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14 May 2006

Buying an off plan property 5 rules to follow

A golden rule of property investing is ‘Don’t buy without viewing’. But there is an exception, says Iain Maitland of International Property Alerts, and it is off-plan! The best time to buy is when there’s not even a hole in the ground yet. That’s how you’ll maximise your profits – assuming you still do your homework and apply common sense... 

Buy as early as you can

At the early stages of a development the cost of property is always lower than towards the end. As the project progresses, it establishes its place in the market and confirms its value. At the beginning, it is in the developer’s interests to sell a proportion of the properties at a lower price to get things going.

By committing to purchase a property far in advance of its completion time you are locking yourself and the developer into an agreed purchase price which would be reasonable in today’s market. In one or two years it would be reasonable to suppose, assuming inflation continues apace in the area you’ve chosen, that the then current market value will be  higher than it is today. The increment is your profit.

How much cash do you need to commit? That depends on the deal and the country. France will offer around 10% deposits. In Spain, off-plan deals generally involve a 30% deposit with the balance payable at completion. Some developments will require staged payments.

Make sure you can get a mortgage – and if you can’t, don’t buy in!

Most developers will have a funding partner who will provide or at least arrange a mortgage on the off-plan apartment or house that you’re buying off-plan (subject, of course, to status). If the developer is not offering this facility you have to ask yourself why not. Because it’s not a good deal is the obvious answer!

You should still shop around for the best possible mortgage deal though. With overseas mortgages, you’ll typically be able to raise 60-70% of the purchase price. Don’t let yourself be misled though. Lenders will almost invariably lend against the purchase price or the value of the property; whichever is lower!

Note too that, even though your investment should increase in value, you may not necessarily be able to borrow against its future value and thereby get some or all of your deposit back. It can happen but don’t bank on it.

Recognise that buying off-plan is a speculative investment

Off-plan is not without risk. You can reduce the risk by applying due diligence. Look for a bank guarantee, especially in Spain where there is a history of developers building on land they do not own. If a major bank is a funding partner there’s a good chance somebody has checked the paperwork before they break ground.

Use a developer who has a good reputation for high specification work coming in on time. Ask about previous developments, visit them, talk to the owners of properties there etc. Only buy through agents you can trust or who come recommended by someone you can trust.

What if the developer goes bust? It happens, especially overseas. Surprisingly, if the development is financially sound and there is a bank guarantee in place this is not necessarily a problem. When I bought my first off-plan my solicitor pointed out that since I was paying only 10% of the contract value on exchange I was already in profit because the land value was more than that.

See if the contract is assignable

Ideally, you should go into the deal believing that you cannot get your money out. When you buy off-plan the contract of sale can sometimes be passed on or sold to a third party. In the UK we refer to this as being an assignable contract. It is not automatic that this is the case in all developments. Indeed there is a good case to be argued that the better developments will not have assignable contracts.

Developers want to sell off-plan so that they can show the bank that they are getting on with the job in hand and get more money from them. However, banks and good developers tend to prefer developments where investors are there for the long term. A high turnover of assignable contracts during the building stage can damage a development’s reputation.

Personally, I don’t believe you should necessarily assign the contract at the earliest opportunity. You may find too many others are doing the same and that pulls down prices. If you’ve bought wisely, it’s better to wait.   

Sell later than on completion

Don’t get caught unprepared. We’ve already spoken about due diligence. Now you have to consider how you will pay the balance of the purchase and what will you do with the property when it’s ready. Most people buy off-plan with a view to taking a short term profit.

My own feeling is that you should probably not sell until perhaps a year after the development is finished. It is at this time that you can maximise your profit. The gardens will be flourishing, a steady rental market will be established and yours is more likely to be the only apartment on the market at that time.

If you need a mortgage to purchase make sure you can afford to repay it. Ensure that the developer is doing something about letting facilities when the project is done and that there is a market for the kind of property you’re buying in the immediate area. Golfers like to live near the course and you can’t have a beach holiday from a mountain top!

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