Streetwise Property Alert 18th December 2013

Lots of you seem to be asking about off-plan purchases at present. Some thoughts…

Use A Lawyer

Have the contract checked (before signing) by an independent lawyer. To profit from offplan flipping, you need to be able to assign (sell on) up to or at completion. An independent lawyer – i.e. not the developer’s nor the agent’s – can check to see the contract is assignable. It’s not always the case.

Just because the developer or agent says you can, doesn’t mean you can – you need it in black and white. As often as not, the contract will prohibit this. Many developers want to see the development fill and grow naturally rather than becoming a speculative investment for foreign investors. Some contracts state that you must own the property for a certain period of time thereafter, typically 12 months.

There are other issues. Even if selling in-between is possible, it is often easier said than done to call the top of the market. And most follow-on investors prefer to buy new from a developer than flipped from a fellow investor who is clearly making a profit from them. As ever, take independent legal advice before signing.

Due Diligence

Have you looked at supply and demand? Most investors don’t or, if they do, they don’t look ahead to completion and, as likely, delayed completion. Clearly, some thought needs to be given to what you are buying and its USP (unique selling point), if any. What, for example, is going to distinguish this ‘luxury apartment’ from others that may come to market at the same time?

You need to think how the supply of similar properties is going to alter over the next 12 to 18 months or whatever. You want to see a rising market but that generally brings increasing supply too. And the more new-build there is, the more competitive the prices will become at some stage and this will eat into your projected profits.

Look at demand as well and whether that’s likely to keep growing, particularly for the type of property you are buying. That ‘two-bed luxury apartment’ is much favoured by the international investor but may be less suited to the home market. If or when a market stalls it is often these apartments that remain empty.

The ‘What If?’ Principle

Work the ‘what if?’ of delayed completion. The biggest ‘if’ is ‘if’ the unit is built on time (or at all). Even in good times, this is far from certain and it’s becoming less so nowadays when developers are struggling with funding from new investors and banks. You need to consider what will happen if completion is delayed six months, 12 months or if it’s never completed.

Many investors borrow money for staged payments and struggle to keep up repayments as completion is delayed time and again. If the property is completed on time, a common ‘but’ is that part of the remaining development has not been completed or the developer hasn’t had the funds to put in all the infrastructure and facilities.

There is a ‘maybe’ as well – maybe, two years down the line, the market you are buying into today will be a very different one when it comes to selling on. Think how markets such as Bulgaria, Spain and Dubai turned.

Look Well Ahead

Have you looked beyond completion? Too many investors do all their calculations carefully but stop in 18 months; they don’t make plans for beyond completion. It’s wiser to have a plan of action that features various alternatives and exit strategies. What if you can’t flip for whatever reason?

The obvious alternative to flipping is to let the property out. Before signing, it’s worth doing your due diligence on the lettings market here – who rents, supply and demand, and so on. Failing that, you may wish to look at using it yourself as a second home.

Exit strategies are as significant. You make money when you sell, not when you buy. You need to think who might buy from you. A follow-on investor is the common assumption; but they may prefer one of the similar units over the road that the developer is releasing at a knock-down price. It may be better to look at a sale within the home market although many resorts are priced out of reach of local buyers.

The Bottom Line

Make sure you can work to the bottom line. The best case scenario is that everything unfolds exactly as planned and, 12 to 18 months after signing, you flip and pocket those profits. But it’s wiser to look at the worst-case scenarios and, just in case, make sure you can live with

Flipping tends to be something that occurs most with cheap, emerging hotspots where a ‘goldrush’ mentality seems to take hold and where investors reserve a number of apartments with the aim of flipping whilst knowing they wouldn’t be able to complete on them. Is that the sort of market you are moving into?

Before investing, but after taking professional advice and doing your due diligence, it’s worth looking at the worst things that could happen to see if you can live with them. For example, consider the currencies. What happens if a currency devalues? What happens if a developer does something wrong and fails to deliver? It’s not easy to sue a developer in a foreign country.

All for today, see you with more news and views tomorrow.

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