Off-plan home purchases: how to protect down payments
In the current scenario of high demand for new housing and limited supply, off-plan purchases have become a common option. However, this modality carries significant risks, especially in a context where construction is mainly financed through pre-sales. This article discusses how to protect oneself, focusing on the First Additional Provision of the 2016 Law on Construction Management (LOE), which replaced Law57/1968.
Supply shortages and high prices are characteristics of the current market, where approximately 90,000 new homes are sold annually, mostly off-plan. Developers and banks minimize risks by advancing pre-sales and obtaining financing later, generating the perception of low risk in the purchase based on the fact that there is already a majority of homes (pre) sold. However, it is essential to recognize and manage the risks associated with potential construction delays or defaults.
Lessons from the Past: Real Estate Collapse in 2008
The 2008 real estate market collapse left important lessons. Overbuilding and pharaonic projects led to the bankruptcy of developers, leaving thousands of buyers without homes and with an even bigger problem: a legal battle to try to recover the money given to the developer. The legal protection in place at the time, based on Law 57/1968, was limited and was not always enforced, leading to homelessness. This law protected buyers who acquired the property as a first residence and also left out companies and investors. Judges had to come out and, through a solid jurisprudence, managed to protect many of the buyers who were affected, forcing banks, insurers and guarantors to respond for the amounts paid on account.
New Regulation: First Additional Provision of the LOE (2016)
Law57/1968 was repealed in 2016, and the new regulation focuses on the First Additional Provision of the LOE. Unlike the previous regulation, the protection does not distinguish between buyers for personal use or investors. Concerns arise about the obligation to guarantee down payments only from the time of obtaining the building license. Does this constitute a loss of protection for buyers?
How to make down payments safely
Case law on the new regulation is incipient, but cases such as the SAP Madrid of February 2022 offer clarity. Bank liability in the new advance payment regulation arises from two events: obtaining the building permit or receiving advance payment deposits, paid exclusively into a special account.
In other words, it does not matter whether the advance payments are made before or after the building permit is obtained, as long as the advance payments are made to a special bank account indicating in the concept that the deposit is an advance payment for the purchase of the property. The banks and the entities offer this type of special accounts to the promoters, under the responsibility of the former, under the requirement of a guarantee in the form of a surety or surety insurance.
This means that, regardless of whether the down payments are made before the building permit is obtained, the buyers will be covered for these amounts (including interest) as long as the down payments are made to a special account of this type.
Surety insurance or guarantee
The developer's obligation to guarantee advances is triggered upon obtaining the building permit. The coverage includes the totality of the funds contributed, taxes and the legal interest of the money until the estimated date of delivery. This guarantee may take the form of an individual surety insurance policy or a bank guarantee.
It is essential to be alert: if the construction does not meet the deadlines, the buyer can request the rescission of the contract and ask for a refund. After a formal request to the developer, if the refund is not made within 30 days, the buyer can turn to the insurance company or the bank guarantor, as appropriate.
It should be noted that previously, the guarantee was directly enforceable against the bank, but now this enforceability is no longer automatic. In addition, the guarantee expires if, within two years of the developer's default, the buyer has not requested the termination of the contract and the return of the funds advanced.
Practical advice for the buyer
- Prudence in the Purchase: evaluate the project, location and ability to pay. Be sure to obtain financing before the deed.
- Research the Developer: inquire about the developer's creditworthiness, previous developments and project status. Demand guarantees even if the license has not yet been obtained.
- Deposit Procedures: make deposits only in the account indicated by the developer, specifying the concept. Avoid cash payments and generic concepts to guarantee the bank's legal liability.
Conclusions and future perspectives
Although current case law supports the interpretation of the new regulation, it is expected that future cases and Supreme Court decisions will confirm these interpretations. The key for the buyer is to understand their rights, be diligent in research and payment procedures, and be aware of legal developments in the real estate sector.
Miguel S. Moreira
Miguel is a trained architect and building engineer with a ample experience in the real estate sector. He is the co-founder of Valido Home and loves to inform about the risks involved in purchasing property in Spain.
