Investment approach
When a flat is not worth buying: three questions before the arras
Three questions decide a "no": does the flat fit, do closed sales confirm the price, and can the risks be closed before the arras. How to tell a "no" from a "yes, but" and work out the price ceiling.
A flat is not worth buying if one of three questions has no good answer: does it fit a brief written down in advance, do closed sales confirm the price, and can the risks found be closed before the arras (the deposit under the preliminary contract). The third is the most expensive: in Catalonia money paid as arras becomes by default part of the price of a concluded contract (art. 621-8 CCCat, the Civil Code of Catalonia), and the flat answers for the debts of the comunidad (owners' association) for the current year and the four previous ones (art. 553-5 CCCat).
The decision "do not buy" is not a failure of the search but a normal result of checking. The earlier it is taken, the less it costs.
Why the criteria for walking away are written down before the search
Criteria written down before the search protect against two things: falling in love with a particular flat and someone else's interest in the deal closing. At the seller's agency, the fee is set in the nota de encargo (the written brief the owner gives the agency) with the owner (art. 55 of Llei 18/2007), and a collapsed deal is lost income for the agency. That is not bad faith, it is how the role is built.
That is why the brief is fixed in writing: mandatory conditions, red lines and what the buyer is ready to give up. A flat without a lift on the fourth floor does not pass if a lift was written down as mandatory, even if everything else about it is wonderful.
Which three questions are asked of every flat
- Does it fit the brief. Checked against the red lines and against what can be seen on site: the noise of a restaurant's extractor in the courtyard, the light, the route to school.
- Is the price justified. A comparison with similar flats that really sold nearby, with adjustments for floor, condition and fees. The signs of overpricing are collected in the article on an overpriced flat, and the difference between the listing price and the transaction price is covered in the piece on the price gap.
- Can the risks be closed before the arras. Documents, the state of the building and the flat, debts and decisions of the comunidad. The legal part is reviewed by an abogado (lawyer), the technical part by a specialist.
How a "no" differs from a "yes, but"
Most problems can be solved by haggling, a condition in the contract or an additional document. A "no" is what is left when the problem cannot be closed by any of those routes.
| Finding | It is a "no" if | It is a "yes, but" if | How it is closed |
|---|---|---|---|
| Price above sales | The gap is large and the seller will not discuss the price | There are arguments and a readiness to negotiate | A reasoned offer |
| Documents do not match reality | It cannot be legalised or the timing is unknown | The lawyer sees a route and a timeline | A condition in the arras, a discount |
| Approved comunidad levy | The amount was concealed and is not up for discussion | The amount is known | Priced in, or paid by the seller |
| Technical issues | The seller does not let a specialist in | An inspection is allowed and the scope of work is clear | A cost estimate before the offer |
| A red line of the brief is crossed | Always | Never | It is not closed |
| The seller does not provide documents | Refusal before the deposit | Documents are on the way, there is a date | A request with a deadline |
A refusal to provide documents before payment is a separate signal: in Catalonia, before any sum on account of the price the buyer is entitled to written information, and if the sum exceeds 1% of the price, to an extended package (art. 60 of Llei 18/2007).
How to find the price ceiling: a worked example
Worked example, not a forecast. The flat is listed at 450,000 €. Nearby sales give 410,000 € for a flat in good condition.
| Step | Amount |
|---|---|
| Benchmark from sales | 410,000 € |
| Minus renovation per the estimate | −30,000 € |
| Minus the approved comunidad levy that will fall on the buyer | −8,000 € |
| Price ceiling | 372,000 € |
| The seller is ready to sell at | 430,000 € |
| Gap | 58,000 € |
A gap of 58,000 € with the seller refusing to discuss it means "no". If the seller is ready to cover the levy and to discuss the price, it is a "yes, but", and the next step is a written offer. Note that "I like it" takes no part in this table. It matters, but it decides only between flats that have passed all three questions.
How to record the decision
The conclusion on each finalist flat is written down in a single document:
- fit with the brief and the red lines;
- price against sales, and the price ceiling;
- the status of documents and what has not yet been received;
- a list of risks, with the way of closing each and its cost;
- a recommendation: continue, negotiate or stop.
The decision stays with the buyer. If the buyer goes ahead against the recommendation, the document must show which risks they are taking on. For an investor such a document turns into an investment memo: DNPI Capital prepares it as part of an investment analysis.
When this approach does not work
The approach is weaker where the property cannot be checked before the commitment: auctions, some bank sales, buying off plan. There the risks are not closed but priced, and the price ceiling has to include a margin for the unknown. It also does not work in hot demand, when the seller does not expect checks: then the honest choice is between a knowingly accepted risk and walking away. The price of exit at each stage of the deal is covered in the article on when it is reasonable to walk away from a purchase.
Questions and answers
What are the signs that a flat is better not bought?
The seller does not provide documents before the deposit, the papers do not match reality, an approved comunidad levy is concealed, a technical specialist is not let in, or the price is far above sales with no readiness to discuss it.
Can one walk away from a flat after the arras?
Usually by losing the sum: in Catalonia the arras is by default part of the price of a concluded contract, and a right to withdraw in return for the deposit has to be expressly agreed. The consequences under a specific contract are explained by the abogado.
What to do if you like the flat but the check says no?
Ask for a written explanation of the risks and of how to close them. If the risks can be solved, a "yes, but" variant is often found. If not, it is cheaper to lose the flat than the deposit.
Should the requirements for the flat be written down before the search?
Yes. Red lines written down in advance protect against deciding on emotion and against pressure from parties with an interest in the deal.
How can I tell that the price of a flat is inflated?
Compare it with closed sales of similar flats nearby, not with neighbouring listings, and subtract renovation and approved levies. If the seller is not ready to discuss the gap, that is a reason to stop.
