05: Signing contracts when purchasing a property in Marbella
By Artur Loginov on
When the seller accepts your offer, you move on to the legal phase of the purchase process. When buying property, you will be asked to sign a reservation contract, a purchase contract and an official deed at the Notary on the day of completion. This is not the only way to proceed, but the most common. However, there are various ‘standard private’ contracts you may be asked to sign:
1. Reservation contract – Documento de reserva
A reservation contract is a document signed by the buyer and vendor that allows the property to be reserved for an agreed-upon time, typically from 7 to 14 days or more. A reservation fee is also applied in this instance by the seller for the buyer to pay. The payment size can vary from €5,000 - €20,000 or 1% of the purchase price or any other mutually agreed upon by both parties. A fee is paid for the property to be taken off the market during an agreed-upon time by both parties. If the buyer decides to go ahead and purchase the property, then the amount paid in the reservation fee goes towards the purchase price.
However, suppose the buyer chooses not to go ahead with the purchase. In that case, the buyer loses the reservation fee as compensation as the property is off the market, unless special conditions are included in the reservation contract that allows the buyer to back out without losing money.
2. Private contract with a 10% payment
After the reservation contract is signed, you sign a private contract and then make a payment that amounts to 10% of the purchase price, which includes the reservation fee paid prior (if you pay 1% at reservation, you then pay the other 9%). A point worth mentioning is that, on occasion, it is possible to jump straight to a private 10% contract without signing a reservation contract. However, this is usually done if the purchase price is high and the seller cannot take the property off the market for a small reservation offer.
There are three different types of contracts you may sign that are all similar when making the 10% payment:
a. Penitential Deposit Contract - Contrato de Arras Penintenciales
This contract penalises the vendor if the property is not sold under the agreed terms previously set by the vendor. If the seller decides not to sell you the property, they have to pay you double what you originally paid. Technically, this means the vendor can break the contract anytime; even though the penalty fee is high, the risk is low. If the buyer does not follow through with the property purchase, he loses the 10% paid, and the contract is no longer valid.
b. Private Purchase Contract - Contrato privado de Compraventa
This contract does not allow the vendor to back out of the deal. There is no penalty established, as the vendor has no right to back out in the first place. The buyer chooses to execute the option during the contract and make the purchase. If the buyer doesn’t buy the property, they lose the 10% paid, and the contract is no longer valid.
c. Purchase Option Contract - Contrato de Opción de Compra
This contract is typically less used as it obliges both parties to buy and sell, which means that the loss of the 10% paid or the reimbursement of double the amount by the vendor might not be enough to cancel the contract. If one of the parties doesn’t want to sell or buy, the other party can still oblige them to do so through court. The vendor can be obligated to sell (even if they refuse to go to the notary) or the buyer to purchase (even if they do not want to). Of course, such scenarios are infrequent.
It is important to note that each of the previous descriptions of the 10% private contracts are a general summary of what each contract entails. Each contract is also subject to additional clauses and penalties that affect the contract. The law states it is not the title of the contract that defines its intention but how a contract is written.
If of interest, you can also apply for a mortgage in Spain. If you plan to do so, ensure that you start the process as soon as possible, as getting a mortgage approved in Spain can take up to 2 months after putting in your initial request.
If you decide to go ahead and request a mortgage, the bank will also require additional documents, although they are mainly interested in proof of any recurring income. The usual conditions for a mortgage today are:
● Amount of mortgage: up to 50% of the purchase price
● Rate: 1.5% to 2.5% per annum
● Term: 15 to 25 years
● The early repayment fee for closing the mortgage is around 0.5% to 0.25% of the amount repaid.
● The bank may also require life and property insurance as a prerequisite for a mortgage.
Completion of a property purchase in Spain – Escritura de Compraventa
All parties involved in the completion must attend: buyers and sellers and their legal representatives or lawyers, bank personnel for redemption or subrogation of an existing loan, a bank providing a new mortgage, etc.
The moment you sign the title deed at the notary's office (notaría pública), an immediate transfer of possession and full responsibility for the property is passed over to you. The payment for purchasing the property is also made at the same time via bank cheques. In Spain, this payment method is the safest for both parties, as the payment is made when the property is passed on to the buyer, and banks can give a fast and verified confirmation that the payment has indeed been made.
Once you have signed a notarial sale deed and paid all required taxes, the deed is registered at the Land Registry. This process can take up to three months. After registration, the original deeds and all invoices relating to the transaction will be available. You are then at liberty to change all utility bill contracts such as water, electricity, gas, telephone and HOA bills into your name and bank details.
QUESTIONS AND ANSWERS
What happens after you purchase a property?
The moment you sign the title deed at the notary's office, an immediate transfer of possession and full responsibility for the property is passed over to the buyer. After signing a copy of the deeds, the originals are sent to the Land Registry to be registered, which can take up to three months. After registration, the original deeds and all invoices relating to the transaction will be available, and you can then change all utility bills into your name and bank details.
What is a reservation contract in Spain?
A reservation contract is a document signed on behalf of the buyer and seller that allows the property in question to be reserved for an agreed-upon time. If the buyer violates this contract and does not go ahead with the purchase, they lose their reservation fee, unless exceptional conditions apply in the contract. The reservation fee is included in the final purchase price if they go ahead with the purchase.
What happens if the seller pulls out of the deal after paying the reservation fee?
The standard reservation contract states that the vendor must give you back double the amount initially paid when reserving if they decide they no longer want to sell you the property. Since these types of contracts are subject to a small payment, we recommend that you speed up the process of signing the following private contract once you sign and pay the reservation fee.
When does the seller need to move out of the property?
Technically, unless stated otherwise in the purchase contract, the buyer can move in the second all contracts are signed at the notary and have received the property's keys. Suppose the Seller needs more time to move out once the property is purchased and lets the Buyer know beforehand. In that case, an agreement is made between both parties for an allocated time when the Seller can remain in the property once sold. To simplify, the Seller can stay in the property only if it has been previously negotiated with the Buyer and agreed upon.
What are the mortgages fees in Spain?
The mortgage fees in Spain are 1.5% to 2.5% per annum. This rate depends on what bank you choose to go with and whether or not you are a resident of Spain. The rate also varies depending on what the market is like when applying for a mortgage.
Banks offer two types of mortgages: a fixed mortgage (hipoteca a tipo fijo) which is a fixed fee that is paid off, or a variable mortgage (hipoteca a tipo variable) which is usually lower than a fixed fee. Although the variable mortgage may seem more enticing, the value of the payment can change in the long term, meaning the price can become higher than if you were paying a fixed fee, depending on the market fluctuation. In this case, a fixed fee is safer in the long run.
A variable mortgage is calculated based on the following factors:
● The percentage established by the bank. E.g. 1 → 1% + the value of EURIBOR at the time you request the mortgage. E.g. 2 →If EURIBOR is 0.2%, then the total percentage will be 1.2%. This is then reviewed annually.
● If the EURIBOR value increases, so will the interest rate. If EURIBOR decreases, then so will the interest rate.
Artur Loginov is the CEO and proud Partner of Drumelia Real Estate. He has over a decade of knowledge and…