Antonio Flores’ Blog

As tempting as it may look, “handing over the keys” to the bank (dacion en pago in Spanish) , without pre-arranging this via a Notary Public and disappearing, has to be done with care, for being pretty dangerous, unless you have the right figures. Or you happen to have been lucky enough to have been judged by the court in Navarra that has ruled that the bank is not entitled to not accept the “handing” in of the keys, in a very relevant decision.

This ruling (to be discussed on a next post), however important it may seem, does not take away the horror of our mortgage foreclosure legislation. The reason for this happening is that Spanish provisions in respect of foreclosures, unlike other countries, stipulate that auctions will be valid so long as the minimum bid is over 50% of the auction start price (the latter value generally being pre-agreed when signing the mortgage deeds and equivalent to the valuation), irrespective of the current outstanding debt with the bank.

I have taken a real-life example, on a property at Jardines de Casares, and to understand this have attached the following:

• The print out we got from the bank after the property had been repossessed, showing the existing debt and the value the property achieved at auction.
• The value given to the property, in 2006, for auction purposes (coincidental with the valuation).

So we have then that property was valued, for auction purposes, at €350,700 (the auction start price), the outstanding mortgage was of €243,217 and, as usual, nobody of interest turned up (only retired law-lovers and the occasional passers-by) .

The auction kicked off with only the bank being present -and a few curious skinned time wasters -rapidly skipped the 70% ASP mark and ended being repossessed for 50% of this value. And the “summarily executed” debtor ended up, as a consequence of these unfair laws, without a property but still owing €67,867 plus a further €100,000 approximately in legal costs and arrears interest (19% p.a.).

In the above case-study, from the debtors perspective (which is the one we are interested in here), the following scenarios and consequences were possible (although only scenario 5 was probable, considering the value of the property and the area):

1. Bidder(s) turn up and bid over the debt (being over 70% of the start price): we walk away with no property but no debt and probably some spare cash.
2. Bidder(s) turn up and match the bank debt (between 50% and 70% of the start price): we walk away with no property but no debt. In this case we would have the right, within 10 days, to bring a third party to improve the bid.
3. No bidder(s) turn up but the bank repossesses for the debt value: we walk away with no property but, luckily, no debt.
4. No bidder(s) turn up and bank repossess at over 70% of the start price but under the debt: we walk away with no property and the horrific auction negative-equity.
5. As point 4 but bank repossess at under 70% of the ASP (sometimes at 50% of start price or the value of the debt): we walk away with no property and a larger auction negative-equity, worst than 4. However, albeit illusory, we still have 10 days to bring a third party to improve the bid, up to 70% or the debt.

Under the current Spanish foreclosure system, if we find ourselves in the scenarios of points 4 and 5 we can end up being chased for the difference (which is fictitious although becomes very real once the Judge’s gavel goes down!), calculated by subtracting what article 670 of the LEC (civil Procedural Act) allows the bank to keep the property for, from what we owe them, just as the couple from Wiltshire are experiencing, to their sorrow.

And so, what options do we have? Not many, but I can propose two:

• Stop paying your mortgage and try to convince the bank that it is silly to go to Court and clever to take the property back, because a) you have no property in Europe and b) you are going to live in Peru for the rest of your life (don’t be shy here, concoct a proper story, set them up!)
• If you are not in any of those scenarios, or are too honest to lie, find a friend who will be happy to put in a dummy bid to push the auction value up to the debt you have with the bank. Your friend will have to put down, as a deposit, 30% of the starting price (just over €100,000), and needs to get the bank to make a first bid equivalent to the debt. This will free you from the negative equity, and your friend will be free to get the deposit back, job done satisfactorily! Careful though: the bank’s representative may push his bid short of the debt, making your friend put a higher bid only for the bank to then…pull out. Now your friend has a problem!

And bear in mind the following:

• Most auctions end up with the bank repossessing as they will not -yet- settle for anything less than the outstanding mortgage capital (even if it is way over the market value). We should see a change happening towards mid-2011, as the Bank of Spain has already warned.
• Bidders currently discard 95% of the auctions happening in Spanish courts.

Antonio Flores Mortgages, Property bank repossessions, dacion en pago, foreclosure in spain, spanish property auctions

You may have heard of them, but until you actively participate in one, you don’t quite get to grasp the extent of the fraudulent machinations going on at Spanish property auctions . It happened last week, when we were approached by a client who wanted to bid for a front line Puerto Banus property at an auction being held at the Marbella Courts.

The client had previously lodged 30% of the auction price with the bank, and instructed us to bid for the property with a power of attorney, which we capped at €2,050,000. The day before the auction was interesting, as we had found out that there was a demolition order for a section of the property built without planning permission. Notwithstanding this threat, our client decided to proceed, and so we turned up at the Courts with our pink slip proving the payment of the deposit to the BBVA Court bank account and our power of attorney.

It was surprising to see some familiar faces: a couple of lawyers, a few real estate agents and two or three professional property auction dealers, known in Spain as subasteros, who are all the following in one: speculator, opportunist, outright fraudster and liar. One of these subasteros, who attempt to control the outcome of the auction by either offering you money not to bid or, more to the point, asking for it in exchange for them not bid, approached us at the start of the process like dogs sniffing out hashish at the Tangiers border, and demanded we paid €150,000 to stop the bid at €1,400,000 so that the price would not escalate. We refused on obvious grounds, and proceeded to commence the bid process.

In total we counted 6 legitimate bidders, or rather 6 bidders who had the pink slip, as we soon realized that they were mere speculators and were not prepared to even pay what the bank was owed (€1,200,000). When the bank kicked off the bid at the latter price, we soon dropped the only other bidder who seemed genuinely interested in buying the property, and began a drawn out bidding war with an overweight bold subastero (am told he is the boss of the mafiosi syndicate) who was appointed by a lawyer who in turn had been instructed by British clients. The gentleman, known to have 35 years of experience in the art of ripping off debtors and creditors alike, was determined to bag the property, and took the bid to an unaffordable (to his clients) €1,715,000, well below our limit (unknown to them) of €2,050,000.

As a summary, if you are going to a Spanish auction watch out for the following:

1. Pooling: it happens when a group of bidders pre-agree the result of the auction to either drive legitimate bidders away or cap the bidding price with a view to resell later at a higher price. Occasionally, they can resort to extortion and other more subtle ways to convey the message.
2. Dummy bidders: someone who is hidden in the crowd for the sole purpose of making false bids in an effort to artificially increase the price of the property. They work for the debtor.
3. Subasteros: Professional fraudsters who make money by generally asking for it before the auction so as to not bid. In the auction being described. we were asked to pay €150K to save €200K, which, considering the nature of the business, could have made sense.
4. Innuendo, gossip and lies: it is a typical off-putting mechanism, and it normally refers to the value, quality or hidden defects of the property. In this case, I was told by the one lawyer who was bidding through his “subastero” that the garden was being land-grabbed by the Coastal Department (via compulsory purchase) but he obviously did not think this to be a problem!
5. Dirty looks, sarcastic smiles or congratulatory hand-shakes: Each one means something, generally never good. In our case, we received 2 phone calls after the event offering us to not legally challenge the auction, in exchange for €150K Euros, which we kindly declined.

Have a look at the excerpt of the auction below, as it was one where almost every single sharp practice in the book was displayed, unsuccessfully, by professional bidders. Unless, of course, the insistent bidder was in dummy format and was working for the debtor to raise the sale price as much as possible!

• Example Spanish Property Auction Excerpt  (PDF 923 Kb)

Antonio Flores Litigation, Property, Scams property auction in spain, property auction spain, property auctions spain, spain auction, spanish auction, spanish property auctions