Buying off-plan: A guide

In many parts of the world buying property off-plan is common. In others its considered to be a very risky investment. On the plus side it allows you, the buyer, to purchase ahead of many other buyers but how does buying off-plan really work, and what do you need to do before signing any sales agreements?

Quite simply, buying off-plan is purchasing a property that is yet to be built. In most cases construction will also not have started. Buyers and investors will largely be agreeing to buy based on architectural plans – hence the name ‘off-plan’.

In some cases, you may be fortunate and the developer will have a show unit for inspection, but don’t be surprised if what you see in the showroom changes to what you actually get at the end of the transaction.

How does buying off-plan work?

The process differs between developments and countries. Some developers reserve the right to alter the design of a property without having to seek approval from the buyer, while in some countries the developer will have to pay the buyer a penalty for any minor changes. Its not uncommon in some countries for developers to expect buyers to pay additional funds if construction costs change. For these reasons and more, an off-plan sales and purchase contract can be very different to a standard one.

When signing a deposit is always due, but the amount varies from as little as a few percent of the total price to as much as 50 percent. In most cases that deposit is held in a trust account until a certain stage of construction has been reached. This is where professional and legal advice is strong recommended.

How long does the process take?

After signing there may be a cooling-off period depending on the country you’re buying in. If you are fortunate to have one, this is when you will legally have the chance to withdraw of the sale. You may have to forfeit some or all of your deposit at this time, and again this is where professional legal advice before you sign anything becomes vital.

The actual construction time will vary across different developments, from as short as 12-months to as long as four-years. There is no set time. Your sales and purchase agreement should state the date on which the development will be completed, and provide details of any penalties for failing to meet this date. In some countries construction delay penalties are enshrined in law regardless of whether they form part of your agreement.

What are the benefits of buying off-plan?

Many first-time buyers and investors are often short of cash, so buying off-plan allows them more time to acquire the funds to complete the purchase. When signing the contract, you are agreeing to a specific price. Usually the market will have grown before completion and creating capital growth. This is not guaranteed, though.

Off-plan properties can sometimes be customised to the needs of the individual buyer. Naturally you may have the widest choice of available units in a development, but you may also be able to choose the type of finish, appliances and furnishings. Every development is different.

What are the risks of buying off-plan?

This is where your professional, independent legal advice will be worth the investment. Completion of any project is not guaranteed and there is a chance that the project could fall through for a whole host of reasons.

Do your due diligence on the developer, get your lawyer to do the same and check for things such as previous successful developments. Visit them and ask to speak to owners. They will often tell you of any issues.

The resulting unit may often be different to the original plan. Developers often reserve the right to make changes where necessary but significant changes may not be permitted without your agreement, depending on the developer and country.

Of course there is also the chance the real estate market could decline, meaning you will be paying above market price upon completion. This can have serious implications because if the bank valuation is lower than you anticipated, you might struggle to obtain the mortgage you were expecting.

It is also difficult to measure the resale value of off-plan properties, especially in areas that have been identified as hotspots or are seeing significant developments. It’s important to view the entire area around your chosen purchase, and see what other options may be on offer.

At Dot Property Group we cannot stress the importance of independent legal advice and thorough due diligence when buying off-plan, not matter where in the world you are and how much you trust you own instincts or the words of the sales person.