Buying Off-Plan

It seems to be the hot topic - many agents in the area are pushing off plan as the investment vehicle for get rich quick. Is buying off plan the key to quick money or can it leave you with egg on your face and no dinero?

The basics

Buying off plan means buying a property before construction starts. The developers need to finance the project and typically use bank mortgages to finance the project. Increasingly however they sell an amount of the properties off plan to investors who hope to increase their investment many fold.


They put down an initial deposit of say 30% and if the property increases in value by say 20% in the time it takes to build then because you are staking a smaller amount your money grows faster. The purchaser then sells on their contract before completion, and the new purchaser pays all IVA and taxes paid to date, so in effect the only taxes you pay are capital gains tax.


Sounds perfect – where do I get in?


Before we go rushing in to buy off plan lets look at it a little closely.


What has happened recently is that many amateur investors rush in without doing their homework and buy off plan, fuelled in part by the many agents out there who are pushing off plan developments as THE way to make money.


The developers are aware that investors are buying and therefore price accordingly. We often receive calls from developers offering new developments to off plan investors, but 99% we refuse as they don’t offer any sort of real investment. An off plan development should be under priced by 10-20% compared to other constructions nearing completion, or indeed complete. It stands to reason that if you are effectively funding the project you should gain something out of it.


However very rarely these days do developers offer any sort of discount at all of buying off plan. Their argument is that the market is moving so fast that in two years time it will be worth much more.


Add to this that if a development is being sold to off plan investors – what happens nearer the time of completion. Yes everyone wants to cash in their chips before going to the notary and having to pay purchase taxes. So guess what? Lots of properties go on the market at the same time – over priced of course because they were told that it would be easy to sell at a much higher price. Lots of products in a flat market means prices drop and the price you expect isn’t going to be achieved.


The Risks


1. Prices may not rise as expected

2. You will need to finance the property if you cannot sell it – can you afford another mortgage payment?

3. Too many investors (more than 15%) means more people selling at the same time meaning there is less likelihood of selling at a good price

4. Too much construction in the same area

5.Poor location


Off plan investing is a serious business. There is money to be made at it but you have to follow guidelines. The art of selling a property is to buy the property less than market value, but many investors have lost money by buying without thought, so how do you avoid becoming one of them? Here are a few simple rules to lessen the risks.


1.Make sure that the price you are buying at is genuinely below market value by at least 10% or better by 20%. You will be told time and time again that the value will increase. That may be the case but unless you are clairvoyant how can you possibly predict what will happen in two years time? Did you envisage Sept 11th or March 13th?

2. Do your homework. Will the property be easy to sell afterwards?. Find out what people are buying in the area and why. Adosados/terraced houses, and town houses are difficult to resell because they are either in vogue or out of vogue – apartments and villas are easier. The Spanish love apartments so you have a ready market for good quality apartments. They just don’t like buying something that they cant see (or generally so)

3. Research who will be likely to buy the property afterward Is the location prime? If not forget about it as you will have difficulty selling later unless the price is very much below market value.

4. Are there many other investors buying here? If so be wary because they will all be selling at the same time.

5. Do not become emotionally attached. Do your figures. Will it stack up on paper? Will you make a profit when you come to sell? If not walk away. People who are emotionally attached to a property make incorrect decisions. Remember it doesn’t matter if you want the building sky blue pink – the potential buyers are the ones you should be worried about. What do they want?

6. Is it close to amenities? If not your market will be reduced Are there many new buildings around or being planned? How many of them do you think will be selling at the same time as you.

7. Do not sign for anything on site (this is an emotional purchase). In a flat market as today there will always be units available so no matter what the agent tells you, always think about it and do your sums. If it all stacks up buy it, if not - don’t.


So how do you make money from off plan?


Generally if you are buying off plan you are too late. Once the first few units have been sold the prices will rise. The best time to buy into a development is when the land is being bought. But this is more difficult because you need to be close to developers or land purchasers and how do you find when land is being bought? It comes down to homework and this is my little secret, but there are plots around being bought now that will make very attractive investments.


In fact one I know of will hopefully have apartments for sale at half the value of surrounding property. Now that’s what I call a sound investment because you can make a profit and sell it on at below market value, so you will win, the buyer will win and the developer will win.


So when it comes to investing off plan the main point is do your homework. There are very few real bargains about these days but a little digging will soon turn up a gem because most people don’t bother looking hard enough.




Additional information