The Buying Property process in Mallorca

Buying property in Mallorca is neither a complicated process nor a particularly unfamiliar one to those who have, for example, purchased property in the United Kingdom. There are many similarities from negotiating a price and finalising an “offer and acceptance”; undertaking searches; checking the title; ascertaining all relevant consents are in place for the property; checking it’s condition; agreeing any third party finance for the purchase etc. There is the signing of a “Private Contract” similar to what in the UK is the “Exchange of Contract” and, lastly, “Completion” or signing of the contract of “Compra Venta”.

So if it is so straight forward and, on the surface of things, transparent, why do we read so many horror stories? 

Pitfalls of buying in Mallorca - Why things can go wrong

  • Appropriate advisors and professionals are not instructed to deal with the due diligence, contracts etc. Estate Agents will often undertake the “legal work” themselves and while this is not in itself a reason why it should be done badly, some do lack the experience or knowledge and, at the very least, there must be a question mark over their impartiality where so much rides for them on the successful completion of the sale.
  • Buyers are “encouraged” to sign either Reservation Contracts (prior to the Private Contracts), or the Private Contracts themselves, before the necessary legal and financial due diligence is in place. In many cases the former commits the buyer to purchasing the property in much the same way as the Private Contract (equivalent to the exchange of contracts in the UK)
  • In effect the purchaser is putting at risk their deposit monies without the comfort of knowing the outcome of the searches, checks on title etc and, where mortgage finance is being sought, confirmation of a formal mortgage offer. While there may be situations where a buyer may be prepared to do this in order to secure the property, they should only do so with a full understanding of the implications should they decide not to proceed with the purchase. 
  • There are a significant number of illegally built, or part illegally built, properties in Mallorca, especially in rural areas – buyer beware! This is not necessarily an impediment to a successful purchase but the buyer should only proceed once they are in possession of all the facts.
  • Most foreign buyers, understandably, have a lack of understanding of the Planning and Development Control regulations effecting plans for any new works they propose to undertake post completion. Appropriate advice should always be sought, preferably in writing.
  • Dare we say it – straight mal practice or at best hiding of the “facts”! Remember most Estate Agents only receive a fee if there is a sale and are working, in the main part, with and for the vendor (who is equally keen to sell!). While this is no different to many other parts of Europe, it is exacerbated by the fact that the Estate Agency industry in Mallorca is totally unregulated and the practice that most properties are marketed on a Multiple Agency basis - a property is commonly on with many different agents and the agent will only earn a fee if they introduce the eventual purchaser. 
  • Furthermore many sales people in the industry are paid on a commission only basis, or at best receive only a very basic fixed salary, and are therefore understandably “keen” to get a sale.  

So what are the key stages to the buying process and how can we ensure that the purchase proceeds safely and quickly to a successful conclusion?

The buying process - Property search through to acceptance of offer

The following should act as a checklist for buyers:

  • How will the purchase be financed? Prior to seriously commencing a search the purchaser should decide how the purchase is to be financed and, where third party / mortgage finance is required, obtain an appropriate offer of funding from the bank. This will not only provide the purchaser with a very clear view of the budget they will then be working with, but also speed up the process post offer and allow a more robust negotiating stance. It is also useful at this stage to open a bank account (if a mortgage is being used this will generally be at the same bank) and, where funds are being transferred from outside the Eurozone, to open an account with a Strategic Currency Partner (they will give much better exchange rates than the high street banks and will in many cases be commission free)
  • Commence serious search for property. There are many ways of doing this, from walking the streets and trawling around different Estate Agents; doing a similar process but via the internet; or using a Property Finder or Buyers Agent. The latter should be able to take the strain out of the search by liaising with the Estate Agents on behalf of the purchaser and have the advantage of offering an impartial service dedicated to the needs of the purchaser (not the vendor) 
  • It is important to note the distinction between a Property Finder, or Property Finding Service, and a Buyers Agent. The former will generally charge a fee to the purchaser on successful completion of the acquisition while the latter will act as the purchasers representative but will, in most cases earn their fee from either the vendor, or most likely, the Estate Agent who is representing the vendor. While this distinction is not always clear with some operators in the market (are they Estate Agents, Property Finders or Buyers Agents?), at Novi Property Mallorca we differentiate between our primary role as Buyers Agents (earning our fee from the Estate Agent, or vendor if we source a property where there is no Agency representative - we can still be fully impartial as the commission rates are standard from one property to another so which property you by makes no difference to us, save we want you to buy the one that most suits you!!) and our separate and specialised Property Finding service where our fee comes only from the purchaser.  
  • Is the Estate Agent, Property Finder or Buyers Agent “registered” with bodies such as the ABAI, API and ATP or professionally qualified (Royal Institution of Chartered Surveyors - RICS etc)? While this is not a prerequisite to receiving a good quality service, it does provide the purchaser with the comfort that they are dealing with a practice that is governed by certain rules and regulations, and should have a complaints policy, code of ethics / values etc.  
  • At Novi Property Mallorca, as members of the Royal Institution of Chartered Surveyors (RICS), we are governed by the Institutions strict rules of conduct and have additionally fully adopted their stated values of honesty, integrity and professionalism (see "Our Values") 
  • Making an offer – There is no hard and fast rule as to whether a purchaser will be able to negotiate a reduction in the asking price. All depends on the individual seller (and what is motivating the sale); whether the asking price has been set “to sell” or just to see if a purchaser will “bite”; and conditions in the market place.  
  • By way of background it is useful to know that in Mallorca the vendors can sometimes have a significant influence on what price is set for a property, with the Estate Agent simply following the sellers instructions. This, along with the unfortunate practice the world over of some agents over pricing property in order to win instructions, can have a distorting effect on the market and certainly requires the purchaser to be well informed and well advised (see comment below re “Purchase Price”).   
  • Acceptance of an offer – A common practice in Mallorca, and indeed the whole of Spain, is for a vendor to ask for some of the purchase price to be paid in cash to cover any furniture, fixtures and fittings etc – i.e. items that would not normally be included in the asset value of the property. This practice lowers the official value of the property declared on the deeds. While this is not illegal, if the sum truly reflects the value of the furniture etc, these should still be covered by an official contract and the sum declared. Tax Authorities will take a dim view of any transaction where the declared value has been lowered excessively as a tax evasion exercise. It is important to discuss this with your Agent / representative and Legal Advisor.

The key now is the due diligence, appointing an appropriate representative for this work and ensuring you do not over pay. Set out below are a number of key issues regarding this work; what needs to be done and the costs involved.

The buying process - Post offer, the due dilligence and associated costs 

The additional costs of buying property in Mallorca (i.e. over and above the purchase price) are high and can easily amount to some 10 – 12% of the purchase price. While some are avoidable it is important to ensure you don’t get over charged with others. So what can you do to protect yourself from these ‘extras’; what will the due diligence cover; who should assist you with it; and what costs should you expect?  

  • The purchase price – Drawing together a number of the issues addressed above the following should be noted.                                                                                                   Researching the market and buying through a reputable agent (RICS or API) is very important. Remember also that most Estate Agents in Mallorca are there to represent the vendors / sellers not the purchaser. Property Finders and Buyers Agents work for the purchaser and therefore should ensure the price you pay is fair. Novi Property Mallorca operates almost exclusively as both Property Finders and Buyers Agents and, as members of the Royal Institution of Chartered Surveyors (RICS), works under the Institutions strict rules of conduct. 
  • Legal Fees - Solicitors fees generally amount to 1% of the purchase price, plus VAT, a tidy sum especially where the purchase price is high! In many cases the work involved (time etc) isn’t materially different between the purchase of a small 1 bed apartment or a large villa worth many hundreds of thousands of euros and it is therefore always worth trying to negotiate a reduction. There is no doubt that it is possible to get excellent legal work, from both solicitors and specialist property transaction advisors, for sums less than 1%. Equally paying large sums for your legal work does not guarantee the quality of the work!
  •  In addition to the straight legal costs associated with the purchase itself many will charge extra for other services related to the acquisition. Foreigners will need a tax identity number (Numero de Identidad de Extranjero – NIE); it is often recommended to take out a Spanish Will (in addition to any you may have in your home country); utilities will need to be transferred etc. Ask for a fixed fee in each case so you know what you are going to pay from the outset and if necessary compare prices (none of these should be very significant costs) 
  • Taxes - Tax bills vary throughout Spain and are set by each regions autonomous government. In Mallorca there is a sliding scale on the Transfer Tax which can range from 8% to 10% on resale properties and 10% VAT plus 1.2% stamp duty (total 11.2%) for new properties. These are unavoidable and are paid on the Declared Value of the property.
  • Notary and land registry fees - Again unavoidable if you want to fully secure your rights to the property. These are set by the State and amount to approximately 0.3% of the value of the property for the notary and 0.3% to register the title. Furthermore if you need a mortgage to purchase the property, you will have to pay a second set of notary and registry fees, once again of about 0.3% each based on the value of the loan.
  • Mortgages - Mortgages in Spain are generally very similar to those in the UK and elsewhere in Europe although the variety of different products is generally less. The key is to shop around, in just the way you would do back at home, and to ask for a detailed breakdown of all costs before you commit. The average mortgage opening fee is 1% although this can be higher so, beware! Also be wary of brokers looking for upfront non refundable fees. In most cases you should be able to get good advice without them.  
  • There will also be the cost of the property valuation required by the Lender (generally around 300€ - 500€) and the bank’s administrative costs of about €300 for drawing up the mortgage deeds. 
  • Currency conversions - If you are a British purchaser transferring money from the UK, or indeed from any non Eurozone country, the exchange rate you get and the costs of transferring monies can make a very significant difference dependent on how and who you use.
  • At Novi Property Mallorca we recommend using specialist currency dealers such as Magna Financial who invariably offer considerably better exchange rates and in many cases will organise the transfer at nil charge (typically high street banks will charge a handling fee with a second fee charged by the Spanish bank – between 0.3% and 0.5% of the sum transferred!)