Mallorca Property Partners Blog

The underling point to recognise is that the banks have been slow and ineffective in gearing themselves up to sell their increasing stock of repossessed properties. As in the UK, they are cumbersome organisations unable to act nimbly in response to market conditions that have changed dramatically over the past few years. Their internal structures have not been set up effectively to deal with the repossessions issue.

One illustration of this is that in a repossession transaction, an element, or potentially all, of the estate agent commission will usually be paid by the purchaser. This is as opposed to a “normal” sale where the vendor pays the commission. In Mallorca this is usually 5% and sometimes 6%.

There reason for this is that the Spanish banks have simply not been in a position to offer commercial contracts equivalent to what the agents receive in their normal dealings. They do, however, want the agents to be as equally motivated in selling repossessed properties as they are in selling “normal” non-repossessed properties. So there is an understanding between the banks and the agents that the commissions are paid in this way.

In practice, the end result is exactly the same. I.e. There is always a commission factored into the final cost of the property. So there is no real issue with this provided the purchaser is aware up-front of the exact terms in each case. Some agents will ask for a written agreement to this effect before showing a repossession property. This is a sensible practice as everyone then knows exactly where they stand.

Of more importance is the fact that, while repossessions can offer great buying opportunities, many more are “duds” that should be avoided.

• The majority are lower quality properties in lower quality resort areas. While prices in the more sought-after “prime” locations in Mallorca have leveled out, it is likely prices of low-end properties in the locations which have the bulk of the repossessions still have further to fall.
• In the case of individual properties, the people that control the prices are unlikely to know either the property or its location at first hand. The decision makers are in head offices dislocated from local markets and have only a superficial understanding of price trends in specific locations. Their price reference will be the amount of the outstanding loan on their books. Their reluctance to drop prices below this is both apparent and understandable.

• The mortgages outstanding on many repossessions were originally set at high loan-to-value rates – frequently as high as 80% and sometimes over 100%. So, for a property valued at 100,000 Euros, the bank may well have to recoup 80,000 to 120,000 Euros.

  However, the 100,000 valuation was set before the recession and since then prices have fallen. For the sake of this illustration, let’s say they have fallen by 25%. The property is now worth 75,000 and, to represent a “bargain”, would have to be sold for less. This means that, in many instances, the banks would have have to reduce the prices to levels far below the original loans they provided to get even close to current “good deal” price levels.

  In most instances the banks have been too slow and too conservative in going about this. They have been chasing the market down and still have the properties on their books with “for sale” prices that are higher than realistic current market values.

• Repossessed properties are generally not looked after at all. Properties that are not maintained degenerate quickly and sometimes the resulting dilapidation can be expensive to rectify. It may be that this expenditure cannot be justified in investment terms when overlaid on top of the price the bank expects for the property.

Therefore, when looking into repossessions:

1. Sort the wheat from the chaff. Don’t expect a property to be a good deal just because it is a repossession. Take a step back and assess it in the context of other properties in the same location. Also assess the location itself, considering how strong that local market is and whether prices are likely to fall further.
2. Ignore the banks views on the current value and make an independent assessment of the realistic market value.
3. Make sure the estate agent is negotiating hard with the bank – not just passively putting in your offer and waiting for their response!
4. Make sure an assessment has been made as to any renovations or repairs that are necessary to rectify dilapidation that has occurred while the property has been unoccupied. This should obviously be taken into account in any negotiations with the bank.

With this in mind, at present there are actually very few repossessions available that are good quality opportunities, in good locations and which have an asking price that realistically reflects current market prices.

There are, however, some! Research is the key, and those that could be of interest should be included in your viewing list along-side non-repossession properties. Don’t however make the mistake of looking solely for reposessions.

If you are using Mallorca Property Partners search services we will assist in all aspects of this. We also recommend working with our legal partners who are experienced in dealing with the Spanish banks in repossession matters in order to ensure any offer is put forward and progressed in the most effective way.

For further information, please contact us direct at info@mppsearch.com.