Fraud? Buying Property in Mallorca

Buying property in Mallorca is no walk in the park, as the latest example shows again ....

El Aviso headlined in February 2020: "The era of shady property sales will soon be over". At that time, the Association of Real Estate Agents of the Balearic Islands (API), together with other industry associations, was trying to push the government to curb the proliferation of unregulated real estate agents. Because since the liberalization in 2000, anyone could call themselves a real estate agent. Without exams or any prerequisites whatsoever.

Politicians remained inactive. Although the reputable players in the industry repeated their demand to politicians, among other occasions, in January 2021.

And in December 2021 came the big bang. Bild newspaper: "Handsome Ferdinand and his dirty secret". The Mallorca Zeitung reported that the alleged fraudster relieved his victims of at least 2.2 million euros, with other publications estimating a double-digit million amount.

What Happened?

Well, if the media reports are accurate, and having a superficial knowledge of some of the people involved I can well imagine it, buyers of luxury properties were "ripped off". Empty villas were shown during viewings. And the happy buyer was told they could (or had to...) pay the deposit directly to the real estate office. Only in some cases there was apparently no intention to sell on the owner's part at all... Or there was already another buyer. In any case, the deposits were, according to the authorities' accusations, retained by the real estate office and allegedly used for sports cars and luxury clothing.

In the real estate office with two locations (Puerto Portals and Port d'Andratx) in the finest locations, everything looked like a serious business operation. Which probably also partially took place. Today, nobody works there anymore.

Let's go through a few points that fall somewhere between general life experience and layperson legal advice. So you don't fall for any scam!

GUCCI and G-Class Are Not Signs of Success

It may well be that the person across from you, who hangs status symbols on themselves like a billboard, simply has bad taste. But it's also possible they're trying to portray something they're not.

The truly wealthy people I've met were never conspicuously dressed or adorned. Accumulations of prominently visible brands may be "en vogue" among the nouveau riche in the Near and Far East, but in Central Europe they rather aren't and should perhaps even be perceived as a warning sign.

The same applies to agents who pull up in a Ferrari or an AMG G-Class. Everyone's entitled to that. But it has never happened to me with a successful agent. So: Is this a highly superficial assessment? YESSS. But even clichés always contain a grain of truth.

Greed Eats Brains

There are no bargains. And don't take it personally, but even if there were, nobody would offer them to you. Why is that?

"One-Shot" of the Heirs

The children are waiting for grandma to finally pass away. And then the community of heirs steps up to sell the family silver. Often they have to, because the maintenance costs today are much higher than during the golden times when the family property was built. Or because inheritance tax is due.

The heirs know they can only sell their inheritance once. And of course they've all heard from friends who supposedly sold at an incredibly good price. Without considering that those friends may have invested more money in renovating the finca beforehand. Or that it isn't located on a main road ... Or that there's no high-voltage power line running across the property ...

What I'm trying to say: When buying property in Mallorca, greed rules on the seller's side just as much. Everyone wants to see as much money as possible, because nothing else is coming after that. It's the family inheritance after all. And once the family silver is sold off, it's gone. Period. End of story. And the imagination is often greater than what the market can bear.

When buying property in Mallorca, you'll also hear sentences like

"Each heir wants at least 500,000 euros."

That's simply a let's say more emotional view of the whole thing, given the realization that this will be the last time a warm shower of money can be expected.

Add to that the fact that Mallorcan families generally live down-to-earth lives. And maintain close family ties. And greatly value land and property as an investment themselves.

Sellers Are Greedy Too

Every seller when buying property in Mallorca will try to get as much as possible for their property. That's logical. Because prices here have been going almost continuously upward for the past decades and every fool has at least heard from another fool who sold their villa at great profit, every seller here first wants to make the big score. Statements from agents like

At that price he can't sell, because after his purchase price, acquisition costs, and renovation costs he wouldn't make a good return anymore

are meant seriously. It has often worked that way in recent decades. And if the seller doesn't have to sell, they probably won't even consider your serious lower but appropriate offer for buying property in Mallorca. Even if it's objectively and substantively closer to the actual market value than the price they're asking.

I've seen many properties on the island that haven't moved for 5-10 years. Because the asking price was far too high. Eventually, reality catches up with the inflated price. Or the famous "sucker" comes along.

Why You of All People?

Then you should ask yourself, if someone offers you an alleged bargain, why you of all people should be the lucky one.

I live here and invest professionally in real estate. And of course I get offered many properties. So many that I ask the agents to at least give me two or three introductory arguments about the listings that explain what makes this particular property so interesting. Often I find that the agents themselves don't know. Why is that?

Agents in Mallorca don't have properties on an exclusive basis. This means the agent "wins" who registers a prospective buyer with the owners as quickly as possible. That's the process by which the seller confirms that this prospective buyer is now blocked for agent XY and in the event of a sale, this agent is entitled to the commission.

Unfortunately, this procedure means there's actually no economic reason for the agent to spend a long time studying the property in detail. They'd only risk never receiving a commission because another agent was faster.

So I simply have to read every listing. And form my own picture. And use Google Maps when I'm lucky enough to find the address. But whenever I'm offered a genuine bargain, there are simply reasons for the low price! Either a new construction project garnished with "ocupas" (squatters). Or the often-hyped bank sales. But beware, these are all topics where the price discount is justified. Because getting rid of "ocupas" is a long and rocky road. Somewhat easier for private individuals, but extremely costly and time-consuming for companies that invest professionally. And the bank loans being resold don't guarantee at all that you'll end up as the owner. You're buying a loan. Which is either serviced. Then you're basically a private bank without property. Or you pursue the public auction. Where perhaps another interested party buys your dream property right from under your nose.

"What an Independent Third Party Is Willing to Pay"

Experts know I'm talking about the fair market value here. In contrast to the income capitalization method, where the value of a property is determined through rental income, for example, the fair market value is a very variable figure. Because soft factors come into play here. If, for example, the developer of the new villa in Port d'Andratx was savvy enough to furnish their new build with Missoni furniture and the nice Russian oligarch couple thinks it's totally "wow," then the absurd asking price of 18 million euros is suddenly the realistic fair market value. Even though a serious calculation would perhaps say: 3 million for the land + 3 million construction costs + 2 million profit for the developer equals only 8. But the "independent third party" came around the corner and added 10 million on top. For furnishing that may have cost 500,000 euros.

Mallorca as a Seller's Market

The simple main reason why there are no bargains: There are too many interested buyers.
And it's extremely unlikely that only one agent knows about a good property by coincidence. And that agent coincidentally only knows you and coincidentally wants to do you a favor. It's probably not impossible, just very, very unlikely.

People buy houses, especially vacation properties, emotionally. If a property is well-done and move-in ready, it's never a bargain. Because even at a high price, it's easily marketable in a seller's market. If there are any bargains at all, they're occasionally projects for investors that require extensive renovations. But even here, the potential profits for the investor are usually already factored into the existing prices. So even there, in such a hot market, there's little potential to make a killing!

So don't be dazzled when Mr. "Gucci" comes around the corner and offers you the dream of a house in Portixol in a prime location for 1 million. That doesn't exist. And if they then ask for a deposit to their account: hands off and go to the police.

Buying Property in Mallorca Safely?

Buying property in Mallorca or real estate transactions in Spain in general work differently than in Germany. Relatively identical, however, is the role of the agent, which is now largely harmonized through European law.

How Do I Find an Agent?

We already covered this topic in the first part. In short: it's not wrong to go with the well-known names. But: please google first. Check Google Maps, check Facebook. If you find nothing at all, hands off. If you don't find clearly predominantly positive reviews and enough of them, hands off.

Otherwise, the courtage (the agent's commission) is usually negotiated with the owner beforehand, so you have limited influence on that. And, assuming seriousness, you naturally also need to find your agent likeable and credible. Just please: Don't ask them for a lawyer or a building engineer. You might be unlucky enough to get a recommendation for someone who doesn't look too closely.

How Do I Find a Lawyer?

That's a good question! I would generally recommend not taking a lawyer recommended by your agent. Why? I know countless honest, good agents. But unfortunately a few cases where a little carousel runs between agents and lawyers, where the lawyers don't take their review mandate too seriously. In return, they keep getting clients from the agent. And the agents are even involved in the development companies themselves.

The unsuspecting buyer of course never receives the objective and serious advice they need. And so one or another bad purchase has come about. I generally think it makes sense not to mix the different interests of the parties involved:

The agent desperately wants the deal to go through. Only then does he get his money. That's his good right, but it doesn't make him the most objective advisor, even if he tries. You should pay the lawyer in a way that they always get their money. Even if the purchase doesn't happen. So they can advise you objectively. And don't have their own interest in the deal going through.

In Spain we have a similar but of course different legal system than in Germany. And in the autonomous region (comparable to a German federal state) of the Balearic Islands, there are of course also regional laws or implementations of national law in regional regulations. These include points such as nature and environmental protection, so that not only good knowledge of Spanish real estate law is important for your lawyer. But also very good knowledge of Mallorcan customs.

Initially I worked with German lawyers because it was easier for me linguistically. Meanwhile I work with two Mallorcan law firms because I do have the impression that local conditions are sometimes even better known there.

I'm honestly "biased" though, because meanwhile my wife serves German clients as a German jurist at a law firm. I don't want to be suspected of using this guide for covert advertising. Therefore I don't recommend anyone here, but rather recommend: Google and ask friends who have already successfully purchased. In any case: Google every partner before you decide.

"Arras" or "Promesa de Compraventa"

Usually the seller still wants to move out. Or you need time to arrange financing. Then an option contract ("contrato de arras") or a purchase promise ("promesa de compraventa") is negotiated between the lawyers, which is largely identical in content to the later notarized purchase contract. The option contract doesn't need to be signed before a notary; the signatures of both parties are sufficient. This is the main formal difference when buying property in Mallorca compared to Germany.

Typically, a deposit of 10% is agreed upon. It should be that the seller commits to selling to you. Or they pay back the 10% AND a contractual penalty in the same amount. Conversely: If you don't buy, the seller may keep the 10%. The 10% should be held in a notary escrow account. Or at a super reputable, long-established law firm. But NEVER with the agent. NEVER with the seller. Preferably not with the seller's lawyer either.

Often you can also negotiate that if your financing falls through, you get the 10% back. But that can also alarm the seller because they see that their sale isn't quite as sewn up as the agent previously told them.

Unlike in Germany, the notary has more of a purely executive role when buying property in Mallorca. They also read the contract aloud during notarization, but don't engage with it nearly as extensively as German notaries do. In return, their fee is much lower. The actual work lies with the lawyers; the usual fee is 0.5 - 1% of the purchase price.

The Lawyer's Tasks

What Does the Lawyer Need to Check?

Quite a lot! Most importantly, that the owner actually is the owner. And that your desired property is registered in the land registry. Specifically with the actual building structures and the correct areas. Slight deviations are normal, also between the different registries.

I already went into detail about illegal constructions when buying property in Mallorca in the first part. Just this much here: If minor things are illegal, you might be able to live with it. But if essential parts of the house are not legal and also not legalizable, stay away.

"After Eight Years It's Legal"

That's not quite right. After 8 years, the prosecution of the illegality expires. But as soon as you need to file a building application — even if just for plastering the facade — it will fail. Because your property simply isn't legal. So the illegality remains. And it's being prosecuted increasingly strictly. And it may make your property, when you want to sell it again, a hard sell.

And: If your house burns down, you can "only" rebuild it legally. Meaning not the way it perhaps stood. But only the way it's legal. Does that happen every day? No. But if it happens to you, well, tough luck.

Then there are more complicated topics when buying property in Mallorca that are often only regionally important. For example, the zone around the Tramuntana mountains enjoys very strong protection. There's nature conservation and flood protection.

So for example, you can't (anymore) build next to a riverbed. Which is quite reasonable, as the storms have shown us. But if it's the only legal spot for the pool, you might even get the permit from the town council. But the pool is still illegal. Only the lawyers who deal with transactions in such areas know that.

For condominiums, it's very important to check the bylaws of the homeowners' association ("Comunidad") and the meeting minutes. And to check whether there are any payment arrears. The same generally applies to payment arrears on the property itself, e.g., taxes.

Sometimes the lawyers negotiate very strictly when buying property in Mallorca because they want to protect your interests on one hand. But on the other hand, perhaps also want to demonstrate their importance to you. During the phase when the lawyers are talking, I recommend: Stay engaged. Talk to the agent. Talk to your lawyer. Many transactions fall through before the option contract is signed, either because the lawyers harden the fronts or simply because another buyer, often presented by a different agent, comes around the corner and simply raises the stakes.

What I'm not saying: Agree to everything. But if ownership is clear. And your desired property is ideally legal, then there's really only one genuine point of contention: the warranties.

Warranties Often Worth Nothing

Warranties are often only truly valuable from reputable developers when buying property in Mallorca. Because usually you're buying from investor ownership structures or a project SL and then have service addresses for lawsuits in Northern Norway ... And in court, the Spanish construction cost table is used for comparison. That's typically much less than what it actually costs to remedy the defect, especially on a luxury property. And more importantly: Many things that may be poorly built or badly planned are obviously rubbish. But technically not a defect.

I typically buy unrenovated properties. The seller doesn't want to guarantee anything there. Sometimes we manage to get them to at least declare they know of no defects. Or that the structure is sound. But honestly, for the properties we buy, that's secondary.

For you, who probably wants to buy a new build or a newly renovated property, the quality of construction when buying property in Mallorca is of course a decisive factor.

My estimate is that about 70% of properties have been relatively poorly built or renovated.
You can often already see this in the "finish," meaning how the final elements were installed, e.g., tiles, built-in wardrobes, and similar externally visible parts of the building structure. More expensive and harder to fix, however, are issues like: quality of windows, quality of heating and/or air conditioning installation. Here it can definitely make sense to ask the seller to let you conduct tests with specialists at various appointments, to determine, for example, whether the controls via the KNX bus system actually work. And whether the system is even adequately sized for hot summer and cool winter days. There are specialized engineers for this, whose advice I would definitely seek, at least for a larger property. And: make the effort. Buying property in Mallorca safely is a lot of work. Takes time. But it's worth it!

Otherwise, the general advice from the first part applies: Keep your eyes open when buying property in Mallorca and bring in experts!

What I'm trying to say: Better to check, check, check. Than to hope afterward that some warranties are successfully enforceable. And if you've checked really thoroughly, better to focus on successfully completing the transaction than demanding "wild" warranties from the sellers.

But that's clearly a decision you have to make yourselves. It's also difficult for anyone to advise objectively on that. Don't make too many compromises, but don't be too stubborn either. As always in life ;)

Have fun with your continued and hopefully successful search for your dream property!

Arnd