Buying Real Estate – Spain v the US

Attention Passengers: Fasten your seat belts, cause it’s gonna be a bumpy ride. That’s right, boys and girls. Purchasing property in Spain, as opposed to the US, is a very different experience. Very different. Remember that bureaucracy thing I was talking about before? Yeah. That. And, so very much more. Is it achievable? Yes, it is. But it will take every ounce of patience you possess. And if you have a partner or a spouse, it will take every ounce of theirs, too.

If you bought a property in Spain before July 2020, your experience was very different than ours. All the real estate laws changed in July of 2020. Now, they’re so much more fun! And opaquely transparent. Sounds like a contradiction. Cause it is.

Falling in Love

Let’s get in our Wayback Machine and travel to the moment we fell in love with the farm in Lugo in October 2020. It was early days and we couldn’t get enough of it. I drove up there at the end of October, took out some javalies, crashed my car, got stuck in Lugo Covid perimeter lockdown, and finally saw the farm on my way outta town. But, we couldn’t wait to put a ring on it. The engagement was quick and the owners said ‘Yes!’ to our offer. Great! We were gonna do this thing. An exciting moment when our lawyer in Lugo sent us the signed, executed contract. Now we could get started.

In the US, you would have likely gone through some sort of bidding war to get the property. You will have paid much more than the asking price and might have even waived the inspection (if you’re paying cash) or any contingencies. In Spain, there will be no bidding war. Properties here do not sell super fast – as a general rule – so you have time to negotiate, and leverage. This is Jeff’s job. I’m the money. That’s always been my job.

In the US, we would put down forty to fifty thousand in earnest money and talk to the bank to get a loan going. Easy peasy. In Spain, you put down 10% of the purchase price. That’s essentially what all the taxes and fees (closing costs) will run you, so you’re putting that money down indicating you can cover those fees. Not a problem.

Show Me the Money

Now, if you haven’t already decided how you’ll fund the deal, you’ll get out your calculator and make some determinations. Will you pay cash, do owner financing, or borrow money from a bank? In the US, if you’re getting a loan you will have already gotten pre-approved. It’s easy to do and quick. Just like buying a car in the US. It will happen in hours, especially if you are getting it through your bank or investment house. They know you and how much money you have.

In Spain, even if you have banked with a bank for years, this is not possible. They will not pre-approve you. So you go into the real estate contract with some risk. But you can put language in to protect yourself, as we did in Portugal (Thank God) when the inspection came back and much of the property was not legal. But this is not boiler plate language. You have to insist.

Today, in Spain, the interest rate is based on how much you borrow and how qualified you are for the loan. We could have paid cash for the farm, but the interest rate for us is .77%. You read that right. <1% interest. Basically, it’s free money. We are better off leaving this money in investments in the US, than we are paying cash for the farm. Better to use the bank’s money than our own as it continues to earn. And these days, our mortgage is covered by our investment earnings.

Right about now you’re saying, Duh, Kelli! But that’s not what our bank here said. They didn’t get why, if we had the money, we would want a loan. I explained the time value of money, and while I used my investment account statements as a visual aid, they still didn’t get it.

‘This money.’ I pointed to my last statement with all the graphs and charts in it. ‘is still earning. See my rate of return?’ Then I pointed to the loan amount, and the total interest on the life of the loan in the simulation they had drawn up. ‘This money costs me nothing because,’ and I pointed to the investment statements ‘this money is actually making me more money, which covers the entire loan payment.’

The woman looked confused. ‘But you could pay cash. You have the money.’ She told me pointing to the investment statements.

I took a deep breath. ‘The money pays for the loan in what it earns. If I leave it there, it’s a good thing. It’s like having another job.’

She had to get a supervisor, who seemed to understand. I feel like they thought I was trying to pull a fast one. But we got through it. At a fixed rate o .77% I would be a fool to cash out investments to cover that money. The light bulb never went off, but it flickered.

But Here’s the Catch

In Spain, like the US, to borrow money on a property you have to get an appraisal. Standard. We understood that. But it gets crazy. According to our lawyer, when the pandemic hit, appraisals were automatically cut by 20%. Off the top. They didn’t wait for the market to adjust itself. Nope! The appraisal community (if there is one of those) just did it. But that caused a problem. And it impacts all real estate purchases.

We are considered ‘Residents’ because Jeff has a work contract in Spain and we are on a special visa. So the bank will loan us up to 80%. If we were still on a ‘Non-lucrativo’ visas we would be considered ‘foreigners’ for the purposes of banking and loans. And, if you are a foreigner buying property and getting a bank loan, you will only be allowed to borrow up to 70% of the purchase price. But if the appraisal comes in at only 80% of the purchase price, you can only borrow 70% of the 80%. Our appraisal came in at 60%. The bank went a little nuts after that.

I told them, HELL NO! And we had a little tussle. They wanted me to come up with 50% down. They told me that getting a second appraisal was Impossible! We never do that.

I had done my own market assessment and there was no way the property appraisal should have come in that low. NO WAY. The sellers were pissed off. My Lugo lawyer said the appraisal was bad and that ‘It’s not possible that this property is this price.’ So he got involved and told the bank they were out of their minds. He suggested we go to a different bank – not our bank- and he hooked us up with a friend of his locally.

All this took time. And the contract is ticking away. You only have so much time to close or you lose your 10%. And I really didn’t want to cash investments to cover this thing. That costs me too much, in the long run.

Mo Money

So, we went to another bank. We showed up to the first meeting and they explained the process of getting a loan. I pulled out every document the woman said I would need. She laughed. ‘You are prepared.’ I laughed ‘You have no idea.’

We went through the spiel and signed and signed. And we were approved in a day or two. But they had to order the appraisal. This is where you sweat in Spain. The appraisal will kill your deal. I know this because of that lake house we liked last year. The one where the owner called me because the sale to another buyer fell through because of the appraisal. And we’ve heard similar stories since then.

Our Lugo lawyer suggested we get a private appraisal. He arranged for someone at an accredited appraisal company to ‘attend the property’ and perform an ‘independent appraisal’. So we would have that in our back pocket.

In the meantime, the first bank came back (our bank where we do our banking) and said they wanted to keep us, and our money, and they wanted to order another appraisal – which they had told me was Impossible and that they never do it. ‘We are bleeding for you.’ was the phrase in the email.

So now we had bank #1 doing a second Impossible appraisal. We had a private appraisal ordered by our lawyer. And bank #2 ordering an appraisal. We have so many appraisals we must surely get one that will tell us the true value of the property. But then it got interesting.

Water, Water Everywhere and Not a Drop to Drink

So, bank #1 knows about bank #2. They had to, since they knew we didn’t like what they came up with in the first round. But I didn’t realize bank #2 didn’t know about bank #1. I missed that somehow. But the sellers were talking to them all because they have to drive from their home in A Coruña to attend all these appraisals. And bank #2 found out that we were sort of still dating bank #1. This caused a stir.

‘Aren’t you committed to banking with us, Kelli?’ they asked me at one meeting. Like indignant lovers.

‘Yes,. I am. But only if it’s a good deal. You’ll have to earn it. This relationship needs to be a two way street. If it’s not good for me, then I’m not bringing my money here.’

They appeared wounded but they got over it. I was shocked that anything to do with money would be emotional in the slightest. But, unlike in the US, in Spain, you don’t get multiple banks working on a home loan. Here, it’s single threaded. And you’re supposed to act grateful they’re even considering you, at all. I don’t operate that way. In money or love.

This is Business, Baby

So, while bank #2 was pushing forward, bank #1 was taking the first and second appraisal back to their higher ups and working on getting approval. We qualified for the loan – this wasn’t the issue. It was the appraisal. It all hinged on that. And then we hit a snag.

Bank #2 got a hold of our private appraisal and things got ugly.

‘Why would you order a private appraisal, Kelli? Don’t you trust us?.’ Again, with the emotional stuff.

‘Trust you? Sure, I trust you. But I need to protect myself. What if I find out the property value isn’t what your appraiser says it is? What then? I needed independent verification.’

They were not happy.

‘By doing this, the loan is paralyzed.’

I don’t know if they were using the English word, or if it’s the same in Spanish but that word got even Jeff to sit up and take notice while sitting in the banker’s office. They used other words like ‘slaves’ and the like. I honestly, didn’t get why this was such a big deal. Money is money. It’s my money, and I’m not about to throw it away by trying to have bankers, at a bank where I don’t even bank yet, like me. I don’t need more friends. I just want their money – for free.

Many suited-up people gathered and talked over each other while standing in front of the computer monitor, pointing. Jeff and I just looked at each other over our masks and rolled our eyes. I heard the word ‘Impossible’ thrown around like confetti. But, as I have said before, my blood pressure doesn’t rise when that word is uttered anymore. Impossible means nothing to me. My brain just hears Whah Whah, Whah Whah Whah Wah .

A Race to the Finish Line

The banks were neck and neck. Neither of them were happy to be in the race with each other. But it was working for me. And here is where the new laws that went into effect in July 2020 come in. Before, you could get a loan on any property. The building or the land might not be legal. It might be tied up in some sort of litigation with the builder. We have heard from our lawyer stories of mayors of villages who developed land illegally and gave out ‘stamps for money’. This put the buyer’s claim to the property in jeopardy. But it didn’t matter. If you wanted to protect yourself, you needed to hire a lawyer in Spain to do a serious search of property records and make sure the property was a ‘freehold’ and all the permits had been filed and registered with all the stamps.

Now, if you get a bank loan, even a small one, the bank must do all this for you. We’d already had our lawyer in Lugo do it before we made the offer. We learned a lot in Portugal. But the bank must do it, too. It’s like a title search in the US. There, this takes days. But in Spain, this will take as long as it takes. And I’m of two minds about it.

I know my lawyer got this done in a couple of days, but he’s up in Lugo where the land and the buildings would be registered. He knows people at the land office and it’s not his first rodeo. But the bank took weeks to get this done. Our loan was approved but the title search by the gestoria inside the bank, was FOREVER. Property records being what they are in Galicia, means many properties are not registered correctly. But ours is, and we even had our lawyer send over the stamped copies he had gotten for us. It included the paid property taxes, because if you buy a property and don’t check the tax rolls, you will be liable for years of the sellers unpaid property taxes. It’s crazy. But the process now protects the buyer.

Bank #2 was in the homestretch when bank #1 messaged me. Their management were having a hard time reconciling why the first appraisal came in so low, while the others came in near the purchase price. They just couldn’t understand it and it felt ‘risky’. We weren’t risky customers, they assured us. It’s just that the first appraisal was throwing them off. Even though the other appraisals did a very thorough competitive analysis. Madness. They said they would need more time to ‘study’ the issue. It has already been months.

Throughout all this, Jeff just shook his head. We’ve bought and sold many homes in our lives. And we have never seen anything like this. Here, we had to get 2 contract extensions approved by the sellers to close the deal. At one point, I had to get bank #2 to issue a certificate for the sellers promising that this thing was going to go through – for sure, Kelli – but we were waiting on the gestoria to complete the paperwork and start the 10 day clock. What’s a 10 day clock? It’s a new, fun twist in the ‘How many hoops can we make them jump through to buy a farm in Lugo?’ game.

Down to the Wire

After the gestoria has gone into the cave of the Oracle at Delphi, and asked the eternal questions about life and existence, and taken weeks and weeks to do so, he comes out and sees his shadow. Which adds 6 more weeks to the loan process. Finally, after your hair has turned grey and your grandchildren are heading off to college, you get the call. The paperwork is ready from the gestoria.

So, we were finally ready to sign with bank #2. But, even there it was tricky. In many states in the US, if you get married without a prenup, your union results in community property. Washington State is like this. So, anything we earn during our marriage is community property. Buy or sell real estate. Community property. Here, married couples often keep their money separate.

In this way, Spain is much further ahead than the US. Here, everything is individual unless you have a paper, signed, stamped, and registered with the state that says you hold your assets communally. Getting married doesn’t do that automatically. I guess that makes sense because, in Spain, a woman doesn’t take her husband’s name. After the wedding she’s still who she was before. She may have assets she inherited from her side of the family. Or a previous marriage. These are not automatically assumed to be the property of her husband. Divorce laws here are very interesting. And I, frankly, like them better than the US.

So, the bank was confused that we wanted to purchase the farm as community property. They wanted all kinds of documentation and to have our lawyer draw up papers and register this. We were able to get around it because we have a will from the US giving each other all our money and assets, but it was a hiccup at signing.

At long last, you read through the documents. You sign it. You feel a sense of elation and relief. It’s done. You’ve bought the farm! You hear the music from the first ‘Rocky’ movie playing in the background. But no. It’s not the end. That’s when you hear a faint tic tock, and it’s getting louder. What could it be?

It’s the clock that starts after you sign the papers from the gestoria. It’s the 10 days you will wait until you can sign at the Notaria. The signature at the Notaria will be when you really own the property. When you get the keys, so to speak. It’s not 10 business days. It’s 10 ‘Natural Days’ as they informed me when I asked when this nightmare ride would finally be over. ‘It must be 10 days.’ due to the new law from last July. Yay!! I guess it gives us a chance to come to our senses – as if the weeks and months previously wouldn’t have done that.

It’s Just the Beginning

And now, we’re farmers. I will be wearing aprons and wellies with a head scarf. Very, very soon. By this time next month we will be living in Lugo. I’m afraid to say that because today is April 1st. Will someone pop up and yell, April Fools!? But I think not. We earned our way through the Spanish Real Estate purchase. Our first one. Sure, we’re battle scarred, but wiser now. And something tells me, this is just the beginning.