The risks of buying off plan property
As the worldwide real estate market continues to recover investors are now looking towards traditional investment strategies such as buying off plan. There is no doubt that done correctly, off plan investments can be very lucrative and in many cases can lead to a short-term profit. However, buying off plan is not as easy as many would have you believe, there are risks and sometimes the risks do outweigh the potential rewards.
We think this is a subject that warrants more in depth discussion as more investors are now being dragged into new markets and taking on all strategies which have proved controversial in the past.
Research your developer
In a perfect world you would have a developer who delivered on time, gave you excellent value for money and offered no risk whatsoever. The problem is that we do not live in a perfect world and even the strongest developers in the world, from a financial viewpoint, can struggle and many have crashed and burned. That does not mean you should not consider off plan investment because if you research your developer in depth you will get a feel for their standard of work, their value for money and their financial stability.
Take legal advice from day one
In some cases real estate contracts are not worth the paper they’re written on but taking legal advice from day one will at least ensure that you are going into any transaction with your eyes wide open. Legal eagles will ensure that your contract is watertight, they will monitor the progress going forward and ensure that payments are made on time and projects are delivered on time. Aside from the traditional legal work you would expect from a solicitor/lawyer they are often in the know and will alert you to any undue rumours in the marketplace.
Quote from PropertyForum.com : “Do the media have undue influence on property markets?”
Know your market
The idea of building a property from scratch, being heavily involved in the design and being left with your dream home sounds great. However, you need to compare the cost of your property investment with the cost of property in the local marketplace. Does it really offer the kind of value you would expect? Is there scope for upside in the short, medium and longer term?
You would never buy a share without researching the company and therefore you should never buy a property without researching the local marketplace. It may well be that your timing is impeccable and you could potentially sell-on the property for a profit before it is even finished. These are the details that could make or break your investment, could give you a tidy profit and could reduce your exposure and perhaps release investment capital for future transactions.
Keep a close eye
Sometimes when you are buying property overseas it can be difficult to keep a hands-on control of the project. Where possible you should consider installing a local monitor to keep an eye on the situation, to report back to you and keep you up to speed with what is happening. Many inexperienced investors will sign the contracts, hand over the money and wait until the project is finished. Only as they approach the expected completion date will they take notice of what is happening, the fact that the builder may be having problems and the project is behind time.
Stagger the funding
Again, many inexperienced investors will hand over the full investment amount on day one and then be surprised to learn that their developer is perhaps not as focused as they expected and indeed where do they stand if the developer was to go bankrupt? The best way to ensure the focus of your developer is to agree stage payments and stagger these across the full-length of the investment. Do not be swayed by arguments that all funding is needed upfront, do not be swayed by short-term demands for more finance, stick to the agreed stage payments and keep your developer focused.