Call now!

100% Mortgages - Another warning from an international investment advisor


We have written before regarding the immorality of some of the Spanish Banks offering 100% mortgages and instantly putting their clients into negative equity debt. The statement that was common 20 years ago of not being a 'customer' of a bank, but being a 'victim' has never seemed so true as in these instances. Here is an article written by an unconnected international investment advisor with whom we wholeheartedly agree. (name supplied upon request)

100 percent mortgages in Spain - what is the catch?

As an agent with a reasonably high profile, we receive a lot of requests from developers to promote their products. An increasing number of these have been Spanish developers offering 100% mortgages (including closing costs) for buyers and high commissions (6-10%) for the agents. They're usually big developments (500 units+) with facilities such as swimming pools, golf courses, sports centres, shopping malls etc.

I've always had suspicions about these developments and so I visited one this week (23 Nov 2010) to satisfy my curiosity. I won't give away too much information about the resort we viewed, but there are lots of them in the Costa del Sol and it's highly unlikely we will ever promote one.

The development we viewed had more than 1000 units all told, and although construction has completed, most have never been occupied. The developer told me they were 80% sold, but he actually meant that they've taken 20% deposits for 80% of the properties pre construction and most of these buyers have no intention of completing, certainly not at 2007 prices.

As sales fell off a cliff in late 2008 and people delayed closing, the developers cashflow dried up and funds have clearly not been available to maintain the resort over the past 18 months. Mould was visible on every property we viewed with cracks on the interior and exterior walls, walkways and ceilings. No heating or lighting fixtures had ever been installed.

The golf course was overgrown, the sports centre was never started, the shelves on the supermarket were bare, and the entire roof of the indoor swimming pool will need to be replaced due to the inadequate air conditioners that were installed.

The developer clearly owes the bank a fortune and the bank is desperate to divide this debt between 100s of buyers rather than one developer (who is probably insolvent).

Hence the 100% mortgages.

The pitch is that the bank provides 80% on their "valuation", the developer "pays" your 20% deposit plus your closing costs and then you get your free property with exclusive access to their rental pool.

Give me a break.

So you get a 2 bed property for €250,000 without having to spend a penny. You just need to service a €200,000 mortgage over 20 years at a variable interest rate with a net rental income that probably wouldn't amount to more than €4,000 per year. Setting aside the substantial problems with the existing and non existing facilities, no other bank would give you a valuation of more than €175,000 and they wouldn't lend you more than 70% of it.

Clients ask me about Spain all the time and I've no doubt our agency would have quite a few takers for Spanish property like this with 100% mortgages, great facilities and easy access to the beaches and airports. We'd mostly sell them to people who would buy sight unseen. We might sell 50 of these over two months if we put our minds to it, and we'd make a tidy commission on them all.

The only problem is that our reputation would be destroyed within a year, because these are terrible investments.

That doesn't sound like a sustainable business plan to me and so it looks like we'll be sticking to other markets until Spain becomes sufficiently attractive (not to mention safe) to investors.

I'm curious about two things.

Firstly, why are Spanish banks allowed to blatantly inflate the valuations of properties on their books and then offer mortgages on them? Secondly, what sort of property agent would actually encourage their clients to invest in them?

The result of all this is that lots of naive buyers are going to get (forgive me) screwed, but they won't purchase anything close to the amounts of properties needed to reduce the current oversupply and return some semblance of market normality to the area.

Campbell D Ferguson
F.R.I.C.S. Chartered Surveyor
Survey Spain
00 34 952 923 520

>> back to the Survey Spain information page