Buying Off Plan Property: Who Really Makes the Money?

One of the most popular ways to buy property is buying off plan.

But what the heck is "off plan", and what’s all the hype about?

Off plan means buying a property that doesn't exist. In other words, you're relying on a development company to build your property.

The big 'HYPE' is that if you decide to invest in the right development project, then you, as the investor, can make some serious money.

Let’s have a look how a typical off plan investment works.

You’ve been reading the ads in the Sunday newspapers again, haven’t you?

You’ve seen an advert for a fabulous new development that’s being planned. At the moment, however, there is nothing there yet. It is merely a developer’s idea, presented with some fancy pictures and inflated financial returns to get your juices flowing.

You’re invited to invest in this scheme. If you invest early, the developer will give you a 15% -40% discount. You only need to sign the contract and hand over the first 10% as a deposit. After that, you’ll make regular periodic payments in accordance with your contract until the development is completed.

You can sell your contract during construction, or sell the property after completion to make a nice juicy profit.

Okay, let’s stop here!

First, let’s take a look at the idea from the developer’s perspective, and then we’ll look at it from the investors’ perspective.

The developer has an idea. He’s seen a plot of land or some dodgy rundown building where he wants to build make some serious money. But he has a problem. He has no money to start the project. He can go to the bank to borrow the funds, but the Bank won’t lend him the money unless he can provide security.

The developer plans to develop the project  at a cost of £20 million pounds, but he doesn’t have the money. He only has enough funds for drawing up the plans and printing the advertising brochures....oh and of course a fancy website.

The land costs £2million. He needs another £2 million for putting in the infrastructure and £10 million to build the actual development. The Bank advises him that if he owns the land, it will lend him the £2 million. Once he puts in the infrastructure, the project can be started. He’s in a fix.

How is he going to raise the £2 million for the land?

This is what he does…

He markets the off plan for his development via thousands of on-line real estate agents from around the world. Early-bird investors jump in with their 10% deposits. The developer then uses the investors’ deposits to pay for the land/building. He then goes to the Bank to borrow the other £2 million for putting in the infrastructure. The Bank lends the £2 million and puts a first charge over the land.

At this stage, administrative staff from the developer’s office is collecting the next round of payments from the investors, usually around 30% of the total. Now the developer will have the funds needed to start construction and pay the builders. If all goes well, the project has been started, without taking any money from the developer’s bank account.

This, in short, is how the buying off plan development process works from the developer’s perspective.

Now let’s have a look at the same off plan process from the investor’s perspective.

You, as an investor, can secure a unit at a 15+% discount if you purchase it quickly. You don’t want to miss this opportunity, so you decide to fork out the 10% deposit and pay the developer. The sales team has promised you that you can sell your contract at any time during the construction phase to make a nice, hefty profit.

Let’s look at an example.

Flats are retailing for £87,500. You’ve secured a 30% discount on this price, so you’ll pay £61,250. You need to secure this unit by putting a 10% down payment of £6125.

A year later, the price increases by 10%. The flats that were valued at £87,500 are now worth £96,250. If you sell your contract at this new price, you’ve made £35,000.

You could hold on for another year, or sell before the construction is completed.

The remainder would probably be covered by a 70% mortgage. If prices rise by another 10%, you could probably sell your share for even greater reward.

You’ve more than doubled your money! 

Okay, now let me tell you the bad news that no one else mentions!

• You need to sell your flat  within a tight time frame. Actually, you need to sell it before the next payments are due. In order to do this, you need plenty of buyers and a liquid market.

TELL ME SOMETHING.... why the heck would someone buy your resale property when he or she could go directly to the developer and get a discount? The only way the developer will help you sell your property is if the development is already sold out. However, the problem is that the developer has just started a new development down the road, where he is selling off plans to more new investors at a discount. Guess which property will attract your potential buyers?

• If the project goes down the pan, how will you get your money back? You can’t get a refund for your deposit, because the money went to pay for the land that is now mortgaged by the bank.

The bank will get its money back, as it secured a first charge over the land, but unfortunately it was your money that went toward the purchase of the land.

• Prices must be rising quickly for this scheme to work, because if they are rising slowly or are static then you’ve made nothing.
• You are dependent on the initial valuation being correct. If the property is overvalued by even 10%, you will lose money.

Buying off plan is fine if you love the development plan and intend to use it for your own retirement. But I guarantee that if you look in local newspapers in any country around the world, you’ll find lots of desperate buyers trying to sell their own off plans at a third of their sale price on the resale market.

Buying off plan is ideal for the developer. But they’re not the way for investors to make money. It’s the developer who makes the money with off plans.

...and this does not take account of the fact that in many cases the development is never even completed, the company disappears with your money and any guarantees you have been given are completely worthless!!