Question: I am buying a property in Spain and am concerned to protect the money that I pay them before completion. If the developer goes bust then I am worried about what will happen to the money that I have paid him so far. Do you have any advice as to what I can do about this?
Answer: When you buy a property in Spain (or in fact many other countries) which is being built it is highly likely that you will be expected to make a deposit at the beginning and then various stage payments throughout the course of construction. This is normally because the developer needs the money to help fund the construction.
When you buy in Spain it is the legal responsibility of the developer to provide a Bank Guarantee and to pay for this. The bank guarantee is a bit like an insurance policy in that if the developer goes bust then you should be able to claim your money back using the guarantee. This has been a legal requirement since 1968 and therefore you would have thought that developers would have time to get their act in order and provide these – but they don’t always. Sometimes the developer will refuse to provide a bank guarantee. If the developer refuses to provide a bank guarantee and you still want to buy then you can pay for the guarantee yourself. This will typically cost on the region of 1% of the amount being covered. The alternative is to tell the developer that you are not going to buy from him because he isn’t providing a bank guarantee and then go and buy from somebody who does provide such guarantees. Sometimes the developer won’t provide a bank guarantee because it costs him money, sometimes because he can’t get one because he hasn’t got his paperwork in order and sometimes even because he is personally insulted that somebody would dare suggest that it is necessary (I, Jose Luis am your guarantee!)
The other option is to transfer the land into your name at this stage and then have the property built on it afterwards. This will mean that you own the land and any construction on it. Unfortunately this option is unlikely to be possible when you are buying an apartment. This option may also not be possible if the individual plots of land haven’t legally been divided up yet.
A third option would be for the money that you are to pay to be paid into an Escrow account and not released immediately to the developer. This option is not very common in Spain yet – especially as it has a significant impact on cash flow for the developer, but a few developers now will agree to this.
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