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“Flipping the Contract” becomes an “usual” practice – another property story

Let us now spend a few lines on a property practice that is history for the good of the spanish property business. A widespread practice in Spain during the boom years that has had many implications for the average buyer and investor:  “dar el pase”=”To flip the contract.” Nowadays it is impossible to do this given the prices trend and new regulations.

Buying property off-plan

I remember my friend Anthony asking me in a restaurant in London in 2005 why Spaniards always bought properties in new developments and why those new developments were more expensive than second-hand properties, a phenomenon that puzzled him, as he had recently bought a large, brand new apartment in Mallorca.
I told him that the primary reason was because Spaniards often like to flip the contract: “dar el pase”.

Property practice during the boom

This practice was especially prevalent during the period of credit expansion from 2003 to 2005, and it had a big impact on planned development. Proper developer did not allow this practice, generally. During a bubble period reflecting fast growth of property prices, soft credit and the property business cannot be fully monitored by the national tax office, thus opening the door to contract flipping.

Flipping the contract… a typical case

Here is a typical case to explain this lucrative practice: a developer and a buyer sign a contract on a flat that costs € 130,000. The agreement states that at the signing of the contract the buyer is to pay 10% of the total amount (€ 13,000) and an additional 10% in 15 monthly instalments (€ 2,600), whereupon the development will be finished (15 months).
In the third month after the agreement had been signed, the buyer has spent € 13,000 + €2,600 = € 15,600 , but he finds another buyer-speculator who is interested in the property. Often, the first buyer would transfer his rights and the deed to the second buyer for an amount higher than what s/he spent, generating a profit. For instance, the first buyer could sell his agreement with the developer to the second buyer for € 30 K, earning a profit of € 14.4 K .
That gives the second buyer 12 months to find a third buyer and repeat the flip if s/he desires. Because of all of these possible transactions, the final selling price at the completion of the development could easily be increased by 20% from the starting price, as commonly occurred during the property bubble.

Now, this is history

To add to the hidden nature of this practice, payments were usually made in cash, making it impossible to track the changes of possession of the contract.
This practice was able to continue because there was not any regulation that forced developers to register primary contracts (contratos de arras) with their clients and upfront payments until 1st December 2008. The contracts were registered only in the name of the final buyer, who was in some cases paying 20% above the original price of the property. Now that dodgy practice is history.
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