Investing in mortgage debt consists of acquiring credit rights secured by mortgages, i.e., with the guarantee of a property that is recognized in the registry, with the aim of obtaining a real estate property or a financial return at a price below the market price. This type of investment has become popular in Spain in recent years as a way of accessing property at significant discounts, although it involves complex legal and tax procedures. Below, we analyze the main moments of entry into this business (before, during and after foreclosure) along with its practical, tax and profitability implications. It is important to remember that, while it can be very lucrative, investing in mortgage debt requires specialized knowledge and expert legal advice to minimize risks.

Moments of entry

In a foreclosure there are three key moments at which an investor can enter the transaction, each with its advantages, risks and return potential:

• Purchase of the mortgage loan (pre-foreclosure): The investor purchases the debt from the bank or other creditor prior to (or at the beginning of) the judicial proceeding. This puts him in the position of the bank, with the right to collect the debt and, if it is not paid, to foreclose in order to foreclose on the property. This entry point offers maximum discount on the purchase price of the debt, but also entails taking on the entire foreclosure process and its uncertainties.
  
• Auction assignment (during the auction): Option available during the judicial auction. If the foreclosing creditor (e.g., a bank) is awarded the property at the auction, it may assign the auction to a third-party investor before the award becomes final. The investor pays a price (usually equivalent to the auction price plus an agreed surcharge) and is subrogated as the successful bidder of the property. Thus, the investor acquires the property without having initiated the judicial process, taking advantage of the reduced auction price.
  
• REO (post-foreclosure) purchase: REO (Real Estate Owned) refers to the property already awarded to the bank after a foreclosure. The investor acquires the property directly from the bank, usually through a conventional purchase contract. It is usually the simplest way (no prior judicial procedure is assumed), although the price discount may be lower compared to the previous options, especially if the property is unoccupied and in good condition.
  

Below, we develop each of these entry points in greater detail, addressing their legal and tax implications (Stamp Duty and Transfer Tax) and the typical ROI (return on investment) for each case.

Purchase of mortgage loan

Buying out a home mortgage is to acquire the creditor’s position in an unpaid loan secured by a mortgage. In practice, it involves buying the debt from the bank (or other holder) for an amount less than the outstanding balance, assuming the right to reclaim that debt from the original debtor. This operation is usually carried out with large discounts: it is common to negotiate purchases of loans for between 20% and 50% of the face value of the debt (50% to 80% discount on the debt). In other words, the financial institution assigns the loan with a discount, allowing the investor to potentially obtain a high capital gain if he manages to recover 100% of the debt or to take possession of the associated property.

The investor’s objective when buying a loan may be financial (to collect the debt at a profit) or real estate (to keep the property). In many cases, the final strategy is to promote foreclosure in order to obtain the adjudication of the property through the courts, since the property usually has a higher market value than the price paid for the debt. However, there are also intermediate solutions: the new creditor can negotiate with the debtor a dation in payment or the voluntary sale of the property to a third party, sharing the proceeds. In fact, it is frequent that the purchase of mortgage debt is accompanied by a viability plan, studying existing charges on the property, solvency of the debtor and possible out-of-court settlements.

Risks and legal aspects of the assignment of receivables

Despite its attractiveness, the purchase of mortgage loans entails legal risks that must be analyzed on a case-by-case basis. One of these risks is the so-called ” retraction of a disputed claim” (article 1535 of the Civil Code): if the claim was already in court (enforcement action filed and contested by the debtor), the debtor may extinguish the debt by reimbursing the assignee exactly what he paid for it, plus interest and costs, within 9 days of being notified of the assignment. In practice, the debtor’s right of withdrawal is rarely exercised (it requires the debtor to obtain financing to pay at once), but it entails a possible loss of opportunity: the investor would recover his invested money (no capital loss) but would no longer be able to obtain the expected capital gain.

Another factor to consider is the debtor’s opposition to the proceeding. The new creditor will have to continue (or initiate) the foreclosure, which may be prolonged if the debtor opposes it, for example, alleging abusive clauses in the loan or if the debtor requests to take advantage of legal moratoriums. Following recent legal reforms, foreclosure is not possible until a minimum number of installments have not been paid (for example, 12 monthly payments or 3% of the principal, according to Law 5/2019 on real estate credit contracts). In addition, certain protection measures for vulnerable debtors in their habitual residence are still in force, which may temporarily suspend foreclosures (evictions) by court order. All of this may delay the time period for the investor to recover its money or take possession of the property.

On the other hand, there is the possibility (remote but beneficial if it occurs) that the debtor may manage to cure the debt before the auction: i.e., pay all the overdue installments and catch up, thus rehabilitating the loan. If the investor had bought the debt with a strong write-off, the debtor’s reactivation and continued payment can mean an immediate return (since he will collect a debt of a much higher amount than the amount invested) or facilitate an advantageous agreement for both parties (e.g. refinancing). In summary, the purchase of a mortgage loan offers the highest potential profitability but requires a complex process and many unknowns. It is not usually suitable for small investors without experience or without adequate advice, as it requires a thorough legal analysis and the accompaniment of specialized professionals.

Taxation on the purchase of the loan: AJD and ITP

When buying a mortgage loan, two main types of indirect taxes must be taken into account: VAT (Value Added Tax) or ITP (Transfer Tax), and AJD (Stamp Duty ). The specific taxation depends on the nature of the seller of the loan and how the assignment is formalized:

• Seller subject to VAT (e.g. a bank or investment fund): In this case, the assignment of the receivable is subject to but exempt from VAT. Credit assignments constitute financial transactions exempt from VAT according to tax regulations, so no effective VAT is applied. As the transaction is subject to VAT (albeit at 0% due to the exemption), it is not subject to ITP ( TPO, Transmisiones Patrimoniales Onerosas), as VAT and ITP are mutually exclusive taxes. However, if the transfer is embodied in a public deed (the usual way to oppose it against third parties and register it in the Land Registry), it does accrue AJD. In Catalonia, the AJD modality for notarial documents is applied at 1.5% (general rate) on the corresponding taxable base. Until 2015 the taxable base was the total mortgage liability (principal plus guaranteed interest and costs), but following recent criteria of Tributes now the outstanding amount of the loan repayment is usually taken as the base. In any case, the AJD typically involves a cost of between 1% and 2% of the outstanding debt, depending on the autonomous community. It should be noted that, unlike other transfers, in the assignment of credit the legal taxpayer of the tax is the transferor (who sells the debt), although in practice the tax cost is usually passed on in the price agreed with the buyer.
  
• Private seller (not entrepreneur): If the credit is assigned by a private individual (e.g. an original private lender), the transaction is not subject to VAT as it is not carried out as part of a business activity. In such a case, the assignment is taxed by ITP (concept of Onerous Transfer of movable/credit goods) at the reduced rate of 1%. This 1% is applied on the nominal value of the assigned credit (or outstanding amount, according to current interpretations). Since the transaction between individuals is not subject to VAT, there is no AJD due to the concept of notarial document for valuable consideration (unless additional guarantees are agreed, which is not usual). In short, when a private individual buys a mortgage loan from another, the indirect tax cost is normally 1% of the agreed amount, settled by means of the ITP form 600.
  

Subsequent taxes: If, after purchasing the loan, the investor succeeds in obtaining the property (either at judicial auction or by dation in payment), he/she will have to pay the taxes inherent in the acquisition of the propertyThe following taxes are typically ITP (at the general rate of 10% in Catalonia for second-hand housing) or VAT (10% for new housing, if it is the exceptional case of a new construction award), in addition to the municipal surplus value (Tax on the Increase in Value of Urban Land) in case of adjudication (this tax usually corresponds legally to the transferor, but in judicial adjudications of mortgage the new owner usually assumes its payment) and eventually taxation in IRPF/Corporate Tax for the gain when the property is resold.all these costs must be considered when calculating the final profitability of the investment.

Assignment of auction

The assignment of the auction is a legal figure provided for in the Civil Procedure Act (art. 647.3 LEC) that allows the enforcing creditor, after a judicial auction, to assign the result of the award to a third party. In other words, if at the auction of a mortgaged property the bank (or another creditor) is awarded the property (due to lack of bidders or because the debt has been covered), it may agree to transfer that right of award to an investor before the final award decree is issued. The transferee will pay the transferor an agreed price, and in return becomes the successful bidder for the property at the auction.

From the legal point of view, the assignment of auction does not involve two real estate transfers, but a single direct award of the property to the assignee (third party) by virtue of the auction. The assignee takes the place of the creditor in the auction, acquiring the house for the same award price that corresponded to the creditor. This avoids the bank becoming the owner and minimizes the tax burden (there is only one transfer). However, the law requires that the assignment be formalized before the Lawyer of the Administration of Justice by means of an appearance in court before the conclusion of the procedure. Generally, the term to present the assignment is 20 working days from the celebration of the auction (while the adjudication decree is pending).

For the investor, the auction assignment represents an opportunity to acquire real estate with an already advanced judicial process and a closed price. For example, if the bank was awarded the property for 60% of the appraised value (a typical case when there are no third party bidders), the assignee can obtain the property for that amount, which is usually below the market value. In addition, since the auction is already over, the investor avoids the risk of competition from other bidders and saves many months of litigation compared to starting the foreclosure from scratch. However, the bank will normally seek to obtain a price premium for the assignment of the auction: that is, the investor may have to pay more than the outstanding debt or the auction price to encourage the creditor to assign the business to the bank. This surcharge can range from a few thousand euros to significant amounts if the difference between the market value and the auction price is large. It is advisable to structure this agreement well so that the assignment is pure and simple for the auction price, because if an extra payment is officially documented, it could be considered another transfer subject to additional taxes.

From the point of view of legal risk, the assignment of auctions is simpler than the purchase of a claim: the foreclosure proceedings are already completed as far as the adjudication is concerned. The debtor can no longer preserve the debt (late payment would no longer stop the foreclosure), nor does the right of withdrawal of the disputed claim apply, since it is no longer the claim that is being assigned, but the foreclosed property. The main aspect to manage will be the possessory situation: it is common that, after the auction, the property is still occupied by the foreclosed debtor or other occupants, so the assignee will inherit the task of eviction (see section on delivery of possession below). You should also verify that there are no prior encumbrances remaining: when acquiring by auction/auction assignment, encumbrances subsequent to the foreclosed mortgage are cancelled, but prior encumbrances (e.g. a prior mortgage, prior liens) remain, which the investor would have to assume or cancel at its own expense. Therefore, as in the purchase of credits, it is vital to analyze the registry situation before the auction assignment.

Taxation in the transfer of auction: AJD and ITP

In the assignment of auction, the taxation is assimilated to that of an adjudication in auction in favor of the assignee. As it is a transfer of real estate, the relevant taxes are the ITP (or VAT) and the AJD, but with particularities:

• Transfer Tax (ITP): As a general rule, the adjudication of a property in a judicial auction between private individuals is subject to ITP (TPO modality). The taxpayer is the successful bidder (the transferee, in this case). In Catalonia, the general rate of ITP for used housing is 10% on the auction price. This will be the main tax paid by the investor for acquiring the property through the assignment of the auction. If the property awarded is a new building and the successful bidder acts as a businessman, it could be subject to VAT (21% or 10% in housing) instead of ITP, but in the majority of auction assignments it is a second-hand property, so ITP applies. It is important to emphasize that, being a forced sale, the taxable base is the adjudication price obtained in the auction, even if this is lower than the market value; the cadastral or market appraisal is not normally used for recalculation, although the Tax Authorities may check values if they consider them too low.
  
• Documented legal acts (AJD): The judicial adjudication itself (decree of the Justice Counsel) is not subject to AJD as it is an act of forced adjudication, but the assignment of the auction itself could accrue AJD if it is formalized in a public deed between the assignor and the assignee. However, normally the assignment is made by means of a writ of appearance in court, avoiding the notary’s office. Provided that the assignment follows the procedural channel (appearance before the court, approval by decree), it will not be necessary to formalize it in a public deed, and therefore there would be no AJD fee for this private/judicial agreement. In summary, in a well-conducted auction assignment, the investor pays ITP for the acquisition of the property, but does not pay additional AJD for the assignment agreement (unlike the purchase of a loan, where there was a deed subject to AJD).
  
• Overpricing and additional taxation: If the investor pays the bank an overprice for the assignment (i.e., an amount that exceeds the auction price), it should be carefully structured. Ideally, such an extra payment is justified as part of the auction price or debt (e.g., covering interest or costs not included) so as not to generate a separate taxable event. If a payment to the transferor for the transfer is documented separately, the tax authorities could interpret it as a transfer of the right to award subject to ITP (at 1% as transfer of rights) or even to VAT if the transferor is a businessman, which would complicate taxation. For this reason, it is legally insisted that the assignment must be pure and simple, for the same price of the auction. In case of doubt, it is advisable to seek advice from a tax specialist to minimize the tax cost of the operation.
  

As for other taxes, after being awarded the property by assignment of auction, the investor must also consider the municipal capital gain (which is accrued by the transfer of the property at auction, generally charged to the successful bidder according to recent case law) and, if the property is subsequently resold, the taxation of the gain in the corresponding Personal Income Tax or Corporate Income Tax.

Purchase of REO (Real Estate Owned)

It is the latest entry point in the cycle. The purchase of a REO(Real Estate Owned) involves acquiring a property owned by the financial institution after foreclosure. In other words, the bank has already carried out the auction and awarded the apartment, registering it in its name, and now sells it on the conventional market. For the investor, this is the simplest way of entry, as it is basically a normal real estate sale and purchase with the bank as the seller. There are no ongoing legal proceedings or credit positions to be assumed; the investor simply negotiates the purchase price of the property with the bank.

The main motivation for buying REOs is that banks tend to offer them at competitive prices, especially if the property has problems such as being occupied by former owners or squatters, or having defects. In Catalonia and other areas, given the shortage of affordable housing, many occupied properties come on the market with heavy discounts to attract investors and compensate for the “mess” they entail. According to a study by Pisos.com, the average discounts range between 30% and 40% of their market value in occupied properties, and can reach 50-60% in extreme cases. For example, in Barcelona, apartments have been detected whose sale price is 50% lower than that of similar unoccupied homes. These discounts reflect the fact that the buyer will assume the management (legal or extrajudicial) of evicting the occupants, as well as possible costs of rehabilitating the property.

In the case of an occupied REO, the investor must be prepared for a process that can be lengthy. After the purchase, there are two ways: negotiate an agreed exit with the occupants (sometimes through an incentive payment, colloquially “cash for keys”, which is usually around 5-10% of the value to convince them to leave), or opt for judicial eviction for precariousness. Many operations combine both routes: the legal eviction procedure is initiated but at the same time an attempt is made to reach an economic agreement with the occupants. According to real estate experts, the average legal eviction period can be 20 months (almost 2 years) when all the legal procedures are followed and if the case suffers administrative delays. If, in addition, the occupants are people in a situation of socioeconomic vulnerability (habitual residence of a family at risk), current laws impose additional delays and the obligation to find them alternative housing, which can further lengthen the process. For this reason, the sale of occupied properties is focused only on investor profiles that do not need the property for immediate use, but can wait as long as necessary.

On the other hand, if the REO is empty and in good condition, the purchase is much simpler: the investor acquires and can dispose of the property immediately. However, in such cases the discount will be lower. Banks in recent years are already selling many of their assets at near-market prices (especially in large cities), so the profit opportunity for an investor is reduced unless they provide value (renovation, rental, etc.). Generally, an empty REO does not offer the spectacular profitability of a debt purchased with 70% write-off, but it can still provide interesting margins if undervalued properties or properties with appreciation potential are detected.

From the fiscal point of view, the purchase of an REO is similar to that of any second-hand property: the investor will pay ITP at 10% of the purchase price (in Catalonia, except in cases of reduction for young people, etc.), plus notary, registry and agency fees. There is no VAT as it is a used property (unless the bank opts for a sale with VAT in special cases, which would entail AJD, but this is not usual in foreclosed properties). The bank-seller will pay the municipal surplus value for being the transferor, although in the sale negotiation they sometimes try to transfer this cost to the buyer. As always, when reselling later the investor will have to pay tax on the profit obtained (Personal Income Tax or Corporate Income Tax).

Judicial delivery of possession (in mortgage proceedings)

A critical aspect when investing in mortgage debt is how and when physical possession of the property is obtained. In credit purchase and foreclosure assignment scenarios, the investor acquires the property through a judicial foreclosure, so he can benefit from the so-called judicial delivery of possession. This means that, once the adjudication decree is issued in his favor, the successful bidder can ask the court to evict the occupants and hand over the keys to him. Article 675 of the LEC provides for this measure for mortgage adjudications: the Court Clerk will order possession to the successful bidder, equating this procedure to a forced delivery of the property.

In practice, judicial possession is not automatic; it must be requested by the purchaser. If the property is occupied, the new owner files for a release (eviction) within the same foreclosure proceeding, thus avoiding having to file a separate lawsuit. This speeds up the process compared to buying an occupied REO (where a separate eviction lawsuit would have to be filed). However, in recent times even these foreclosures have been subject to temporary stays for social reasons. Several Decree-Laws have protected vulnerable groups by preventing immediate evictions, and in Catalonia there are regulations that oblige large landlords (e.g. banks or funds) to offer social rent before evicting families in exclusion. Therefore, although legally the tenant has the right to possession, he/she may face significant delays if there are special circumstances (families at risk of residential exclusion, etc.).

Another legal option, if the mortgage procedure ended without requesting possession, is to resort to the possessory domain proceedings of art. 41 of the Mortgage Law. This allows the registered owner (the investor) to claim possession against untitled occupants, although in practice it is usually preferred to exhaust the route of the foreclosure court itself. In any of the cases, it is crucial to have legal advice to handle these post-allocation situations.

Finally, it should be noted that many investors try to avoid forced eviction by reaching amicable settlements. Just as in the purchase of occupied REOs, in a foreclosure the successful bidder can negotiate with the former owner or occupants an agreed exit. Sometimes financial compensation or more time to vacate is offered. There are even cases in which a dation in payment with rent is agreed: the bank/investor keeps the apartment and allows the debtor to stay for a while as a tenant paying an affordable rent. These amicable solutions can speed up the delivery of possession and avoid legal costs, while improving the investor’s image with the community.

Estimated ROI on the three types of investments

The return on investment (ROI) on mortgage debt varies widely depending on the timing of entry chosen, balancing risk, time and capital invested. Broadly speaking, we can establish the following expected return trends for each type:

• Mortgage loan purchase (higher ROI, higher risk): By purchasing the debt at a deep discount, the potential for gain is greater. If, for example, a loan is purchased for 30% of its nominal value and finally almost 100% is recovered (either because the debtor pays or through foreclosure and sale of the property), the gross capital gain could be around 200-300% of the invested capital (tripling the investment). In annual terms, it will depend on the term of the execution; if everything is completed in 2 years, 200% is equivalent to an annualized ROI of 100%. Of course, legal expenses, taxes (AJD, ITP of adjudication, capital gains, etc.) and possible discounts to sell the property quickly will have to be deducted from this profit. Even so, it is not uncommon to see net returns of 20-30% per year in well-studied credit purchase operations. These are highly profitable investments but reserved for professional profiles that can assume a long process and certain uncertainty.
  
• Auction assignment (moderate ROI, medium risk): In foreclosure assignment the investor usually pays a price closer to the real value of the property, as the foreclosing bank will try to cover most of its debt and perhaps add a small profit. Even so, there is usually a margin because judicial auction prices are usually low (50-70% of the appraised value). According to specialized portals, it is possible to obtain discounts of up to 35% over the market by acquiring by auction assignment. This would translate into a gross potential of ~35% when selling at market price. In practice, discounting taxes (10% ITP) and costs, the net ROI could be around 15-25% of the investment in a relatively short period of time (6-12 months to register adjudication and resolve possession). The assignment of auction is seen as a balance between profitability and risk: the judicial process is already mostly resolved (less legal uncertainty) and the profitability, although lower than buying debt, is still attractive compared to buying property in free sale.
  
• Purchase of occupied REO (variable ROI, minus judicial management): If the investor buys an occupied apartment at a 40% discount, and manages to evict it and put it up for sale at the market price, in theory he would obtain a 40% gross profit. However, from that margin you have to subtract everything invested in the process: the cost of eviction (either the payment to the occupants – typically 5-10% of the value – or the legal costs of an eviction), the time without the property (which is also money, especially if it was financed with own resources that could be generating interest elsewhere) and the renovations that squats often need (it is not uncommon to spend another 5-10% on repairs, given that they are often deteriorated). In the end, an initial 40% discount can end up turning into a net profit of ~15-20%. Given a 1-2 year horizon to normalize the property, we would be talking about an annual ROI of approximately 10%. In cases of larger discounts (50-60%), the ROI may grow, but it also usually indicates that the case was more problematic. If the REO was unoccupied, the discount may only be 10-15%, leaving a very limited net ROI (similar to any buy-sell transaction with slight appreciation). In sum, buying REOs offers more modest returns on average, albeit with less procedural complexity than the above.
  

In conclusion, investing in mortgage debt can be very lucrative if done with knowledge and caution. Each modality has its audience: the purchase of loans and foreclosures attracts real estate investors specialized in complex transactions, while the purchase of REOs may be accessible to more modest individual investors, provided they understand the associated risks (especially when there are occupants). In either case, legal and tax advice is recommended throughout the process. As we have seen, the opportunities are there – from 30% to 80% discounts – but so are the technical pitfalls; therefore, good professional advice will make the difference between a failed investment and a highly profitable one. If you are thinking of investing in mortgage debt, don’t hesitate to get in touch.

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