Are you interested in buying a property but are worried about losing money on the currency conversion? If so, this article tells you everything you need to know about currency conversion when buying a property in Madrid. It also explains why now is the best time to buy a property in Madrid if you hold US dollars.
The process of buying a property in Madrid
Initial due diligence
Once you decide upon an apartment you like, you need to do initial due diligence before making an offer. This is a very important step and you will need a good lawyer to help you. They need to check a few things before you make any sort of financial commitment to buy the property:
- That the person (people) selling the property actually owns the property.
- That there is no debt associated with the apartment. In Spain, mortgages are tied to properties, not people. Often there is a balance due on a mortgage. Your lawyer will work with the banks to get this debt cleared when you pay for the property.
- That all is clear with the land registers. Legally, your sales contract will not be valid until entered into the Land Registry. Many houses in Spain have never been officially registered because they were built in areas not zoned for property development, or are old properties that were never registered. In some situations the property can be made legal. In others the situation can’t be rectified, which would render your investment worthless.
Open a Spanish bank account
You are required to pay for any Spanish real estate purchase via a Spanish bank account. The account must be in your name. This is for a variety of reasons, one of the most important being to curb money laundering. Another is to prevent Russian nationals from obtaining golden visas, which is no longer allowed.
It can take a few days to open a Spanish bank account, so we recommend starting the process as soon as you know you want to purchase property in Madrid. You will have to obtain a certificate of non-residency, which requires completing two forms and paying a tax, at a Spanish bank or cash machine. Once you obtain this, you will need to make an appointment to open the account. We recommend the banks Santander and BBVA, for different reasons. To learn more about Spanish banking and how it probably differs from banking in your home country, we refer you to this article: Spanish banking tips for expats
Make an offer and enter into a pre-agreement
Once the property passes due diligence, you make an offer and then perhaps negotiate with the buyer to find a mutually agreed upon price. Keep in mind that Spaniards typically don’t negotiate very much, and can even get very angry if you try. Once both parties settle upon a price, the buyer needs to make a down payment to reserve the property and start the purchase process moving. Typically, the deposit is 10% of the purchase price.
The Spanish real estate market has an interesting feature in that if the seller backs out of the purchase, they must pay the buyer double the amount of the initial down payment. Thus, if you really like a property in this fast moving market, it might make sense to pay more than the traditional 10% amount. This is why it’s really important to work with trusted real estate professionals, like the team at Madrid Estate. They can guide you through this process and help you secure your dream property in Madrid. You can arrange a free consultation by clicking here: Book a Meeting with Fabiana
Note that when you pay the initial deposit, you can pay this directly from your bank account to the seller’s account. However, when it comes time to pay the balance on the amount, you must pay it via a Spanish bank account. The team at Madrid Estate can help you open one with minimum effort on your part.
Close on the apartment
You must sign the final contract, called a contrato de compra venta, in front of a Spanish notary. At this time, you must pay for the apartment. You can do this via a bank cheque or a direct transfer. Again please note: this must be done from your Spanish bank account.
Will I need to change additional money to pay for the closing costs of my apartment in Madrid?
In short, yes. You should exchange additional money to pay for the following costs:
- ITP (transfer tax) which is 6% of the purchase price
- The IAJD (land registry tax) which is 0.3%-0.7% of the purchase price
- Legal fees, which amount to 2,500€ or 1% of the purchase price
- Notary fee, to make the purchase official. These depend on a variety of factors, but are typically between 0.1% and 0.4% of the purchase price. Typically, one pays a smaller percentage on higher priced properties.
How to do the currency conversion when buying a property in Madrid
There are a number of ways you can exchange currency into euros. You can let your bank do it, but they often don’t give you a very good rate. Currently, the best rates in the market are offered by Wise, a fintech company that specializes in currency conversion. You can keep over 50 different currencies in your account and convert money between these accounts, always getting the real time exchange rate. You can receive money denominated in most major currencies (including USD, Sterling and Singapore dollars). NOTE: We receive no commissions from Wise, nor compensation for recommending them to our clients. All of us at Madrid Estate personally bank with them because we think they are the best.
To do the conversion, you first open a Wise account. Once that is done, you can wire money into your Wise account from your home bank. Due to money laundering concerns, this is more difficult than it used to be. In the US, commercial banks will usually make you initiate the transfer in person. Broker dealers, which aren’t subject to such strict regulations, will often allow you to authorize the transfer in writing. Once you transfer the money into your Wise account, you can convert it into euros, which you will need to purchase your property. This is done on your phone and typically only takes a few minutes. Once the money is in your Wise account, you then transfer it to your Spanish bank account.
There are two things to take into consideration: when to get the best exchange rate and where to hold the funds before you transfer the money to the seller. Currently, if you hold US dollars, the exchange rate is extremely strong so we recommend exchanging the money now (see below).
Unfortunately, Wise often charges fees if you hold large sums of money with them for more than a few days. Therefore, we have found it is cheaper to keep the money in your home country bank account, transfer it into your Wise account a day or two before your transaction closes, then transfer into your Spanish account. Although Wise is not a beneficiary of the FDIC, they hold your funds in major banks (such as JP Morgan, Barclays and Citibank), which means your Wise account balance is secure and is always held entirely separately from Wise’s own assets. Furthermore, since Wise doesn’t loan out your money, like conventional banks do, there isn’t a risk of having a bank run on their reserves. That said, all financial transactions carry some degree of risk, which you should be aware of.
For our UK readers, here is how Wise protects your money in the UK: Is it safe to keep my money in Wise? UK readers can also open Revolut accounts, which are similar to Wise.
NOTE: Although Wise’s transfer limits are high enough for most people buying property in Madrid ($1,000,000.00), many banks have limits on how much your account can receive. In this case, you may need to do a number of smaller transactions. Furthermore, since the US banking industry is regulated by state, your account may be subject to a lower limit.
When to exchange your money
At the time of writing of this article (December 13, 2022), the dollar is extremely strong. Last month it was as at 20 year high against the euro, and it continues to maintain its strength. This is a real benefit for our readers based in the US or that hold assets denominated in US dollars; you can potentially save tens of thousands of dollars in exchange fees if you lock in a good exchange rate now.
If you know you want to purchase a property in Madrid (or any other part of Spain), we recommend changing at least some if your money now. If you haven’t even started your Madrid property search, you can also explore investing in euro denominated bonds to hold the funds. A good money manager can help you with this.
Do you want help purchasing a property in Madrid? If so, we invite you to arrange a FREE CONSULTATION with us TODAY. We offer complete services for your Madrid real estate investment, connect you with our trusted network of service professionals and can further advise you on your currency conversion when buying a property in Madrid.
