Delayed Option to Purchase Contract Overview
for Spanish Property Purchases
There is now available in Spain for the first time a time delayed option to purchase contract in relation to Spanish property purchases.
The need for such an option is by no means coincidence in light of the world-wide credit crunch which has exasperated an already ailing property market in Spain which can be defined as in a downward cycle.
As the old saying goes "What goes up must surely come down", well then it is obvious that it will inevitably go back up again.
It is not necessary to be a real estate expert or economic analyst to know that all property cycles run between 7-12 Years; an average of 10 Years approximately.
Some historic cycles have had either a longer down-slide, or stagnation period such as the last UK period from 91-97 when there was essentially no movement either way; this was of course followed directly behind one of the biggest crashed in history from 88-91 which was not restricted to the UK.
It is because of the earlier comment of "An already ailing property market in Spain" we mentioned that the opportunities to buy at a discount (at the bottom of a cycle) have presented themselves far quicker than would ordinarily have been possible…..See property market facts.
The fact is that due to many diverse situations the market had already started to fall in real terms over a 2-3 year period the first being a dumping on the market of German owned property at a heavy discount (this was fuelled by the German tax authorities sudden interest in properties owned overseas and as such subject to heavy taxation).
The second factor was the rapid growth of the "Off plan market" which at its height saw 40% or all new built property under construction in Europe being built in Spain. The fact is too much property was built for the investor to either sell on or put it in the rental sector (you may now see a similarity between this and the now not so popular "buy to let mortgage" in the UK which has seen huge investor speculation with cheap money resulting in whole up market tower blocks in major UK cities such as Manchester & Liverpool now lying empty despite an acute housing shortage), unfortunately these are too expensive for the community housing market.
The third element is that in the last six months the Euro has become exceptionally strong against both the Dollar and more so Sterling. This has continued to grow due also to the base rate cuts in the US & UK aimed at stimulating the economies of these countries in light of the banking crisis, and the huge rises in fuel costs. The UK is the biggest population, along with Eire buying in Spain so the negative exchange rate has caused more people to drastically drop their house price to accommodate this short fall.
The further problems facing people who hold mortgages in Spain are twofold. The people living in Spain have a number of issues. If you work in Spain and this is your primary income to pay your mortgage this could be your first problem. Spain has the second highest rate of unemployment next to Slovakia out of 37 countries. The hardest hit are the direct, and allied trades in the construction industry (remember what goes up must come down), as many ex-pats are in this trade then problems will surely arise.
If a couple are retired and living on pensions from the UK then due to the exchange rate their income has reduced between 15 & 20% in 2008, this of course will have a great impact on their ability to keep a standard of living and make due payments.
The second groups of people we have alluded to are holiday home owners still living and working in the UK. The situation in the UK has become increasingly difficult for people. The days of cheap mortgages and with those cheap credit cards have come to an end; in effect the party is over, for now anyway. There are millions of house owners who are due to come out of their "fixed rate mortgages", and as such will have a large rate rise due, on top of the expected rises in the base lending rate along with further inflated rates levied by the banks in an effort to shore up their over exposure.
The first priority of this group is to secure the primary family home, in essence to keep the UK house at all costs. The burden of a second mortgage in Spain, in a negative market will simply lead people to "walk away" from this further liability. This has been traditionally been the course of action that people in this situation have chose, believing that this debt cannot follow them back to the UK. This is sadly no longer the case as you will read in Spanish Property Repossession Information
So you may ask where is the opportunity in this to purchase a heavily discounted property. As you have read in Property Repossession Information it is now a very bad idea to leave a debt in Spain and disappear back to the UK, or anywhere in Europe. So there is a situation that arises that suits the seller, and the potential buyer of a Spanish property.
We specialize in rescuing property from the Spanish banks on behalf of clients who are going to have their property repossessed, before it enters into the legal system bringing with it a further debt of 40-50% on top of the mortgage owed.
We have extensive relationships with all of the leading Spanish banks and as such are in a position to obtain repossessed property saving the credit rating of the seller for future purposes.
So how does it work?
For ease of following we will call the seller A & the buyer B.
A is in arrears with his mortgage, and will be unable to keep up with the payments. He wishes to secure his future credit rating and does not wish to go to court, be removed from his property by the Guardia Civil, and be in more debt than he already is.
B wants to purchase a property, however understands that in the present credit crunch this is either next to impossible, or the bank will not allow enough to cover the purchase of the property.
A contract has been written up which legally covers both A & B. The contract is an option to purchase within 4 Years maximum.
The property remains in the name of A and also the mortgage remains in the name of A.
B will pay all arrears owed to the bank (we will not deal with a property that has incurred any further legal costs etc).
There is an account opened in the name of B at the bank that the mortgage is held at. The mortgage account will have been set exclusively for the mortgage payment and that exact amount will transferred on the due mortgage day each month from the new account in the name of B to cover the mortgage.
We try to ensure that these properties have at least 40% equity over and above the mortgage debt so as it will be attractive to the purchaser by buying at the bottom of the cycle. We will use a model listed below to explain how this works for both parties concerned.
Mortgage amount including all outstanding arrears: €300,000. (repossession debt approx' €420,000)
The current value of the property in this market: €500,000.
B pays the mortgage for up to 4 Years (this can be bought or sold at any time during this period).
At the initial signing of this contract there are no taxes etc incurred on either side. For A this means no mortgage cancellation fee (approx 1%), or the 3% tax retention if A is either not a resident, or is not in the Spanish tax system.
For B there will not be the normal 7% IVA (VAT) on the purchase or the mortgage set-up (approx' 1%), there is also a saving of a further 1.6% notary fees and relevant local taxes. There will be approx' a 2% charge for B to have the contract notarized and inscribed in the land registry plus some taxes.
This contract is completely binding and legal and once it is signed A will lose all rights to either live in the property or sell it. B will be able to live in it, rent it out, or sell it.
All above costs incurred are in relation to the €300,000 figure. This is obviously attractive to B as he is cutting his initial buying costs by approx' 80% (a current mortgage deal will only give 70% loan to value at best at present). The costs at this stage would be approx' €120,000 - €130,000 including taxes.
With this contract the costs would be approx' €35,000. This would include an estimate for arrears and our contract and finders introduction of 5% of the valuation, €25,000. This of course would normally be taken from the house sale, however as this property is being bought at the lowest possible amount this represents true value.
In 4 years time the market in Spain will be in an up cycle and dealing with the banks will once again be easier, and the present situation will be a long distance memory. At this point B has the option to either buy the property, or sell it on as if they own it already. Of course at this point the normal buying costs will apply, however in a much healthier market that is oriented toward lending this will be a lot more attractive.