The Risks and Benefits to Buying Property Off-Plan
21st Jan 2021
Buying Property Off-Plan allows home buyers and property investors to acquire property before the development is commenced. The property developer might be able to demonstrate access to vacant land on which the property will be built and has proposed architectural plans for the development. In addition, the property developer may also have approved development plans and built partnerships (consortium) towards executing the property development. The project is moot at the time the off-plan scheme is created – merely a conceptual or theoretical plan.
Risks and Benefits to Buying Property Off-Plan
In effect, subscribers to these schemes become the original or initial financiers of a project that needs to demonstrate its “bankability” in order for it to take off.
Depending on the size of the project and the capacity of the property developer, the initial off-plan sales allow the developer to demonstrate sufficient appetite (viability) for further open market sales and also demonstrate the bankability of the project. This, in turn, allows the developer to source any additional financing requirements to execute the project.
In the vast majority of instances, the full disclosure of all commercial interests in the project, or their actual nature, are rarely disclosed to prospective buyers. And therein lies one of the issues ailing the market for off-plan housing in Kenya.
Buying Property Off-Plan: Profitability is Key
Of course, while much of the off-plan scheme will have been developed with the market in mind, the other obvious determinant in developing the off-plan scheme will be its profitability to the developer. Developers are, after all, in the real estate business for the profits they can generate from the business and maximize the wealth of their shareholders/owners.
The uptake of the scheme will be determined by how well the developer has thought through it from conceptualization to implementation; and ultimately, how healthy the appetite is for the scheme proposed. To spur interest in their offering, developers will naturally engage in an intense marketing effort to sell the property, especially because the property is nonexistent and any potential subscribers to the scheme will likely have to be wooed without any physical, visual structures in place. This is where the plot is either won or lost.
Buying Property Off-Plan: Why Buy Into Something That Doesn’t Exist?
For the most part, because it meets a need or expectation that you have and ultimately because you believe (or are convinced?) that once it comes into existence, that need or expectation shall be met. The savviest of property developers will be able to titillate you into visualizing the experience of meeting that need or expectation. They will know just what to say to entice you into buying in and they achieve this through powerful visuals and a package of benefits you may find irresistible including:
- Concessional prices for early adopters: The key benefit to buying off-plan property is the presumably low price. I say presumably because it is arguable considering that the developer offers lower-than-average prices based on current market values and not necessarily on the total cost of construction with a markup (the two values may be as distinct as chalk and cheese!). Nonetheless, it’s still a deal! At the offer price, a buyer can potentially shave off up to 35% off the value of a property when construction is complete. The savvy investor uses this concession in price along with a combination of other investment strategies to make massive profits on off-plan schemes, making them one of the most lucrative investment tools for real estate investors.
- Myriad delightful features of the development: To attract especially home buyers, off-plan developments come packaged with lifestyle goodies include sports, entertainment, shopping, health and fitness facilities (gyms, swimming pools, clubhouses and so on), additional (non-standard) security features, special memberships and as many more as the developers creativity can accommodate.
- Customized Touches: As a buyer/investor under an off-plan scheme, the developer will provide the option of small customized finishes, nuanced touches that will give homeowners an added layer of pride in owning the property. Because structural and design changes may have a significant bearing on the cost of construction, developers usually include this as a time-limited offer.
- Attractive, flexible terms and payment plans including an early right to ownership privileges which real estate investors can apply to make profits from the off-plan schemes even before the development is completed.
- A host of other generous inclusions including exclusive club memberships as well as discounted travel, home insurance, furnishing offers and so on.
Buying Property Off-Plan: Benefits of Off-Plan Schemes.
Additionally, property investors who get in early are able to negotiate higher discounts, particularly where they are able to leverage the terms of the off-plan scheme so that they are able to reserve several units with deposits that are just sufficient to tide them over into the rights of ownership.
At the time of the launch when developers are seeking early adopters, the savvy investor can also negotiate for the right to sell the property at any time during construction having paid just the agreed deposit or some other agreed percentage of the price. This allows the cash-rich, savvy investor to strategically position themselves in the development and to clear strong capital gains even before the project is completed as the prices of unsold inventory keep going up.
For individuals who are self-employed or are business owners, buying off-plan makes financial sense because it allows for a “finance-free” option to beat mortgage lenders in the acquisition of the property. It allows this cadre of individuals the opportunity to acquire property by paying a deposit out of their savings and gradually pay off the balance through periodic lump sums.
Buying Property Off-Plan: Risks Associated With Off-Plan Schemes
Any astute property investor will tell you that, done right, buying property off-plan is a great investment strategy that can yield very high returns. They will also tell you that any investment that offers high returns also carries with it significant risk and as such should be well-analyzed before being entered into. Risks may be attributable to the property developer, market occurrences or even fundamental internal risks with the scheme itself. For both home buyers and property investors, the most common of these are:
- Project delivery delays. A good way to mitigate this risk is to check with the property developer whether they have any financing options in place prior to commencing the project.
- The delivered property falls below expectations. Usually as a result of structural defects or failures and invariably as a result of non-compliance with building codes or, simply, that they do not meet with the preferences and tastes of the buyer.
- Complete failure of the project due to reasons outside of the control of the property developer, usually legal, political, environmental reasons.
For property investors, purchasing off-plan in a market with a high saturation of specific types of properties, especially commercial spaces, there will be exposure to significant market risks as the property may not be suited to the market and this may, in turn, lower returns on investments.
Arguably, in Kenya today, for instance, there are a high number of new office spaces that experience low occupancy rates owing to the unsustainable rental charges they command. This is uncommon where indicative property surveys have been properly conducted prior to the conception of the off-plan scheme and also because property values generally tend to increase even before the completion of the project.
Buying Property Off-Plan: Disclosure, Understanding Off-Plan Property Acquisition
Savvy property developers not only understand their proposition keenly but will also have a very intimate understanding of the market and of their potential subscribers. Often, they will limit disclosure while simultaneously embellishing their offering. Based entirely on the nature of the questions posed by prospective subscribers, a property developer can easily determine the elements of the project to underplay and those to sensationalize in order to elicit a sale.
They will understand how to navigate the conversations with prospective subscribers and will have anticipated questions from home buyers and investors well in advance as well as their responses. They will be able to distinguish between enquiries by prospective home buyers and those by property investors, and therefore how to manage each prospect with the aim of making a sale.
Knowing what you want to hear is great. Knowing what you need to hear may be even more important. By asking the relevant questions, demanding written disclosure and most importantly taking the time to understand off-plan acquisitions, home buyers and property investors can make informed decisions and determine if the off-plan scheme is a good fit for them. Possession of full and accurate information enhances the experience for both parties and ensures that both the developer and the buyer/investor are satisfied with the transaction.
Buying Property Off-Plan: Get Advice to Manage Risk
Whether you are a home buyer or a prospective investor who cannot seem to arrive at a fair assessment of the off-plan scheme under consideration, it would be sound advice to always solicit the assistance of independent professionals to guide your decision making and screen out any potential false marketing.
Property developers will often create a rosy, blissful picture to obfuscate any shortcomings in their off-plan schemes in order to get your buy-in. Consider your decision outside of the emotional high that owning your dream would give you and instead focus on getting satisfactory answers to the hard questions.
Get all the information you require to make clear, incisive decisions. Often that information won’t necessarily be in plain sight. Or in plain language either. Hence the term “fine print”. Don’t be fooled though, it’s often a deliberate ploy. Get knowledgeable about the property development industry to understand the strategies they use to sell to you so that you can separate the wheat from the chaff and strike a good deal for yourself.
Buying Property Off-Plan: Conclusion
- Off-plan schemes are a great way to acquire property. Only if they are executed well.
- Developers are in the real estate business to make a profit. If in the process they offer you some convenience or financial benefit, understand that it is still motivated by the developer’s goal – to make a profit.
- As a rule, if you plan to put down money into a real estate purchase, exercise diligence unwaveringly.
- If you opt to acquire property through an off-plan scheme, understand that you are financing the development of property at zero cost to the property developer. This is why he will love you. In spite of the fact that you are not a bank to levy high fees and onerous conditions, you should drive as hard a bargain as you can and negotiate your way to the best deal possible on the acquisition.
- Take your emotion out of the decision! We all love a bargain but look before you leap. Or at least get help to figure it out!
- Aggressively Research the Market, get to know the developer intimately and understand the potential risks of the decision you need to make.
- Read the Fine Print: Inform yourself on all the finer details of the off-plan scheme, in particular on your rights in the eventuality that project risks mature. This is particularly important when the project experiences failure.
- Seek the assistance of professionals and people in your networks, who have had prior experience with off-plan schemes and, even better, with the developer you intend to work with, should be solicited. Nobody has absolute or perfect knowledge of all market conditions. But experts can help you make informed decisions, or steer you away from really bad ones!
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