The importance of real estate due diligence in Andorra before buying a property

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Buying a property in Andorra is a significant decision that requires caution, preparation, and, above all, thorough due diligence. Signing a reservation or earnest money contract without careful analysis can expose the buyer to financial and legal risks, such as penalties, loss of deposits, or issues with the property itself. In this article, we explore the key aspects of real estate due diligence in Andorra and offer practical advice to help protect your interests.

How does the process of buying a property in Andorra work?

Once the buyer and seller agree on the price and terms of the property, the next step is to formalize the commitment through a reservation contract (common for new developments) or an earnest money agreement. These contracts are signed between the parties—typically with the support of lawyers or real estate agents—and do not require a notary’s intervention. Their purpose is to lay the groundwork for the future sale by establishing the obligations and conditions of both parties, ensuring that the terms are clearly defined.

During the agreed period in these contracts, the parties usually prepare the documentation needed for the public deed of sale, which must be signed before a notary to complete the transaction. In Andorra, there is no statutory cooling-off period, so any option to withdraw from the contract depends entirely on the clauses agreed upon in the document.

The property reservation contract in Andorra

The reservation contract is mainly used in Andorra for the purchase of newly built or off-plan homes. This contract allows the buyer to reserve a specific property in exchange for an initial payment—known as a deposit—which is deducted from the final sale price. In turn, the seller—usually a property developer—commits to delivering the property on the agreed date, according to the specified terms.

This type of contract sets out the essential terms of the transaction, such as the price, delivery timeframe, and property specifications, creating a binding commitment for both parties. These terms serve as the foundation for the later purchase contract, which will be formalized before a notary. It is crucial to carefully review the clauses of the reservation contract, as any breach can have financial consequences, especially if no specific protections are included.

Types of earnest money contracts in Andorra

When a property purchase does not involve an initial reservation, an earnest money agreement is commonly used. Understanding the differences between the types of earnest money contracts is essential, as each entails different obligations and rights:

Confirmatory earnest money: These deposits guarantee that the transaction will take place within the agreed timeframe. If either party fails to comply, the other may demand that the contract be fulfilled or terminated, and may also claim damages.
Penal earnest money (“contracte d’arres”): These allow either party to withdraw from the purchase. If the buyer backs out, they forfeit the earnest money paid; if the seller withdraws, they must return double the amount received. In Andorra, this is the most common form due to its flexibility.

A real case of a real estate transaction in Andorra illustrates the risks of not including protective clauses: a foreign buyer signed a reservation contract with a property developer for a new-build home and paid a deposit of €20,000. However, they were unable to open a bank account in Andorra due to unforeseen restrictions, preventing them from obtaining the necessary foreign investment authorization to complete the purchase. Because the contract did not include a clause providing for a refund in the event of not obtaining such authorization, the developer kept the deposit. This case highlights the importance of negotiating specific clauses to protect the buyer against circumstances beyond their control.

Key points for effective real estate due diligence

To avoid unpleasant surprises, real estate due diligence must cover several critical aspects:

1. Verification of the property’s legal status

In Andorra, there is no property registry like in other countries, making due diligence even more important. All property information must be verified through the land registry (cadastre) and notarial deeds. It’s essential to ensure that:

The seller is the legitimate owner and has the right to sell.
There are no hidden charges, such as mortgages, liens, or easements. It is important to note that the cadastre in Andorra does not reflect all legal charges, such as mortgages or liens, so it is essential to also review notarial deeds and other legal documents.
Any modifications or renovations have been properly registered. For example, if a terrace was converted into a room, this change must be legalized; otherwise, it could cause issues with the sale.

A real case involved a buyer who discovered—after signing the contract—a hidden encumbrance due to a property swap that was not recorded in the cadastre because of an administrative error. This delayed the transaction and led to costly legal expenses.

2. Property valuation

Understanding the Andorran real estate market is essential to determine if the asking price is fair. Hiring an independent appraiser and consulting experienced, reputable real estate professionals can help avoid overpaying or acquiring a property with defects that reduce its value.

3. Thorough review of the contract

Generic contracts provided by real estate agencies may not adequately protect your interests. It’s advisable to work with a lawyer specialized in real estate law to review and customize the contract. Important elements to include are:

Detailed property description: Not only the layout and square footage but also any renovations or relevant features (e.g., a terrace converted into a bedroom).
Clear suspensive conditions: These clauses allow the contract to be canceled without penalties if certain conditions are not met. Common examples include obtaining a mortgage, the absence of hidden encumbrances, or the legalization of renovations. For example, a clause might state that the sale will only proceed if the cadastre confirms no discrepancies or if foreign investment authorization is granted.
Penalty clauses: These protect both parties in case of breach. For instance, the contract might require the seller to return double the deposit if they fail to meet their obligations.
Specific deadlines: Ensure the contract sets clear dates for signing the public deed or, in the case of new developments, for property delivery.

4. Technical inspections

Request all available technical reports, such as energy efficiency certificates and assessments of electrical and plumbing systems. If any report is inaccurate or incomplete, you may have grounds to cancel the transaction or negotiate a price reduction—provided this is stipulated in the contract

5. Customized suspensive conditions

Suspensive conditions should be tailored to the specific circumstances of the purchase. For example:

If you plan to renovate, include a clause making the contract contingent on obtaining a building permit.
If you’re buying for a peaceful environment, specify that the sale depends on the absence of urban development plans (e.g., no nearby road construction or buildings that would block your view).
If you’re financing the purchase, clearly state the minimum and maximum loan amounts required to proceed.
If you're a foreign buyer, include a clause that conditions the contract’s validity on obtaining foreign investment authorization or opening a bank account in Andorra.

A specialized lawyer can help you draft these clauses precisely to avoid ambiguity.

Financial risks and how to mitigate them

When signing a reservation or earnest money contract, the buyer usually pays a deposit, a guarantee, or penal earnest money (typically 10% of the property’s price). This amount is deducted from the final price but can be forfeited if the buyer withdraws or fails to meet the suspensive conditions. To minimize risk:

Request a bank guarantee: As a safeguard, the buyer can negotiate for the seller to provide a bank guarantee to ensure the return of the deposit in case of seller default. However, this is not mandatory and may involve a cost that not all sellers are willing to bear. Discuss this option with your lawyer to assess its feasibility.
Carefully consider to whom you deliver the deposit or earnest money: In Andorra, deposits are often held by real estate agents, but this practice carries risks, as recovering the funds can be complicated if issues arise—such as default or insolvency of the intermediary. Consult with a lawyer to include clauses that protect the deposit and clearly define the terms for its return.
Include protection clauses: For example, a penalty clause requiring the seller to compensate you if the sale falls through due to their fault, or a clause that allows for the return of the deposit if necessary authorizations—like foreign investment approval—are not obtained.

What are the costs associated with buying property in Andorra?

In addition to the purchase price, buyers should consider:

Notary fees: These depend on the value of the property and are legally regulated.
Taxes: In Andorra, the General Indirect Tax (IGI) and the property transfer tax (ITP) apply, varying depending on the property type. Additionally, a foreign investment tax applies to non-residents or residents with less than three years of residency.
Legal and agent fees: Hiring professionals for due diligence and contract review is an investment that can save you significant trouble down the line.

Protect your investment with thorough due diligence

Buying a property in Andorra can be a great opportunity, but it also involves risks if the proper precautions aren’t taken. Conducting thorough due diligence, carefully reviewing contracts, and customizing suspensive conditions are essential steps to avoid legal or financial surprises. Don’t get carried away by the excitement of the purchase: take the time to verify every detail and ensure you have professional support.

At our firm, we are committed to protecting our clients’ interests. We support our clients throughout the entire property purchase process, including contract review, to ensure a smooth and secure transaction. If you are considering buying property in Andorra, contact us to ensure your investment is protected from the very first step.