Buying a property which is not yet constructed is a popular option in many real estate locations including the USA, Caribbean, the Middle and Far East, and the EU. Terminology may vary from one location to another and include a Pre-construction Project, Off-Plan Purchase or a Stage Payments Purchase. The basis of the deal is that the property developer, for a variety of legitimate reasons, does not wish to construct properties on a speculative basis and then attempt to find buyers for them.
One reason may be inadequate local finance facilities, or alternatively, he may not wish to take the challenge of marketing completed properties. This situation poses significant opportunities for the shrewd investor or property buyer. If the buyer has researched the market, he can make serious returns on his investment without taking ownership of the completed property.
The spread of stage payments over the life of a construction project varies tremendously, but is often in the form of a deposit of 15%, followed by further payments of say 25%, 27%, 25% and 8% when the property is completed. The minimum time period is unlikely to be less than 11 months, and it can be considerably in excess of that. Once the buyer has made a deposit, then the developer is contracted to build the property.
At any time during the construction process, the buyer can exercise his right to sell the contract to another person. For example, Mr Smith contracts to purchase a property at $200,000 and pays a deposit of $30,000. The developer has not started work on the site, and the expected completion date is 2 years.
After 6 months, construction work has started and Mr Smith makes a further payment of $50,000. Prior to the next payment falling due, Mr Smith sells the property for $240,000. He has taken advantage of the rising market and made a profit of $40,000.
However, this profit has been made on an outlay to date of $30,000 plus $50,000, namely $80,000. This is an impressive 50% return. However, all good deals can turn sour. There are several points which a prospective investor should bear in mind. 1.
It is always best to be an early bird buyer as prices of new properties tend to rise as activity begins on the site. Once the prices have risen, the opportunity has passed. 2. In some locations, there are lots of completed properties which developers and investors are seeking to offload at significant discounts.
New builds will only make matters worse. Spain and Dubai are current examples. 3. The buyer must have the right to sell prior to completion. This may seem an obvious point but many contracts issued by developers give them the right to refuse such a transfer unless they approve of the purchaser.
From a developers viewpoint, this simply safeguards the developer against bad credit risks. However, from a buyers perspective this may lock him into the contract until completion. 4.
As in all business deals, one should ponder on what might go wrong. In this setting, it is always possible that prices may fall rather than rise and an investor may have difficulty in finding a buyer during the course of construction. This means that an investor needs to feel confident that he can finance the full price of $200,000 if need be.
An investor who only has access to say, $100,000 of funds would be ill advised to contract to purchase a $200,000 property. 5. When things go wrong they can go really wrong. An investor should examine the purchase contract carefully in order to understand fully what happens if he is late in making a stage payment.
The contract will normally stipulate that a stage payment falls due when the developer has finished a specific task, for example, he has tiled the roof. The contract will give the buyer a limited period of time to make the appropriate stage payment. After this time, a penalty will be incurred.
6. Some contracts fail to spell out in simple English what will happen if the buyer simply cannot make the payment at all. Many developers offer verbal assurances that the buyer will have a refund of monies paid to date, but this is often far from the truth. Some contracts state that if a buyer fails to make a stage payment within say 60 days, then the developer may declare the contract void.
What this invariably means is that the developer will sell the project to someone else at the full price and pocket all the monies paid to date by the unfortunate investor. So, the investor must be aware of the risks of a Stage Payment deal, and be prepared, if need be, to hold onto the contract until the property is completed. If the investor selects a property with a rental potential, he could then make a decent return on any funds he has borrowed to complete the purchase, and have the flexibility to await a market upturn before he cashes in his investment.
Leslie Hardy is the UK Chairman of Wellington Estates Ltd, a North Cyprus property development company. Read more on the topic of Property Stage Payments at http://www.wellestates.com