Bidding for fairness

By Adolfo Martos Gross

VISITING court these days is a disheartening affair.

Along with piles and piles of official files chaotically crammed onto every available surface, one cannot help but notice the walls, covered from floor to ceiling with property auction announcements.

It is a sign of the difficult times we are in and the amount of people who have tragically had their homes repossessed by the banks for failing to pay their mortgages.

And then there are those who are benefitting from the situation.

Every now and then you will spot them in the court foyers, flicking fleetingly through the reams of documents, looking out for that elusive bargain.

They usually belong to the guild of auction bidders; professionals specialising in the acquisition and resale of auctioned goods and cynically taking advantage of the flaws in the Spanish legal system.

Auctions can be attended by anyone fortunate enough to find out about them

The recent proliferation of property auctions is seen by many as a good opportunity to buy a home at a price well below its real value… and it certainly is, but it is not risk free, as I shall explain below.

But, first however let me explain how a court auction works.

The Civil Procedure Act allows a creditor (someone owed money) to ask a judge for the forced sale of a debtor’s property.

This sale to the highest bidder is called an auction and auctions can be attended by anyone fortunate enough to find out about them in advance. Not to mention more crucially with enough cash to make a 20 per cent deposit of the reserve price set by a court valuer to the court account.

The problem is the vast majority of people not only fail to have the money, but haven’t even heard about the auctions.

First of all, the publicity of an auction is limited to the bulletin boards at the court, which stacks heavily in the favour of professionals, many of whom have been tipped off about the best possible deals.

An outsider wishing to investigate what is for auction is going to have to go to every local court and sift through a huge myriad of notices, most of which have scant information.

Mostly the notice has little more than the property’s registration number and the name of the owner/debtor, along with the reserve price.

This forces those who are interested to go to the trouble of investigating the physical and legal situation of the property, which is usually not easy to do.

And even once the property is located, there is no way of knowing its interior condition -which is often vital – because access is impossible.

All of these circumstances lead to the vast majority of auctions ending up as follows:

Either, no bidders show up, in which case the creditor (which is often a bank) may ask the court to award the property to him as payment of the debt at half of the reserve price.

This in turn has led to the banks nowadays becoming some of the largest real estate companies in Spain.

Secondly one bidder turns up on his own, as generally auction bidders do not compete against each other.

They prefer to split up to prevent the presence of several bidders interested in the same property which will, of course, raise the price.

In fact, if another bidder does show up without warning it is likely that he will be offered money to refrain from taking part in the auction.

The law however does provide mechanisms to limit the loss a debtor faces if the property is auctioned at a price far below the market value:

The debtor himself can present a third party to make a separate bid, in order to increase the winning bid, if the price is 70 per cent below the reserve value.

Alternatively, the judge has the right to veto the outcome if the price is below 50 per cent of the reserve and, depending on the circumstances, if he considers that the debtor is being seriously cheated.

Judges, however, seldom exercise this power.

You must get proper legal advice first

As mentioned above, the sale of a property by auction is the worst way out for the owner, but it is a very good business opportunity for the buyer because 99 per cent of the time the price paid is below the market value.

However, one must be very cautious about entering the game, and it is obviously important to seek the advice of a lawyer before you start bidding.

Any good lawyer would firstly check whether the property complies with the actual urban planning regulations.

Secondly, check whether there are any liens or charges attached to the property, which would mean a third party having some right to the property. The buyer must know that by buying the home he is subrogating (or becoming responsible for) these charges.

And thirdly, check whether the court procedure, followed by the creditor in order to put the property on auction, complies with the law.

For all these reasons I would strongly advise avoiding the process if at all possible.

And if you do find yourself in the position of being a debtor, creditor, or just someone looking for a bargain, you must get proper legal advice first.

You can contact Adolfo at amg@gam-abogados.com