Why You Should Be Careful When Buying at the Height of a Frenzy

It´s anyone´s dream to retire on a beach front property.

And for buyers at the Banana Beach, this dream came true back in the late 90s.

The Banana Beach is a residential apartment block in Marbella, Southern Spain. It holds 238 large apartments with beach views, gardens and pools. This is all located only steps away from the beach.

Yet little did the buyers know what they were in for…

You see, the apartments were built on what had been classified as public land.

Let me explain.

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Marbella’s Property Boom

Marbella went through a property boom in the 90s, and in those times there was a wild frenzy to get into property. There was high immigration, and all you saw was construction cranes all over the skyline.

Town hall officials were so keen to take advantage of the booming times that they reclassified public land that was destined for green spaces and gave constructors license to build on it. The land the Banana Beach complex was built on was some of it.

Needless to say, once the boom was over, many town hall officials went to jail.

The courts then dictated the Banana Beach complex was illegal…even though for years property owners had been living there, had the deeds, and had been paying for electricity and taxes.

In fact, some of the apartments had been sold two or three times over that period. So it was the new buyers who inherited the problem.

For a while there, it looked like the building was going to get demolished.

But then in 2010, the Andalucian government legalised the building…that is, until 2015, when the Supreme Court revoked their decision.

After being on a roller coaster ride, the Banana Beach property owners are in limbo. The fate of the apartment complex is still unknown.

Who should bear the burden? The town, the builders or the buyers who bought in good faith? 

The matter is unresolved, yet it doesn´t bode well for the Banana Beach apartment owners.

The property craze that hit Marbella in the 90s was a wild time, and the Banana Beach has become an icon for those crazy construction times.

Yet Banana Beach is not the only property in this situation. The 15-year property boom generated about 30,000 illegal properties in the city.

And lawyers…real estate agencies…banks…you name it, everyone was trying to take advantage of the frenzy.

A Parallel Between Spain and Australia

We keep seeing some slight parallels from the Spanish property bubble fiasco to the Australian property market.

The Australian Broadcasting Company recently run an interesting article titled ‘Melbourne man facing dilemma after buying home with illegal structures’.

As the article reported, a man bought a Melbourne house in auction in 2016.

But a few weeks ago the illusion of a good investment was shattered when the council, having received a complaint the property was being used as an unregistered rooming house, revealed most of the structures on the land were illegal.

One of the previous owners of the property on Mill Park Drive had illegally erected a bungalow, a garage and two sheds in the backyard. Some were close to 20 years old.

“I was really shocked,” Mr Dong said.

Mr [Hao] Dong, 32, had purchased the property on the assumption that everything was above board.

’”[The real estate agent] didn’t mention anything so I assumed everything [was] legal,” he said.

If you buy a property with illegal structures, who is responsible?

Well, you are.

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As the article continued:

But in these types of situations the real estate agent who brokered the deal does not hold any responsibility.

That is because in Victoria caveat emptor, which in Latin means “let the buyer beware”, applies.

Prospective property owners are expected to perform their own due diligence to make sure they are happy with the property before buying it.

Once you sign the dotted line, the responsibility is yours.

He is now facing thousands of dollars to either get the right permits or tear the structure down.

And, Mr. Dong is not alone.

According to the Australian Property Investor, about 30% of buildings in Australia have some kind of illegal building.

While the buyer had hired a conveyor, he had not performed a building inspection. In fact, we have heard the same from a few people already. That is, they buy without performing an inspection, as it can get expensive, especially if you keep getting outbid in auction.

Yet this can come at a cost.

My point is, be careful on buying at the height of the frenzy. You may not only be paying more, but you could also get caught up in the excesses of the time.

After all, it is easy to get swept up in the frenzy. And things don´t usually surface until the downturn, when prices start to fall.

Best,

Selva Freigedo,
Editor, Markets & Money


Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.


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