The Rules For Buying Off-Plan Real Estate
Buying off-plan property has many advantages, but it also has many pitfalls.
I bought an off-plan apartment in Leeds, U.K., 20 years ago. It was the third property I ever bought. I naively trusted someone whom I had known for years, and I lost my rear end to his fraudulent promises.
Armed with better advice, my fifth property buy was off-plan in Croatia, and I made a killing.
Usually my advice is “buy what you see,” but this doesn’t work with off-plan
investing.
You need to know what you are doing if you are going to purchase a property before it is built.
I didn’t the first time, and I learned the hard way.
When you select the right property, you can make more from
buying off-plan real estate than any other form of real estate transaction.
What Is Buying Off-Plan?
Buying off-plan means buying a property before construction begins.
Property developers require bank financing to build their projects, and banks want to know they will be able to
sell the properties when they are built.
To incentivize investors to hand over cash deposits years before construction begins, the developer offers discounts.
The size of the discount depends on the estimated time frame to completion and the amount of perceived risk in the development.
You can get discounts of up to 30% by buying off-plan, which is enticing.
Benefits Of Buying Off-Plan:
1. Price discounts
The biggest advantage of buying off-plan. The earlier you invest, the bigger the discount. Discounts are reduced once construction starts, and once the property is underway, discounts can be 10% or less.
2. First choice of the available units
Condos with the best views, biggest balconies, or closest to the amenities are snapped up before construction even starts.
3. Phased drawdown of payments
You aren’t expected to pay 100% of the agreed price up front when buying off-plan. Generally, it’s 10% at signing, with phased payments due at certain milestones during the construction. You typically don’t pay the final instalments until the property is complete.
4. Capital appreciation
If you pick wisely, you can enjoy additional capital appreciation during the construction phase. If you get a 20% discount on the price of a property, and during the 18-month construction phase the local property market appreciates 10%, you could realize a 30% capital gain by the time the property is complete.
5. Pick your fixtures
You can often select the interior décor of the property from a variety of fittings and finishes. Sometimes it’s even possible to buy your own higher quality fittings and have the work crew install them for you, giving your property a unique custom finish.
Drawbacks Of Buying Off-Plan:
1. Construction delays
Because the developer has to sell a certain number of units pre-construction before the banks will release funding, early investors might be waiting longer than expected before the building breaks ground. This affects the IRR of the investment in the short and medium term.
2. Waiting time
Even if construction starts on time, you will be waiting months or years before your unit is finished and the entire development is completed. I bought an off-plan golf villa in Cyprus in 2004, and the community amenities took four years to complete. The villa was lovely, but it was within an active building site for years, which affected the rental potential.
3. Risk of company collapse or the developer absconding
When buying into an empty site you run the risk of the developer going bankrupt or failing to complete the development properly. This is the biggest risk of off-plan buying.
4. Market issues
You have no guarantee that the market will appreciate during the construction phase, and an economic hiccup or recession could see the value of your property fall before its completed. This can cause additional issues…
5. Changes in local financing rules
If the value of the
property market falls during the construction phase, you might find yourself locked into an above-market price or worse, unable to get financing because there isn’t enough equity in the property to satisfy the bank’s loan-to-value ratio requirement. This might mean you have to pump more cash into the investment than you expected or lose your deposit and interim payments because you cannot complete the purchase when the property is completed.
Don’t let this list of possible issues put you off. It’s possible to tailor your risk to suit your appetite.
These are the three general phases of off-plan development that suit three different investor risk profiles…
Off-Plan Phase I: Early Pre-Construction
The biggest risk and the biggest reward are available to those who reserve a property during the planning phase.
Discounts of up to 30% or more can entice you into putting your money down during this phase.
At this stage you are usually only required to put down 10% to 15% of the discounted price to reserve your unit.
You get to choose any unit you want as one of the first buyers.
Potential risk: high
Potential reward: high
Off-Plan Phase II: Construction Begins
Once the foundations are in place and construction begins, your risk profile decreases significantly.
Because the bank finance is usually in place at this stage (but you should verify with the developer) the risk of construction never breaking ground is past. You can also expect to have a much more accurate estimated time to completion. It can sometimes be possible to get completion dates stipulated in your contract, with penalties if there are major overruns.
At this stage the developer will have sold at least 30% of the units, and maybe as much as 60% to 70%.
Your choices for a preferred unit will be significantly less. That said, condo units usually don’t vary hugely in layout and design.
At this stage you can expect to pay 20% to 30% of the price of the unit and additional payments as construction milestones are reached. This payment schedule will be detailed in your contract.
You could be offered a 15% to 20% discount on the retail price of your unit at this stage.
Potential risk: medium
Potential reward: medium
Pre-Construction Phase III: Remnant Phase
When the development is nearing completion or some units are complete and other units are almost done, a busy developer might decide to sell off the remaining units for a 5% to 10% discount.
This phase doesn’t always occur. Many developers will forgo this discount and keep the remaining units for themselves to sell at full price when everything is complete.
Sometimes the banks insist they sell it all quickly. Other times, the developers’ desire to move on to the next development quickly will encourage them to sell the remnants of the inventory at a small discount for the sake of expediency.
At the remnant phase you will be offered the last units, and you’ll have to take what’s available. At this stage you’ll often have to pay 50% or more up front, with the final drawdowns coming fast as the property approaches completion.
The upside is you won’t have to wait long for the units to be complete, and there is little risk that the developer will abandon the project.
Potential risk: very low
Potential reward: low
Other Factors To Consider When Buying Off-Plan
1. Track Record Of The Developer
The track record and financial stability of the developer are the number-one consideration when buying off-plan. You are giving this person your money based on the trust that they can pull off the difficult task of completing a major development on time and on budget.
Trusting someone with no track record is insanity. The developer should have many years of proven track record in the industry before you take this risk.
Do your due diligence on the company, check their company corporate filings to understand their financial position, and get your local lawyer to check if there is litigation pending against the developer and whether they have all their building permits in place.
Google the developer and search for reviews from disgruntled owners from other developments. Take a few unhappy previous owners with a pinch of salt, but if you find scores of angry clients, beware…
2. Assignable Contracts
Sometimes it’s possible to flip the unit when the project is close to completion but before you have to complete the purchase. This allows you to realize a big profit without having to pay the full purchase price, and you can also avoid paying stamp duty and other closing costs.
Many developers will prevent you from doing this in the contract, because you will be effectively selling your unit in competition with the units they are trying to sell. However, some developers do allow this, and it’s a great way of making an even bigger return on your investment.
3. Fraudulent Valuations
This is where my “buddy” stung me all those years ago when I didn’t know the ropes. I was given fraudulent overpriced valuations by him, and I didn’t check with an independent valuer or check the local market myself. What I was told was a 20% discount turned out to be a 0% discount, and my former buddy kept the difference…
4. Ownership Of Green Spaces And Amenities
My parents bought a condo in Croatia 15 years ago. When the developer got into trouble a few years later, it transpired he had retained ownership of the green areas and attempted to build another condo block between all the other units. The residents had to buy the green space back from the grifter to avoid this. Ensure the HOA owns the amenities and that the residents own the HOA.
5. Leasehold Land
Make sure the property is built on titled land and not on a long-term lease.
6. True Beachfront
It’s common for a developer to sell a condo building as oceanfront, and once it’s sold, to build another condo building in front of it.
Mortgages For Off-Plan Property
It depends on the country, but it’s possible to
get a mortgage on your off-plan property purchase.
If the developer is reputable and you qualify for a local mortgage, you can make the down payment and the bank pays the developer’s staged payments. You will have to carry the cost of the increasing loan payments over the construction period, but they start out small.
Make sure you arrange this before you make a down payment if you’re relying on bank financing, and don’t take the developer assurances that you will get financing when you need it.
Off-Plan Beach Bungalows In Brazil
Buying real estate off-plan provides the opportunity to lock in big discounts on future retail prices.
We’ve vetted an amazing off-plan beachside bungalow deal in
Brazil. Each bungalow comes with a private pool and deck.
Prices start at
US$49,000, and in-house financing is available. Prices like these might not be seen again…
Go here to find out more about these huge discounts right next to an amazing beach.
Con Murphy
Editor,
Overseas Property Alert
