Cheap prices put Spanish property back on the map

There are bargains to be had on homes in the sun, but be careful, warn Chiara Cavaglieri and Julian Knight

We've been basking in our own heatwave for some time now, but if it's given you a taste for sunshine, sea and sangria, is it time to look at buying property in Spain again?

The Spanish market, for years the horror show of Europe, is just beginning to show signs of bouncing back, tempting buyers with low prices and attractive mortgages, but if you're thinking of buying a villa in the sun, there are still significant dangers.

Spanish banks have been trying to offload their glut of repossessed homes on the cheap and average prices crumbled by 12.8 per cent in the first three months of this year compared to the same period in 2012, according to Eurostat figures. Some of these bargains are finally turning heads and interest in Spanish property is enjoying a revival, taking over the top spot from the USA last month and accounting for almost one-in-three enquiries on the property portal TheMoveChannel.com.

"It is a good time to buy property in prime locations at the right price. In the best areas of Barcelona city and Marbella it is possible to buy properties at a 50 per cent discount from 2007 prices," says Alexander Vaughan of Spanish estate agent Lucas Fox.

During the real-estate boom, Spanish house prices rocketed, rising by an incredible 200 per cent from 1996 to 2007, before plunging back down to earth when the bubble burst.

Major banks, including UBS and BBVA, estimate that house prices still have another 8 per cent to go before bottoming out, so there may be better deals later down the line.

However, when it comes to properties in ever-popular, reputable areas, some buyers are grabbing the best deals while they can.

"There is still a lot of uncertainty in Spain, but you can buy a two-bed apartment in southern Costa Blanca for €55,000 (£47,355) – how much lower can prices in an established resort go?" says Richard Way, editor of the Overseas Guides Company. "Generally, the people buying now are semi-retirees who want a second home to move into in perhaps five, or 10 years' time when they will be financially self-sufficient, living off their pension and savings".

Estate agents on the ground are feeling much more positive. Chris Mercer, director of Murcia-based agency Mercers, predicts local sales will accelerate as the year progresses. Many of the developers who were selling stock with 100 per cent finance have now done so, leaving established agents to sell property to traditional buyers – average sale prices at Mercers have already risen from €84,884 last year to €92,331 so far this year.

"I find this very encouraging as it suggests that the 'fire' sales have passed through the system," he says. "There is definitely a more positive vibe coming from the UK and this will translate to a larger percentage of British buyers for us as we move into autumn."

Most British buyers have to use their UK home to raise the money to buy in cash abroad. UK-based mortgage brokers such as Conti may be able to help you arrange local loans and rates are keen, but Spanish lenders are loath to lend more than 70 per cent of the property so you'll need a hefty 40 per cent deposit.

If you are buying a repossessed property, banks should offer more-generous finance deals, but you'll need to be extra careful as many of these are new builds in run-down, poor-quality developments. Before you commit, go and check that the development has been maintained properly while the bank has owned it. The infrastructure might not be great and you may find that only a handful of units have been sold.

No matter how cheap it seems, if it's in the wrong place and hasn't been looked after, it will never be a success. Areas in Spain that were overdeveloped before the crisis are still burdened by problems. A quick Google search reveals countless expat forums littered with complaints about buildings falling apart and desperate homeowners stuck with properties they cannot sell because of structural problems. There are still sharks trying to sell Spanish homes that were built without planning permission which often have no mains connections to water, gas or electricity.

If you do buy a new build, look into the track record of the developer. Ensure they have full title to the land or property and get your solicitor to check that you are not inheriting any debt on the property before you buy.

Get to know the local region by renting for a while before you buy and think twice before buying property in an isolated area. Big villas with private pools can be appealing, but if they are in the middle of nowhere they may be difficult to rent out and sell on so buy in the best location you can afford, or stick to well-established resorts, such as Marbella.

When it's time to seal the deal, take advice from an English-speaking lawyer who is unconnected to your estate agent or developer and, where necessary, get an independent valuation of the property to uncover any problems such as subsidence, damp and boundary disputes.

You also need to consider all of the costs associated with buying abroad. Exchange rates can make a big difference so use a currency-exchange specialist to transfer money abroad and make sure you understand all the local taxes and fees that will apply.

"There's transfer tax, VAT and stamp duty on new builds, legal fees and registry costs – by the time you add these all up you need to factor in 10-12 per cent of the purchase cost," says Mr Way. "Once you're an owner you pay council tax and, depending on where you live, another charge for rubbish collection".

Keep on top of new rules too as these usually mean you'll have to dig a little deeper into your pocket. For example, any Spanish resident (who lives in Spain at least six months) must now declare overseas assets worth more than €50,000 to the tax office. Rental laws have also been tightened up so if you're planning to let the property as a holiday home you may need to apply and pay for a licence first.

Don't ignore the ongoing economic problems either; Spain's banks are still fragile and unemployment is high so if you aren't financially independent this could be a bad time to move.