The Reservation Contract and deposit
Once your estate agent and lawyer have discussed the purchasing terms and conditions with the seller and an agreement have been reached, the next step is to formalise this verbal understanding through a written contract. This document is known as the Reservation Contract (Contrato de Reserva) and should be signed by both you or your representative and the seller. It might also include details about payment terms, estimated dates for exchange of contracts and completion. If both parties accept the terms in the contract a binding agreement is created.
It is standard practice in Spain for this Reservation Contract to be accompanied by a sum of money which is paid by the buyer to demonstrate to the seller that there is a real intention to purchase. This money is known as a Reservation Deposit (Señal de Reserva) and usually amounts from €3,000.
Once this deposit has been paid, the property is taken off the market and the price is frozen for a specified period of time.
It is very important to remember that this deposit is usually non-refundable. In other words, if you do not exercise the purchase within the period of time established in the Reservation Contract the seller is under no obligation to return your money. However, if the seller backs out of the deal he will have to return your deposit.
Exchange of Private Purchase Contracts (Contrato Privado de Compraventa)
A private purchase contract is essentially the same as contracts you will have signed as part of the transaction to buy property at home. It creates a binding agreement between you and the seller, establishes a completion date and sets out the terms and conditions of the sale.
Some terms may not be explicitly mentioned in the contract because they are implied by the law governing transactions of this kind. The Private Purchase Contract is usually signed around two weeks after the Reservation Contract.
In the period before you sign the contract your lawyer will have completed the major part of the legal searches that you need before proceeding to completion. He will have obtained a certificate (nota simple) from the Property Registry (Registro de la Propiedad), where information such as the owner of the property, encumbrances on the land and mortgages are registered.
Your lawyer will also have been involved in negotiating the terms and conditions contained in the contract. In particular, he will have established a schedule for the payment of any outstanding debts connected with the property. It is essential that a formal agreement is established on the cancellation of these debts before proceeding to completion. This safeguards you as a buyer because if the seller reneges on the agreement you are entitled to withdraw from the sale and claim for damages incurred or deduct the debts from the sale price together with any related expenses, in some cases.
At this stage it is customary to pay a percentage of the purchase price. If you are buying a resale property 10% of the purchase price is usually paid, if you are buying off-plan you will probably pay between 20% and 50%.
A property purchase reaches formal completion when the Sales Contract (Escritura de Compraventa) is signed by both the purchaser and the seller in the presence of a Notary Public (Notario). A Notary is a public official who certifies that contracts are legal by checking that all the formalities involved in the transaction have been complied with. At this point the agreed sum is paid and possession of the property is handed over to the buyer.
Unless the parties have agreed to vary the terms beforehand, the Sales Contract always states that the property is free from all charges and encumbrances, that there are no outstanding debts connected to the property and that the seller is handing over vacant possession i.e. there are no tenants or other occupants.
If it is not possible for you to be present at this final appointment with the Notary there are two methods which allow your lawyer to sign on your behalf:
- Granting a Power of Attorney (Poder). This formally allows another person (either your lawyer or somebody else that you trust) to sign on your behalf. You can have this document prepared while you are in Spain by making an appointment with the Notary who will oversee all the formalities. Alternatively, a power of attorney can be prepared by a Notary Public in your home country. This power of attorney will have to be legalised for use in Spain by having an Apostille certificate attached to it under the terms of the Hague Convention.
- Granting an informal verbal mandate to your lawyer. It is important to remember that if you choose this option you must ratify the contract as soon as possible after completion. This can be done by appearing before a Notary, either in Spain or your home country. If ratification takes place in your home country, however, it will be necessary to obtain an Apostille certificate before it is legally recognised in Spain. Ratification is simply a matter of confirming the purchase and providing a sample signature, which will be kept on file at the Property ( This cannot be used when purchasing with a mortgage )
Registration of the Title Deeds
Once the Title Deeds has been signed, the Notary will send a fax to the relevant Property Registry to begin the formal procedure for registration of the new title deeds and to avoid that the property is sold twice, to safeguard and warrant your interest. Although this process is not compulsory it is strongly recommended.
The whole process usually takes between one and three months, depending on the workload in each particular Property Registry. In the interim you can request a copy of the records (copia simple) from the Notary or your Lawyer.
When registration has been completed the Property Registry will get in touch with your lawyer to inform him that the title deed (Escritura Pública) is ready for collection.
Finally, as well as overseeing the registration of your title deeds, your lawyer will also arrange payment of the various taxes arising from your purchase. In addition, he can help you to make contracts with suppliers of utility services like water and electricity and arrange for your bills to be paid by standing order from your Spanish bank account.
Special Considerations when buying Off-Plan
If you are considering buying off-plan, in other words you want to purchase a villa or apartment that has not yet been built, you should be especially careful. In this kind of transaction you are required to make a series of payments, before construction begins and whilst it is in progress. Obviously, buyers need a guarantee that some or all of their money will be returned if the project stalls, fails to complete on time or, in the worst case scenario, simply never gets off the ground. Most reputable developers will offer you a scheme whereby a bank guarantees that your money will be returned if anything goes wrong. Some of these schemes are offered free of charge; in other cases you will have to pay a small percentage.
When you complete the purchase of a new property you will be liable to pay VAT (IVA) at a rate of 10% and stamp duty at a rate of 1% on the purchase price.
It is standard practice in Spain for new-build properties to be handed over without utilities like water and electricity. You should include payment of a small fee for the connection of these services in your budget. You should also be aware that it can take some time, up to four weeks in many cases, for this to be carried out, so it is not advisable to make plans to use your new property during this time.
If you are buying a property from a promoter or developer it is extremely important to have professional legal representation.
It is important that you are aware of the costs that are involved in buying a property in Spain. On average these expenses usually come to between 11% and 12% of the purchase price. You will be required to pay three fees and one or possibly two taxes which are explained below. Finally, some other miscellaneous expenses, which may be involved in the purchase of your property, are listed at the end of this section.
Fees when buying
These fees usually amount to about 1% up to 2% of the purchase price + VAT, but your legal costs could increase if complications arise during the transaction. Your lawyer should be able to give you a detailed estimate of the costs that are likely to ensue from your particular case.
This fee is fixed by an officially established scale which takes a number of different factors into account including the price of the property. The scale ranges from about €500 for lower priced properties to €2.000 for more expensive purchases.
Property Registry Fees
The Property Registry (Registro de la Propiedad) will also charge you a fee for entering your title deeds in the register. They use a scale that is related to the price stated in the title deed to assess the exact amount to be charged. This usually comes to about approx. 60 / 70% of the fees Notary fees .
Taxes when buying
Property Transfer Tax (Impuesto de Transmisiones Partrimoniales – ITP) / VAT (Impuesto sobre el Valor Añadido, IVA)
If you are buying a resale property your transfer tax will amount to 10% of the purchase price.
But If you are buying off-plan, purchasing directly from the developer, you also pay 10% of the purchase price, but this is charged as VAT (IVA) & stamp duty of 1%.
Municipal Tax on Property Sales (Plus Valía)
This tax is paid to the local administration ( Townhall ) and is based on the increase in the value of the land since it was last bought. Logically, as the beneficiary of this increase in value, the seller usually takes charge of paying the Plus Valía. However, some Sales Contracts stipulate that the buyer is responsible for meeting this expense. This is an important issue during negotiations over the terms and conditions of the Sales Contract and it is essential to consult your lawyer before making any agreement on this point.
If you finally agree to pay the Plus Valía you will find that it is based on the official value of the land, which is always lower than the actual market value. The tax is charged at between 10% and 40% of the annual increase in the value of the land. The exact percentage depends on a number of factors including the location of the property and the length of time between sales. Local authorities periodically carry out valuations of land and maintain up-to-date records in order to calculate Plus Valía charges.
Other costs that you should bear in mind when considering a property purchase in Spain are as follows:
- Bank fees & Mortgages fees.
- Legal fees for making a will in Spain.
- Connection charges for water, electricity & telephon.
- Insurance of your property and its contents.
- Fiscal advice and representation.
- Representation in negotiations with your prospective Residents’ Association (Comunidad de Propietarios).