Besides the traditional buy-on-plan, where a property is bought based on a standard design, (often smaller-scale) developers also offer customised projects. Consider, for example, a personalised new-build villa on plan in Costa Blanca North.
What is a bespoke new build in Spain?
With a standard design, you become the owner of both the land and the structure when the house is finished. Beforehand, you make interim payments to the developer, which are covered by a bank guarantee. If the developer is unable to complete the project, you can call on the bank guarantee to recover your interim payments, plus statutory interest. Find out more about a buy-to-let plan here.
With on-demand projects, you deviate from this method. You usually buy the land first and then pay the remaining amounts to the developer on a milestone basis. This carries the risk that the developer may not finish the property, leaving you with a building plot and an unfinished property. In this post, we provide four tips to cover you contractually.
1. The applicable VAT rate: 21% vs 10% on custom-built new builds in Spain
The VAT rate for new residential property is 10% on top of the purchase price. However, if you buy a building plot from a professional seller, the VAT rate is 21% on the land purchase price. Since you buy the building land first and then pay for the construction work, the rate is basically 21% on the land value. However, you can claim the 10% rate if you can prove that possession of the property is transferred only after completion. 'Possession' in this case means that the developer retains control of the property until completion. Below are some scenarios.
- Scenario 1: You buy a project-on-plan based on a standard design and become an owner upon completion. The VAT rate is 10%.
- Scenario 2: You buy a building plot from a professional and have a house built by a contractor. The VAT rate is 21% on the land and 10% on the works (provided at least 50% of the built-up area is residential).
- Scenario 3: You buy a building plot from a developer who does not deliver the property. You pay 21% VAT on the value of the land.
- Scenario 4: You buy a building plot and the developer delivers the property in full. Occupancy does not take place until completion. In this case, you pay 10% VAT on both land and construction.
Tip: Make sure the contract specifies that possession of the property is transferred only upon completion to avoid a higher VAT rate.
Read more about the cost of buying property in Costa Blanca here.
2. No planning permission = no purchase
Always check whether the project has planning permission. If it has not yet been granted, it is wise to sign the deed of sale only after the permit has been granted. This will prevent you from buying a building plot for a project that may not be realisable.
Tip: Therefore, include a condition precedent in the purchase agreement stipulating that the purchase will not go ahead until the permit is approved.
Here you will find more information about buying a building plot in Spain.
3. Payment terms: avoid discussions
In a standard buy-on-plan, payments are independent of the progress of works and are made according to a fixed schedule. In an on-demand project, payments are usually linked to the achievement of milestones (e.g. 20% on completion of structural work). An architect then attests the progress.
Tip: Define these milestones clearly in the contract to avoid discussions about payment obligations.
4. Guarantees against failure and defects
With a standard buy-on-plan, you are protected by a bank guarantee or insurance contract. If the developer goes bankrupt, you will get back your payments already made, including interest. In an on-demand project, we distinguish between two phases:
- To execute the purchase deed: Any payment you make for the deed should be covered by a bank guarantee. In practice, however, developers are not always willing to do this, although legally required.
- After execution of the purchase deed: After this, the bank guarantee expires, as you own and the developer pays based on the progress of the works.
Tip: Ensure that the final payment on delivery is at least 16% of the total price. This reserves 11% (= 21% - 10%) for any VAT revision if the developer fails to deliver and 5% as retention for possible defects within the first year. This 5% retention is regulated by law if the developer has not provided insurance for defects during the first year.
Decision
With a bespoke project, you usually run more risks than with a standard buy-to-let plan. However, through proper contractual arrangements, you can significantly reduce these risks. Therefore, always seek expert advice on such projects.
