investment?

Of course, ensuring absolute legality (see my book!) is one of the most fundamental aspects to buying a Spanish property and this is as true of apartments in Spain as it is of the more problem prone sector encompassing villas in Spain. However, apartments in Spain have their own particular danger and this revolves around the 1988 Coastal Law (Ley de Costas).

The Coastal Law was designed to protect the integrity of the Spanish coastline – and in particular the beach area and the first 100 metres from the nearest point reached by the sea. As I have written elsewhere:

The Coastal Law ‘divides’ the coastline into two areas of protection. The first is the ‘public domain’ which is, crudely, the area between the sea and the furthest point which the sea has touched in the worst known storm. This includes all areas of sand, shale and pebbles.

The second area of protection is divided into:
- The Protection Zone. This is the first hundred metres inland from the public domain (although this area can be extended a further hundred metres by the Spanish state, autonomous region or local town hall). No building of any nature whatsover is allowed within this area.
- The Zone of Influence. This area extends for 400 metres inland from the Protection Zone. Building is allowed - however restrictions are applied on a reducing scale of severity as you move inland from the sea.

Obviously, some properties in Spain were built within 100 metres of the sea prior to the Ley de Costas being passed. These can be subject to a ‘concession’ meaning that they can avoid demolition. However, any ‘concession’ must be treated with the very greatest possible care and should be subject to expert, independent advice from a Spanish land law specialist.

Needless to say, the Coastal Law has been erratically enforced over the years. This has resulted in the construction of a number of Spanish properties (including villas in Spain) that oftenly blatantly transgress the law. To put it mildly, this type of puchase could be disastrous - should the authorities decide (as they occasionally say they will) to enforce the law and demolish the offending buildings...

My point is that you must be very wary of buying an apartment in Spain that is too close to the sea and that could be deemed to come under the Coastal Law restrictions.

Of course, typically, the best apartments in Spain to buy are those that are ‘front line’. Everyone wants an unobstructed ‘sea view’ and quick, trouble-free access straight to the beach. As a consequence, it is these properties that are most in demand - and it is these that have retained their value and are excellent investments for the future. This is particularly the case if a ‘front line’ apartment in Spain is within easy walking distance of a lively area with shops, bars and other amenities.

Certainly, the importance of proximity to amenities should never be underestimated, if you want your apartment in Spain to be a sound investment (and to be able to really maximise its use). The Spanish coastline is long and there are countless coastal apartment blocks stretching for miles away from any coastal town or village. However, many are often far from any real amenities and (normally) cannot be compared in value or desirability to those reasonably close to a pretty, lively and permanently lived-in area.

A ‘permanently lived-in’ area is especially important, not least because many coastal apartment blocks are virtually ‘closed down’ out of season. Worse still, this is also true of the one or two surrounding bars or shops that are often open only during the Easter or summer period.

Without doubt, the glory of Spain is the all-year round, excellent climate and few things are more depressing than taking a winter sun holiday in an area that is almost completely ‘dead’ out of season. A canny buyer will always recognise this point and ensure that any apartment in Spain he buys - is not dangerously compromised for most of the year. This affects not only personal enjoyment of the property but also, obviously, its re-saleability and potential investment value. This, of course, is just as true for villas in Spain...1

SPANISH PROPERTY – ANOTHER NAIL IN THE COFFIN?

Probably like everyone else in Spain(!), I have just received, from a UK relative, a cutting from the Daily Telegraph entitled: ‘Expats threaten a villa “siege” as Spanish serve demolition orders’. This headline is enough to send shivers of fear down any Spanish property owner’s back.

In fact, this story concerns some eight properties in Spain sitiuated in Almeria Province (which is at the bottom, south eastern corner of Spain). It seems that the Britons concerned built their respective properties having been granted the appropriate building licenses in 2002 by their local Town Hall, the latter being responsible for planning permissions. However, the regional authority has since decided that the building licenses were illegally granted and a court has now issue a demolition order. At present, there appears to be no compensation available to the property owners.

This, of course, is everyone’s idea of a nightmare! It is also the worst possible publicity for the Spanish property industry and will, justifiably, unnerve potential international buyers.

So, what has happened?

Obviously, I lack any more details than those in The Telegraph article and a couple of other Blogs that I have read. This means that I am in no position to make any definitive pronouncements on this particular matter. However, what does seem to be the case is that corruption within the relevant Town Hall has been discovered by the regional authority. Having found this out, I can only presume that the regional authority or its court are under a legal duty to reverse the ‘invalid’ licences - and then must demolish the properties once they have been formally declared ‘illegal’.

The problem is that this is very far from the first time that this has occurred. Indeed, the Marbella scandal a couple of years ago (see my article ‘Meltdown in Marbella’ on http://www.nicholassnelling.com/) was the most high profile recent scandal involving illegally issued building licenses. In this case, the level of corruption was, literally, breathtaking - with the police eventually seizing some 2,400 million Euros of cash and assets! Corruption had, it seems, pervaded every corner of Marbella Town Hall and had probably stretched a good deal further up the administrative chain...

So, what do we draw from all of this?

Well, as a generality (however defensive this may seem) the vast majority of the problems encountered by people when they buy Spanish property can be avoided. Know the law, always use an experienced, independent conveyancing lawyer and an equally experienced (and fully insured) building surveyor before you buy anything! Furthermore, wherever possible, buy Spanish property that is Urbanizado and fully Urbanizado. Buying property in Spain in Rural areas (as I have stressed many times) almost always carries a risk – and taking any risks when you buy property in Spain is very stupid indeed.

Of course, this does not, in any way, justify the appalling corruption involved in the illegal issuing of building licences to our British compatriots in Almeria. However, I do wonder whether, before they bought their properties (or building plots), our compatriots had any knowledge of the law - or whether they used independent and experienced conveyancing lawyers and surveyors. I wonder...

I mention this because if you want to build a property in areas classified as Rural you must own a minimum m2 of land - for any new property construction to be legal. This varies around Spain but in Valencia Province, for example, you need 10,000 m2 of agricultural land before you can build a property (to a specific maximum m2). If you do not have this then any construction will be illegal - despite any attempt by a local Town Hall to issue building licences to the contrary. A good lawyer will know this and should immediately tell you.

Sadly, corruption in Spain is endemic and has affected just about anything to do with the Spanish property industry. Sometimes this has taken the form of turning a ‘blind eye’ to illegality, sometimes there has been ‘economy with the truth’ and often a straight exchange of cash. None of this is right, none of this is acceptable and every part of it acts to critically damage Spain, its economy and its perception as somewhere safe in which to live.

It would be an epic understatement to suggest that Spanish property is unsafe to buy. The vast majority of people in Spain (native and international) own properties that are problem free and have a sound title. However, it is equally true to say that there are many illegal properties in Spain and many that have potentially serious liabilities. Clearly, it is these illegal properties and those with problems that hit the news – and often with justification.

Undoubtedly, Spain has been careless and, at times, arrogant and stupid in allowing property illegality to occur. Most of it has been blatantly obvious to the authorities and yet rarely has anything been done. This is ridiculous and needs to be rectified as an absolute priority - with those responsible (or those colluding in any illegality) severely punished. Their actions damage (and have already damaged) the very economy of Spain and thereby every person living in Spain.

Unfortunately, whatever the truth with our compatriots in Almeria, they stand as an example to others of what can happen if things go wrong in Spain. Equally, although the Spanish seem blissfully unaware of this, these types of cases provide the worst possible publicity for the Spanish property industry during its most severe crisis in living memory.

The answer?

Well, there are two. Firstly, if you are a buyer: be careful and knowledgable so as to avoid being the purchaser of a ‘problem’ property – this is something I stress constantly in my ‘Move Safely’’ book together with relevant guidance.

Secondly, Spain must ‘grasp the nettle’ and create an amnesty for almost all existing illegal property. It really is way too late to start demolishing property and, although I hate the thought of any rewarding of illegality, this is the only way to clear-up, quickly, a long term, discreditable mess. Obviously, the amnesty should, on no account, extend to corrupt officials...1

SPANISH PROPERTY AND THE SPANISH BANKS

It is always reassuring for a writer when first hand experience meets gut instinct and ‘rumour’. This was recently the case when I became involved in the sale negotiations for a hotel in Spain together with an adjoining Spanish villa. Both these properties ‘belonged’ to the same owner who has sadly gone bankrupt - so the properties were the subject of formal repossession proceedings by a major Spanish bank.

I happen to know a lot about the two properties as the owner was a friend of mine and the properties are in my local area. Both properties were bought more or less at the height of the Spanish property boom and both were very heavily mortgaged. Indeed, the hotel had a 100% mortgage (as of December 2007) with the total debt to the Spanish bank – for both properties – some 1,265,000 Euros.

When (in September 2009) I was approached by someone who was interested in buying both properties I had to get in touch with the Spanish bank concerned to negotiate the possibility of a sale. Initially, I was told that the discount for a buyer would be 30,000 Euros off the bank debt. This, needless to say, was laugable - given the 1,265,000 sale price and the fact that Spanish property since 2007 has probably fallen, for the most part, in excess of 30%.

Grumbling, I was eventually passed onto the Spanish bank’s head office to the manager dealing with the repossession of both properties. After some bargaining I managed to get the initial discount bettered by around another 100,000 Euros. So, after a struggle, the sale price for both properties (if bought together) stood at very roughly 1,1,00,000 Euros. However, the 15% discount by the Spanish bank hardly made the properties a bargain – particularly as the hotel had not been open for almost a year and therefore had negligible ‘goodwill’.

My ‘buyer’ asked me to try again to negotiate down the price of the two Spanish properties. This I attempted but with a complete lack of success. I met an absolute barrier regarding the price. The Spanish bank said it was ridiculous to reduce the price further as the valuations (from 2007!!) for the two properties showed them to be worth pretty much the existing bank debt of 1,265,000. Finally, I was advised that the Spanish bank would not, under any circumstances, pay a fee or commission (to anyone) who introduced a ‘buyer’! This made any further negotiations pointless with a clear message attached...

The point of relating this is to illustrate that the ‘stories’ of the Spanish banks giving less away than they appear on their Spanish property sales appears to be true. Furthermore, clearly it is not in a Spanish bank’s interest to sell reposseessed properties when the disparity of their debt to the current value of their properties is considerable. The reason is obvious:

If a Spanish bank has a repossession property on its books it will probably not show those properties as a ‘loss’ on the ‘books’ whilst it holds a valuation (albeit an old one!) that shows that the value matches, more or less (and very much in theory), the debt. However, should the Spanish bank sell the properties (almost certainly at a loss) then on the bank’s ‘books’ the loss is absolutely and irrevocably proven. In other words, it is better for a bank not to sell some properties which have big losses attached - whilst it can maintain that the loss does not exist.

Of course, this is a book keeping exercise. However, if I am right, then it may well suggest that the Spanish banks (as many suspect) are hiding far greater losses than they have so far admitted.

Time, of course, will tell. However, I think the hotel in Spain close to me and its accommpanying villa will be on the market (but not, in reality, purchasable!) - for quite some time. It is rather sad for all concerned...1

SPANISH PROPERTY MARKET – PROPERTY IN SPAIN FOR THE BRITISH

One of the conundrums facing the Spanish property market is when Spanish property will again become financially appealing to British buyers - given the collapse of Sterling against the Euro which has affected both potential buyers and existing owners of Spanish property.

Obviously, the current strength of the Euro against Sterling has had dramatic consequences for anyone living in Spain and relying upon an income paid in Sterling. The difference between an exchange rate at 1.40 Euros to the £ and (say) 1.10 Euros to the £ is huge. In effect, the purchasing power of a UK pension in Spain has dropped by some 30% over the past couple of years. This has unexpectedly ruined the financial planning of many Britons and made, for some people, life in Spain too expensive to sustain.

Indeed, many ex-patriot Britons have had to place their properties in Spain for sale so that they can return to the UK. The danger of this is that many estates in Spain with a high density of British property owners have, as a direct consequence, a disproportionate number of properties for sale.

Of course, the more properties in Spain there are for sale in a given area the harder it is to sell (the laws of supply and demand) with any seller having to rely upon a severe price reduction to differenciate his property from his competitors. This is never more true than when an estate comprises more or less identical properties - which is often the case on ‘new’ urbanisations. To make matters worse, some estates in Spain are primarily ‘British’ and therefore unlikely to appeal greatly to other nationalities. This means that any likely buyers of Spanish properties on ‘British’ estates will largely remain fellow Britons – themselves hampered by the weakened purchasing power of Sterling.

Of course, many Britons bought their properties when Sterling was at 1.40 (or more) to the Euro. This means, very crudely, that they can drop the sale price of their Spanish property by 30% - and still get their money back (at current exchange rates).

The conundrum is obvious.

Property in Spain has fallen by (at least) 30% since the end of the boom in 2007. So, if you, as a Briton, reduce your Spanish property price by 30% (from its 2007 level) then your property in Spain is still not cheap - to a British buyer! In fact, the 30% drop in an ‘in-coming’ Briton’s purchasing power means that your Spanish property price has, in effect, not fallen at all. So, ironically, any UK buyer is going to be looking for a further price discount before he even begins to think he is getting anything like a real bargain.

In fact, ironically, Britons in Spain are not helping the vortex of falling Spanish property prices. At the moment, many are able to drop their prices by 30% with impunity – and then to drop them by a further 10% - 20% if they are prepared to take a (reasonably acceptable!) loss to extricate themselves from Spain. This is more than most Spanish or Euro sellers are prepared to countenance but acts to further destabalise the Spanish property market.

Certainly, it is no secret that the stabalisation of a property market is utterly dependent upon ‘distress’ sales being rare. Until that is the case, any property market will continue to be volatile with the emphasis being on continued falling prices rather than any marked ‘levelling off’.

In short, are prices stabalising on British owned property in Spain?

Sadly, I rather doubt it – although this could change should Sterling suddenly find sustained strength against the Euro. This would put money back into the pockets of those Britons in Spain drawing their incomes in Sterling and thereby make them less desperate to sell. It would also, as a side effect, force prices up as the Euro weakened and reduced the ability of British sellers to drop their sale prices ‘artifically’ on the basis of having bought when Sterling was strong.

In the meantime, can Spanish property offer value for money to in-coming Britons carrying Sterling worth some 30% less than a couple of years ago? The answer is a cautious yes. The unfortunate number of true distress sales (particularly on ‘British’ estates in Spain) provide some real opportunities to buy Spanish properties at bargain prices unthinkable a few years ago – even given Sterling’s depreciation against the Euro.1

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

SPANISH PROPERTY CRASH – THE MARKET IS MORE COMPLICATED THAN IT LOOKS!

Of course, there is no denying that the Spanish property market is in deep trouble. Indeed, the problems caused by the Spanish property crash are, undeniably, central to the ‘crisis’ in Spain. Quite simply (as everyone now knows) far too many properties in Spain were built during the boom years. To compound this fact, promoters were lent absurd amounts of money on projects that, at the best of times, would probably have been unworkable. Meanwhile ‘debt’ for the general public was easy to obtain and often based upon over-valued properties. All of this created a rampant Spanish property market that spiralled out of control and for which Spain is paying heavily now.

However, for a foreign buyer to look upon the Spanish property market as a lethal area to avoid, at all costs, would be a mistake. The truth is that the Spanish property market has many different parts to it. It is far from being a one-dimensional market and still offers value for money to the careful foreign buyer - who is unlikely to be in the least interested in the vast majority of the housing in Spain for sale.

Indeed, many of the Spanish properties for sale are flats, apartments and adosados (terraced houses) that were built not for ‘wealthy’ North Europeans but for the Spanish (or in-coming non-European immigrants) within towns and villages away from the coast. Of those that are on the coast many newly built properties are often too far from normal tourist amenities (bars, cafes, restaurants, clubs, international airport etc.) to be attractive to North European holiday buyers - let alone those wanting to move to Spain permanently.

Of the properties remaining there are large complexes around golf courses and ‘ghetto’ estates specifically built for ‘wealthy’ foreigners. Some of these estates never were going to be sound buys and many would be discounted instantly by any wise buyer upon seeing the rows of almost identical new, or almost new, properties. These are often transparently poorly built and offer little obvious, long term value. This is not say that a Spanish property, for example, on a golf course is not a good value buy – but recognise the difference between a golf course complex built in the middle of no-where and a quality one that is part of an integral and workable infrastructure.

As I have mentioned before, the secret to buying property in Spain is to know what is (and always has been and always will be) of long term value. As a very crude generality, when it comes to the foreign buying market there are two principle types of property that come within this definition (taking absolute legality for granted).

- Front line beach apartments close to amenities. These are always a good buy and tend to hold their value well. They are also surprisingly hard to find (a quality build with a panoramic sea view, pretty beach/bay, reasonably quiet road in front – or no road in front at all! - within walking distance of amenities etc.)

- ‘Character’ villas within 15 minutes of the beach on a quality estate with a full infrastructure close to a lively village. These are also tough to find (given that the ‘ideal’ specification for the build tends to be three bedrooms, two bathrooms, a flat plot, a swimming pool and some degree of privacy).

Try finding a property in 1. and 2,. above and you will discover that it is far from easy – proof, if ever it was needed, of the importance of knowing exactly what to look for if you want to be assured of long term value. Indeed, 1. and 2. are as good a representation of the complexities of a ‘crashing property’ market as anything else. There is always value to be had (and a reasonable amount of it) if you know where to look and what to look for.

Of course, 1. and 2. are a simplification. In Spain, some town houses and flats are, even now, excellent buys as are, occasionally, some new adosados. However, as I stress in my book guidelines exist to buying property as a sound investment even when a market (as in Spain) is badly damaged. Always there are properties of value – it is just vital to know exactly how to gauge that value objectively.

No-one would deny that the Spanish property market is in long term trouble. However, know what you are doing and there is no reason why buying now in Spain should be anything but a positive action.

In short, the Spanish property market is certainly in crisis - but this does not mean that the entire Spanish property market is defective. Far from it. Some sectors will always have long term desirability and be sound investments. Just be sure that what you buy into is the sector that has assured value and that you are not seduced by ‘bargain basement’ priced properties - in the wrong sector!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

SPANISH PROPERTY FOR SALE - AND THE SPANISH BANKS

It is, of course, no secret that the banks in Spain are now the biggest owners of property in Spain. Naturally, this is not something that they welcome and, as a consequence, several have their own estate agencies (for example, Mediterráneo for the CAM bank and Habitat for Bancaja) to dispose of these properties.

The question is whether, as a buyer, you should automatically search for property in Spain by first going to a Spanish bank or their associated estate agency? Logically this would make sense - as you know that the banks will be invariably offering property at ‘distress’ prices. After all, what a bank wants is its money back i.e. the debt owed to it on a given property. This is irrespective of the true market value of a given property.

Normally, of course the debt on a property will be the mortgage which, in theory, should be less than the value of the property. So, in principle, buying from a bank should be compelling and allow you to pick up an almost guaranteed bargain. With so many properties for sale in Spain, it therefore also follows that, one way or another, you have a reasonable likelihood of finding a bank ‘distress’ property to suit you pretty much wherever you want to live.

However, life is rarely simple and just heading for the banks as your main ‘port of call’ for bargain properties in Spain does not necessarily make sense.

The trouble is that the debt on some properties can be greater than their present day value - given the fall in Spanish property values over the past couple of years. To state the obvious, if a 100% mortgage was granted on a property in 2007 (at the height of the boom) then the debt may be well beyond that property’s true market value in late 2009 (somewhere, possibly, towards the bottom of the Spanish property crash). So, to be told that you are buying a property only for a bank’s debt may be little more than ‘weasal’ words!

Certainly, you should be wary of taking on a Spanish property just for its bank debt value and you must research the prices of similar property within the same location within the general market place. You may find that they are being sold for less by mainline estate agents or private sellers.

That said, one of the advantages of buying a Spanish bank owned property is that the legalities are normally correct and in order. Furthermore, mortgages (sometimes with preferential terms) can sometimes be obtained.

Nonetheless, as I stress in my book ‘How to Move Safely to Spain’ – never forget that a bargain priced Spanish property is not necessarily a good buy. Indeed, the sale price of a property (anywhere in the world!) is only one of the many different criteria that make a property purchase a sound, long term investment.1

THE SPANISH PROPERTY MARKET – WHAT NOW?

Recently an influential annual report was published by Acuna & Asociados who are highly regarded Madrid real estate analysts. Their report makes depressive reading given that they do not think the Spanish property market will recover for several years. Indeed, at current rates of demand (around 200,000 properties per year) it may take some six to seven years to clear just the existing housing stock for sale.

Certainly, there is an inordinate amount of property for sale on the Spanish marketplace. According to Acuna & Asociados there are some 1.67 million properties for sale in Spain. These comprise some 500,000 new builds, some 470,000 new builds yet to be completed and around 500,000 re-sales. It is quite likely that the estimated number of resales is very conservative given the amount of properties privately for sale that will not be registered formally anywhere.

Meanwhile the Spanish economy is in meltdown. Unemployment is currently somewhere around 19% with Citibank predicting that it will rise to 22% and Acuna & Asociados to 25%. The collapse of the Spanish construction industry has impacted not just on its associated industries but on the population at large who have been caught in a lethal vortex. As more people lose their jobs so more properties come onto the market - often with distress sale prices.

Unfortunately, there are no apparent ‘quick fixes’ for the Spanish economy which is also being hurt by the world credit crunch. Socialist Prime Minister Zapatero has tried to stimulate the economy with his much publicised Plan E (see my 14th August Blog). However, this is due to cease soon due to lack of further funds and has done little other than reduce the very short term unemployment figures. These will, obviously, rise once Plan E stops and as Spain goes into the winter period when any tourist related employment reduces radically.

So, what does all this mean for Spanish property buyers and sellers?

Well, as a seller of Spanish property, it is obviously bad news – particularly if you bought within two years or so of the boom. In this case, it is unlikely that you will recover your money for some considerable time to come. Worse still, the sheer quantity of other properties for sale (including many genuine distress sales) means that you will be entering a savagely unforgiving market place. Indeed, the only consolation (for British sellers) will be the strength of the Euro over Sterling which may mitigate any drop in their Euro sale price.

As a buyer, of course, matters are very different. Virtually everything is for sale and you can now pick up bargains throughout Spain almost everywhere you look. However, this does not mean that you can be careless. Far from it. Indeed, uppermost in your mind, at all times, should be the adage that ‘not everything that is cheap is a good buy’.

In fact, you should not even think of buying unless you know intimately how to tell whether a property is fully legal or not. Furthermore, you must be able to assess objectively what will make a long term sound investment (see my book How to Move Safely to Spain).

As always, the key to a sound investment is its ease of resaleability. However, establishing resaleability is often less easy than it sounds when you are in a foreign country with a particularly complex marketplace involving not just native buyers but also a very significant proportion of foreigners from an array of different countries.

Without doubt, the Spanish property crash has produced some excellent bargain buys. These exist now and are well worth exploiting. However, the question is whether property prices in Spain have now reached their bottom?

My own feeling is that prices still have around 10% further to drop. This will be an unpopular ‘call’ but the sheer numbers of property currently for sale together with an economy in freefall means that any optimism at the moment is hard to justify objectively. At the end of the day property, like any other commodity, is subject to supply and demand and at the moment, there is far more supply than demand. Until this readjusts, prices will continue to drop and the Spanish property market will remain very weak for the forseeable future.

Of course, if you are thinking of buying a Spanish property then your next question may be ‘when will it be a good time to buy?’

Well, I cannot help feeling that the desire to make untold money on property is somewhat distasteful. Surely, the primary aim of moving (particularly to a foreign country) and buying a property is about obtaining a better quality of life than you have currently - preferably as soon as possible? To place life ‘on hold’ whilst waiting for a market to guarantee a ‘profitable’ investment seems somewhat short sighted given life’s brevity and uncertainty.

This is not say that you should not be very careful. However, now I think the emphasis should be on buying a property that will retain its value long term – as opposed to being purely focussed on the profit that it will, or could, make. Those days, in Spain, are, for the time being, largely over. That does not, in any way, diminish the valid reasons for coming to Spain which should be about delighting in the genuinely superb quality of life still on offer. Little has changed in that regard – it is just that combining this with a guaranteed short term profitable property investment is less valid.

In short, I suspect, that the prices of Spanish property will hit their low point probably in the spring of 2010. However, that is not to say that you cannot now pick up a heavily discounted property - and one that will prove to be a good purchase for the future. If you are planning to move to Spain then, give or take, this is about as good a time as any. However, be prepared to drive a hard bargain - as I believe that the market has some time to go before it stabalises...1

FINANCIAL DISCIPLINE IN SPAIN - 6 CRITICAL GUIDELINES

When it comes to finance, the secret of moving to Spain is to:
1. Under-spend on any Spanish property.
Set a budget and make it less than you can afford and then keep to this figure. Be disciplined and remember that long term an inanimate object (even a lovely Spanish villa) will not guarantee you happiness. Financial problems, on the other hand, are absolutely certain to provide you with heartbreak and intolerable stress.
2. Avoid any borrowing - whether mortgages or otherwise.
Keep your fixed costs and overheads to a minimum. For someone relocating ‘cash is king’ – unless you are financially very sophisticated.
3. Budget for the worst possible income return on existing investments or pensions.
As 2008 showed, Sterling can crash (in 2008 almost by a third to the value of the Euro compared to a few years previously). Equally, the value of pensions and other investments can drop as radically as they can rise. Nothing is absolutely certain and you must build in a conservative factor to your anticipated long term income. Make sure that you can survive comfortably should your predicted income drop by 20% - 30%
4. Be precise about the Spanish property you buy.
Make sure that your new home will be right for you and that you will not have to move again. The costs of buying property in Spain are considerable (around 10% of the purchase price) and Capital Gains Tax is payable (with exceptions) on the sale of your Spanish property whether it is your main and primary residence or a second home. If you buy a property in Spain that is not suitable for some reason and then sell up and buy again in Spain then you will have lost:
- At least 20% of the gross value of the properties bought (2 x 10% purchase costs).
- Any money payable as a consequence of Capital Gains Tax.
- The fees due to any estate agent.
- The ancillary costs of moving (removals etc.).
This is a fine way of wasting a lot of money very quickly.
5. Allow at least three years for any work in Spain or new business to start providing a satisfactory income.
Businesses are invariably much slower (irrespective of the country!) to produce a proper income than ever first anticipated. There are exceptions, of course, but be very pessimistic on your predictions about the expenditure involved and the time it will take to receive a viable income.
6. Put aside a contingency budget for unexpected problems
Unanticipated difficulties occur when living in Spain (as if with any country) as surely as ‘night follows day’ and just as certainly they involve expense beyond that ever considered. So, always ‘ring-fence’ several thousand Euros as a contingency budget - to be used only in cases of emergency.1

NEW SPANISH PROPERTY - ‘OCCUPANCY PERMIT’

First Occupation License

It is absolutely essential that your new build property in Spain is granted a Licencia de Primera Ocupación (sometimes referred to as a ‘Certificado de Habitacion’ or ‘Cedula´) before you pay fully for it. This vital certificate is granted by the local town hall planning department upon completion of a Spanish new build and declares the legality of the property in Spain. Also, it acts (in theory) as confirmation that the Spanish property meets all necessary local and national planning regulations.

If your newly built Spanish property, when completed, does not have a Licencia de Primera Ocupación (sometimes referred to in English as a First Occupation License - FOC) then ‘alarm bells’ should ring! One sign of this is when a Spanish property is not connected to mains utilities (water, electrics and telephone). This is known sometimes as being on ‘builder’s electrics and water’ - which is an accurate phrase!

Indeed, your property in Spain may literally have its services connected to those of your builder rather then the services suppliers. This is usually obvious but can be proven by the fact that you will not receive or be able to obtain any formal services bills.

Certainly, by Spanish law, utility companies cannot connect their services to illegal properties in Spain. If they do they can now be fined heavily. So, services suppliers tend not to connect to illegal properties - when in the past (pre-fines) they turned a ‘blind eye’ to the law.

So, if your new Spanish property lacks a mains supply of electricity, water and land line telephone then you should take this as a potential sign of illegality. At best, it may indicate that there are delays with regard to legalisation or final completion of your Spanish building project.

Note that sometimes personal registry on the local ‘Empadroniamiento’ can also be affected by a lack of a First Occupancy License.

Being on ‘builder’s electrics and water’ used to be laughed off and was tolerated by many buyers of new properties in Spain. Frequently these people were told that it was ‘quite normal’ and would be ‘sorted out soon’... However, some found out later, to their great cost, that the underlying reason for this seemingly ‘innocent’ delay was related to the far more serious and worrying issue of illegality. So beware...

Note that failure to supply a Licencia de Primera Ocupación constitutes a breach of contract on the part of the seller. Indeed:
· You are not obliged to sign the Escritura (UK ‘Completion’) until the Licencia de Primera Ocupación is presented.
· Your seller cannot cancel the contract on the grounds that you refuse to sign the Escritura without the Licencia de Primera Ocupación.1

OLDER SPANISH PROPERTY - 6 REASONS TO USE A BUILDING SURVEYOR

Despite what is often said to buyers by unscrupulous agents, you should always employ a properly qualified building surveyor to survey your intended property in Spain (whether it is new or old).

Below are some of problems that can relate to older Spanish properties...

Subsidence
Just as for new Spanish properties, older Spanish housing can be affected by subsidence. Whilst a Spanish property may show few signs of movement in its early years, long term ground erosion, seasonal shrinkage or heave (often amplified in a rare very wet or very dry year) can reveal problems suddenly. The attempted cover up of such issues is quite common. However, often it will take an experienced building surveyor in Spain to identify any tell tale signs of past or ongoing structural movement.

Retaining wall movement and failure.
Many older Spanish properties are as reliant on the stability of sound retaining walls as new builds, particularly if the slope into which the property is situated was ‘cut’ out of a hillside. Certainly, the very attractive cut stone walls seen in many coastal areas are not normally proper retaining walls but simply a method of ‘decorative’ facing. This may be despite the fact that a hillside is highly prone to movement.

Rot and insect attack
Advanced attack is common in older Spanish properties. The most common oversight made by buyers investing in older Spanish town houses and Spanish country properties is the fact that the timbers are of softwood (and not the oak we commonly expect in very old UK properties). These are often infested with woodworm, termite and other wood boring insects.

Reinforced concrete steel decay risk
The process of steel reinforcement decay can be slow and is therefore always more prevalent and advanced in older Spanish properties. Steel decay can result eventually in structural failure in elements such as floors and even whole Spanish apartment blocks have been known to fail. Normally, professional inspection will identify initial signs of an issue such that repairs can be made. However, these repairs are invariably expensive and complicated and advanced decay can mean that substantial rebuilding is required. In some cases the concrete itself may be sub standard or even mixed up with salt water and beach sand in coastal locations (observed in very rare cases).

Swimming pool defects
Older pools can, on occasion, be very well built and are sometimes based on converted water deposits. Nonetheless, many suffer structural issues in the long term, which can be expensive to resolve. A typical problem is often time expired, galvanized iron pipe work. This eventually decays and leaks which can, in turn, cause erosion of the supporting substrates.

Defective services
Old drains can be broken and septic tanks insufficient for all-year round use. Equally, iron pipe work can be corroded and even some apparently re-plumbed properties are connected sometimes to hidden iron elements. Re-wiring is sometimes needed and some gas installations can be very dangerous.

Note that legally if you find any significant defects that have been deliberately hidden by your seller within 6 months of purchase then you may have a case for compensation against your seller. However, this can be very difficult to prove and it is always better to try and identify any issues by consulting a building surveyor in Spain prior to purchase.1

PETS IN SPAIN

Most pets adapt easily to life in Spain despite the considerable difference in the summer temperature. However, there are some health issues that need your specific attention.

Make sure that both your cats and dogs have specific annual vaccinations (against viruses and bacterial problems). Most specifically, you must protect them against:
· Mosquitoes (mosquitoes) which cause leishmaniasis, a fatal disease. However, the symptoms of this disease can be treated to provide any affected animal with a better and longer life than it would otherwise expect.
o Use a preventative collar and ‘spot-on’.
· Ticks (garrapatas) are a constant problem and can cause diseases such as canine Babesiosis and Ehrlichiosis. You should inspect your animals regularly and remove any ticks as soon as you see them.
o Use a preventative collar and ‘spot-on’.
· Fleas (pulgas) transmit worms and allergies
o Use a preventative collar and ‘spot on’.
· Tapeworms (lombriz) which affect the overall health and well being of an animal
o Treat with pills every three months

For cats beware:
· Feline Leukemia
o Vaccinate your cat
· Immune deficiency
o No cure
· Peritonitis
o No cure

A summary (from an experienced vet in Spain) of general advice to foreigners coming to Spain is:
· When you come to Spain seek the advice of a vet to establish any common problems or peculiarities within your given area. Spain is vast and conditions differ hugely from one region to another and thereby the specific animal health care requirements.
· Keep all animal vaccinations up to date.
· Ensure that your animal is provided with healthy, good quality food (but do not over feed!).
· Make sure you treat all intestinal problems promptly.
· Wherever possible keep your animal inside your Spanish property at night to avoid the worst affects of mosquitoes.
· Avoid taking your animal to areas where there is an obvious mosquito problem such as marshes etc.
· Never leave any animal alone in a car in Spain. Even in winter the sun in Spain can be very hot and quickly overheat and kill an animal.1

COAST TO COAST

Over the past few weeks a further controversy over the safety of buying property in Spain has erupted into the press. This time it revolves around the illegality of properties situated too close to the seashore. Earlier this year Hollywood actor Antonio Banderas was reportedly advised that part of his luxury villa in Marbella would be demolished. This has been followed by recent warnings that around a thousand homes on the northern Costa Blanca may be equally at risk.

So, what is this all about? Will it affect you if you are thinking of buying in Spain – or if you are already a property owner with a home on the coast?

In reality, everything revolves around a law passed in 1988 called the Ley de Costas (Coastal Law). This law sought to protect the integrity of the Spanish coastline whilst also providing an absolute right of access to the public to the beach and shoreline itself. It is therefore, in essence, not a ‘bad’ law. The coastline of Spain has a fragile ecology and its conservation is important. Most particularly there has always been a danger (due to the heavy demand for ‘front line’ beach properties) that the coastline would be damaged by invasive construction projects.

The law ‘divides’ the coastline into two areas of protection. The first is the public domain which is crudely the area between the sea and the furthest point which the sea has touched in the worst known storm. This includes all areas of sand, shale and pebbles

The second area of protection is divided into:
- The Protection Zone. This is the first hundred metres inland from the public domain (although this area can be extended a further hundred metres by the Spanish state, autonomous region or local town hall). No building of any nature whatsover is allowed within this area.
- The Zone of Influence. This area extends for 400 metres inland from the Protection Zone. Building is allowed - however restrictions are applied on a reducing scale of severity as you move inland from the sea.

Obviously, some properties in Spain were built within 100 metres of the sea prior to the Ley de Costas being passed. These can be subject to a ‘concession’ meaning that they can avoid demolision. However, any ‘concession’ must be treated with the very greatest possible care and should be subject to expert, independent advice from a Spanish land law specialist.

Of course, in typically Spanish fashion, the Ley de Costas has been erratically enforced since it was passed. As a consequence, properties have been built along the Spanish coasts that clearly breach the Coastal Law. In some cases, despite the transgression being blatantly obvious, no action by the relevant authorities has been taken. It is these dangerous properties that lie waiting for the unwary buyer.

Certainly, it would be an error to think that just because no action has been taken so far on a given property subject to the Coastal Law that no action will be ever taken. If this argument is put forward by a seller or agent (or lawyer!) then it should be treated with dismissive contempt before you move onto a property that is undeniably legal in every respect.

The answer, of course, is to be extremely wary of any property located very close to the sea shore. If you want to buy a front line property make sure that your conveyancing lawyer specifically checks its legality with regard to the Coastal Law. Importantly, get any advice provided placed in writing and, if you have any lingering doubts - obtain a second opinion.1

MORTGAGES FOR YOUR PROPERTY IN SPAIN

At the time of writing, the amount of borrowing that banks are prepared to provide varies considerably. Equally, the computation of what they will lend with regard to a given mortgage in Spain is difficult to determine as anything more than a generality.

The preferred method for banks to establish the viability of providing a mortgage in Spain is to find out the ability of the person concerned to make regular mortgage payments. This is called the debt/income ratio. Lenders normally assess net monthly income after deducting worldwide debts and then come up with a maximum possible monthly payment. This then defines the size of mortgage they will grant together with its term (5, 10, 25, 30 or 40 years etc.). Normally the debt/income ratio is between 30% - 50%.

You may, for example, earn 2,000 Euros a month net. However, you may also have a car loan and an HP agreement amounting to 200 Euros a month. If this the case, then the following computations could be made:

40% debt/income ratio

Income of 2,000 E pm multiplied by (say) 40% = 800 E

Less loan and HP debts (200) E

Maximum potential monthly payment = 600 E

This would allow you to have a mortgage on your Spanish property of 100,000 Euros if it was for 25 years at a 4% interest rate. The monthly premiums would be 527 Euros pm – a little less than you can actually ‘afford’.

50% debt/income ratio

Income of 2,000 E pm multiplied by (say) 50% = 1,000 E

Less loan and HP debts (200) E

Maximum potential monthly payment = 800 E

This would allow you to have a mortgage of 140,000 Euros if it was for 25 years at a 4% interest rate. The monthly premiums would be 738 E pm.

Obviously, the maximum amount that your lender decides you can pay and the size of mortgage that you will be granted varies depending upon the interest rate applied at the time and the length of the term of the Spanish mortgage. Accordingly, the computations above could change significantly depending upon given conditions and the computations used. However, as a ‘rule of thumb’ they are a useful guideline.

Finding the right mortgage for your Spanish property is always difficult and there is much to be gained from taking independent professional advice. This is provided by a range of mortgage brokers both native Spanish and North European. The latter are frequently professionals who have settled in Spain and within these there are some brokers who are British and have relevant UK qualifications and previous mortgage broking experience.1

NEGOTIATING THE PRICE OF YOUR SPANISH PROPERTY

Unfortunately, negotiating the purchase price of your intended property in Spain is not always simple. This is because the seller may have two sale ‘prices’:
· The declared price. This is the sale price that will be placed upon the Escritura (deeds) and that will be the price upon which you will pay purchase tax (7%) and upon which the seller will pay any Capital Gains Tax (18%).
· The real price. This may be different from the declared price and include a proportion of ‘black’ money. So, for example, you may agree to buy a property for 300,000 Euros but only declare the sale price as 275,000 E. In this case, the Escritura will state 275,000 Euros and you will pay 7% purchase tax (and the seller any CGT on profit made) on the 275,000 Euro value - rather than the ‘real’ value of 300,000 Euros. The 25,000 Euros difference will be paid by you to the seller in undeclared cash. Clearly, both you and he will have saved money by not being taxed at the correct amount.

Two ‘sale’ prices can certainly make life complicated. So, for example, both you and the seller may agree a sale price of 300,000 Euros for your desired Spanish property. However, you and your seller may not be able to come to an agreement as to the ‘black’ money element - and therefore the price to be ‘declared’ on the new Escritura. Your seller may, for example, want a ‘dangerous’ amount (say 100,000 Euros) of ‘black’ money. Wisely, you may refuse to pay this amount as its proportion with regard to a Spanish property with a fair market value of 300,000 Euros is very considerable. Without doubt, a discrepancy of a third could alert the tax authorities and result in a heavy subsequent fine – which you (not the seller) would have to pay!

Alternatively, you may refuse (rightly) to pay any ‘black’ money at all or simply be unable to do so because you have a high mortgage requirement. In the latter case, paying any ‘black’ money may be academic. Your mortgage provider, for example, will, obviously, only bring a cheque or banker’s draft for the seller at the signing of the Escritura. So, if your mortgage is very high then you may never have any cash with which to pay a seller in any event.

Of course, your seller is well within his rights to refuse to sell you his property - albeit that the only reason is his desire for a certain amount of ‘black’ money which you refuse to pay. Indeed, to your chagrin, you may find ‘your’ seller agrees with another buyer to reduce his ‘real’ sale price if that buyer offers him a really substantial amount of ‘black’ money!

In reality, the Spanish authorities and the ever tighter European regulations concerning money laundering are making ‘black’ money deals ever more difficult. Indeed, I would strongly advise you to avoid any ‘black’ money deal and make sure that the declared value on any Escritura is the ‘proper’ sale price.

Certainly, you should bear in mind that if ever you re-sell then your buyer may be someone who needs a large mortgage. If this is the case then he may be unable to pay you any ‘black’ money at all. In this case, you may have to agree to a declared value that represents the proper sale price of the property despite your Escritura value being artificially low. Obviously, you will then have to bear a potentially far greater Capital Gains Tax burden than ever you intended!

Finally, if a ‘black’ element to your purchase price is unavoidable then be extremely wary of paying too much. Crudely, within the Spanish property ‘industry’, 10% -15% of the ‘real’ purchase price is now considered (informally!) around the viable maximum to pay. However always, always try to avoid any ‘black’ deal regardless of the amount. It is dishonest, illegal, invariably troublesome, can lead to a very unwelcome fine and significant complications when you come to resell your Spanish property.1

THE SPANISH PROPERTY MARKET - BUY NOW OR WAIT?

Few things are more apt to cause stress than an attempt to ‘call’ a market. It is something that my friends at Currency Direct have to do daily and it is something for which I have nothing but admiration. They know that, one way or another, they have to make a prediction about what will happen in the future – and then act upon it - despite the real risks and difficulties of so doing.

When it comes to Spain, the vital ‘call’ for anyone interested in the country revolves around whether or not now is the right time to buy a Spanish property.

Certainly, as we all know, timing is everything. Buy at the wrong time and you can find that your new property in Spain instantly loses you money. On the other hand, if the market rises you may ‘kick’ yourself for not having taken advantage of a distressed Spanish property market offering possibly ‘once in a lifetime’ bargains. In short, do you buy now or remain watchful and wait for another year – or possibly much longer?

As always, it is hard to find meaningful guidance that will help you make an informed ‘call’.

Just as with the UK, reliable predictions in Spain about anything to do with the national economy and its related property market are hard to come by. Those that do exist are often coloured by political or vested interests so biased as to leave most observers baffled.

So, what is the reality?

Without doubt, Spain is suffering a property crash of epic proportions. The world economic crisis has hit the country very hard indeed but has been greatly exacerbated by the lunatic building programme of the past ten years. The latter resulted (between 20002 – 2007) in Spain building something like a third of all new properties constructed within the Eurozone. This was far in excess of any possible demand and has led to a massive oversupply. Indeed, it is thought (no-one knows exactly) that there are some 1 million new builds for sale and possibly much the same number of resales.

To make matters worse, new construction is somewhat like an oil tanker with building completions continuing to occur despite the brakes on the market having been applied some time ago. So, unfortunately, this year some 450,000 newly completed homes will evidently hit the marketplace - further damaging it when least needed.

The combined effect of the world recession, the collapse of the construction industry and reduced tourism means that Spain is already experiencing significant economic problems. Unemployment will almost certainly hit 20% this year (currently it is around 17%) and government debt may rise to 60%. The OECD is predicting an economic contraction of 4.2% and Standard and Poor (S&P) expect the Spanish property market not to recover until 2012.

But what does this all mean if you are a potential buyer? If there is to be no recovery until 2012 - do you have almost infinite time on your hands?

In a way. But what tends to happen in a property crash is that the weak tend to have to sell at whatever price within the first year or so of a crisis. Meanwhile, repossessions take around six months to a year to administer before they appear on the market as forced sales.

So, the first couple of years of a crisis are when you are likely to obtain the best priced quality properties for sale. After that time those property owners who have survived the worst effects of the storm tend to be able to hold onto their homes. The longer time passes the less likely they are to accept really low prices and the more determined they become not to sell at a loss. In reality, it is only at this time that a market naturally begins to stabalise.

My suspicion is that the Spanish property market may still dip down further between now and the early/mid spring of next year. However, during the same period, I think that a remarkable opportunity exists to buy some fantastic properties at genuine distress prices. The latter, for exceptional properties, may start to dry up towards the spring of next year thus making truly excellent buys increasingly hard to find. There may be a lot of ‘rubbish’ still remaining at low prices but they should be of no interest to the wise buyer (because something is cheap it does not automatically follow that it is a good buy).

Would I buy now? I think so - knowing that there will be a diminishing opportunity to buy exceptionally well.

However, I would be a tough and extremely cautious buyer looking for an absurdly good price on an objectively fine (fully legal) property that was easily resaleable and that I could pay for in cash (at whatever the relevant price range). I would also be someone who would be buying on the expectation that I would be unlikely to see any appreciable growth for another three to four years.1

BUYING A SPANISH PROPERTY IN THE WRONG LOCATION – THE COST!

Stressing the importance of ‘location’ has become an unwelcome cliché. However, it cannot be stressed often enough - as it will define your future life absolutely. If you make a mistake with your choice of location within Spain then it may terminally harm your dreams of a new life and lead to a rapid and embarrassing retreat to the UK. Alternatively, if you decide to move again within Spain then it is bound to be an experience that is disruptive, unwelcome and expensive.

You should realise that any sale of a property in Spain, depending upon your personal classification, is likely to attract Capital Gains Tax at 18% even if you are selling your primary and main residence. Equally daunting is Spain’s 7% purchase tax payable when you buy a Spanish property. Move twice in succession (2 x 7% purchase taxes and a CGT of 18%) and you may lose a lot of money simply to the tax man! So, it is important to make sure that any purchase of property in Spain or relocation is precise and does not result in further unnecessary moves.

In fact, there are some very good general guidelines about what tends to suit the majority of people when they relocate. These are really important to understand and deserve close attention. So, always concentrate greatly more upon the suitability of your proposed location - than upon searching for particular properties in Spain. Finally, know what the guidelines are for a successful purchase of Spanish property. This is something that I will tackle in another blog and detail extensively in my book...1

LETTING YOUR SPANISH PROPERTY

The problem for you if you wish to let your Spanish property is that being properly registered can be an expensive process. If you are resident in Spain then you will have to become Spanish tax resident and register your letting business. This will involve inevitably the help of a lawyer (abogado) or tax consultant (asesor fiscal) and result in:
· A possible formal inspection of the premises to be let. This may mean that you have to expend money to ensure that your premises comply with all relevant Spanish Health and Safety requirements.
· Registration as a business. Most likely you will be advised to become autónomo (self-employed). This will mean that you will have to:
o Pay monthly social security contributions which may amount to at least 250 -300 Euros.
o Deliver proper invoices.
o Account for IVA (VAT) either monthly or quarterly
o Pay your lawyer or Spanish tax consultant’s fees.
o Obtain public liability insurance.

Note that in reality a properly registered rentals business in Spain is barely financially viable unless the net profit from the rental of your Spanish property exceeds some 350 + Euros a month.

Take care of renting your property illegally – the Spanish authorities will impose heavy sanctions upon you if they find out...1