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Friday, December 21, 2007

Tips on buying off-plan property

Thinking about buying an overseas property that’s not built yet? Arm yourself against a range of possible problems.

Buying off-plan is one of the biggest trends to have come out of the foreign property market in the past 15 years. The idea is simple enough: a developer sells a property that is not yet built, in stages, to a buyer who doesn’t want to pay the whole price up front. This gives the builder money to finance the project and allows buyers to purchase the property over a period of time,
generally around two or three years.

It seems like a good deal and often such buys are sound, providing you go in with your eyes open. While there are respectable companies offering good products, there are also those who will fudge the truth to get a sale, change the terms of an agreement and, occasionally, disappear
with your money. So how do you guard against making common mistakes when buying off-plan?

Get good legal advice
Hire an independent lawyer, not one that your developer or agent recommends, and get them to check that the building licences and permissions have been approved for that particular development in that particular spot. You also need to know if the developer actually owns the land to protect against issues of title in the future.

A recent high-profile scandal befell some buyers on the Costa del Sol in Spain, where many owners discovered their properties were built illegally and would therefore possibly have to be demolished. In this case, due diligence didn’t help because the scam was perpetrated by the local planning authority, which was taking bribes in return for licences to build. Even the lawyers were fooled.

Usually you can root out such issues if you do your research and refuse to take anything at face value. If a project catches your eye, don’t rush to buy before you’ve had the property and company thoroughly investigated.

The new International Developer Information Pack from law firm Live Overseas does background checks on developers that should help unearth any legal issues relating to their projects. They cost from £625 (RM4,226) depending on the level of services sought.

Get what you pay for
Check the contract of any off-plan development thoroughly to make sure you are getting what you were promised when viewing.

Property expert Alise Crossick of Ready2Invest claims it isn’t unusual for developers to alter plans during the building process, which can mean anything from failing to complete facilities to altering the layout of properties because the builder has realised he can squeeze a few more on to the site.

You need to check everything is in the contract from the on-site spa and bar, down to the square footage of the useable living space you’re buying.

Don’t be fooled into signing for the total space, which can include the thickness of the walls, communal stairwells and halls.

“Developers can change things, if they’re not contractually guaranteed,” says Crossick.

“If it’s promised, make sure it’s also in the contract, otherwise you can’t expect it to appear in reality.”

Be careful about the temptations of ‘flipping’
Off-plan purchasers are often told they can easily sell on their property before it’s finished, taking advantage of capital gains and bailing out before the mortgage kicks in.

However, a changing market can mean you’re left with a property you can’t shift and a mortgage you’re not able to pay.

Many areas of Europe now have a glut of identikit new-builds that aren’t selling. Also, local agents often get better commissions from developers for pushing off-plan products rather than re-sales and buyers might not be shown your property.

Plus, remember that they’re being given the same financial incentives and promises that you were when encouraged to buy off-plan.

Indeed, the problem has become so acute that “distress sales”, in which prospective “flippers” offer to sell at a lower price to get rid of their property, is now a common term in the industry.

“I think flipping is dangerous,” says Stephen Marcon, international mortgage advisor with Connect Overseas, who rarely sees off-plan contracts successfully sold on. “You need to have a contingency plan in case you can’t sell. Also, some contracts don’t allow flipping, so check the small print.”

Beware of ‘guarantees’
One of the most popular off-plan sales techniques is the rental guarantee. This gives owners a percentage of the property purchase price, usually between 4% and 6% per annum, for a set number of years.

In many cases, properties may be in a good location and will rent well. However, rental guarantees are often used to entice buyers to purchase somewhere no one is ever likely to want to rent. So how do you get those returns?

“Sometimes you’ve overpaid for your property by as much as 20% and the developer is effectively giving you your own money back,” says Crossick. “You should always make sure you’re paying a genuine market price by comparing the property with other similar ones in the area.”

If buying for investment is your main aim, then be careful about guaranteed returns as the promised tenants might not exist. “Many guaranteed rents camouflage a poor rental market,” says Stuart Law of investment firm Assetz. “They hook you into thinking the property’s cheap and that there’s a demand, so you feel comfortable about buying.” Do your own research into the local market and check that there’s a market for rental property first.

Stuart Law also points out that developers can renege on guarantees once buyers commit to the purchase. But, if the contract is long-term, say 10 years, and is with a branded hotel or resort chain, then you should be reasonably secure. Finally, remember the oldest rule of all – that location is vital.

By Independent

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