As an American living in Europe a number of words have crept into my English vocabulary that tend to confuse my fellow compatriots. One of those words is SMS (aka text message) and another is Off Plan. A conversation among Britons and most other Europeans when speaking in English about real estate often becomes centered around this concept. For the last several years in fact, one might even say it's become the buzz-word in European real estate investing.
In the past several years billions of Euros have been invested in these types of properties mainly by Europeans looking for second homes and investment opportunities that offer potential returns higher then they could generally find in there home country.
This model represents an equally compelling strategy for North American investors to acquire investment properties in top worldwide investment destinations that may offer much higher returns then in many parts of America.
What exactly is an off plan?
In simple terms, an off plan property is one that is net yet finished construction.
Normally, 'off plans' are offered in an apartment or condominium complex or a development of houses or townhouses.
The buyer "reserves" a property or properties in a development found in one of a various number of stages from planning to completion. (The details of the buying process are described further along in this article.)
Off plan opportunities exist in a number of countries. The most popular and profitable include Turkey, Italy, Bulgaria, and Romania. They are generally represented by representation firms which oversee the project development on a daily basis for it's investors and provides diverse services such as mortgage assistance and property management once the development has been completed.
Why Off Plan is considered such an attractive investment consideration.
One key to why buying 'Off Plan' can be such a good investment lies in the fact that normally you only have to pay approximately 30-40% of the purchase price as a deposit and then often nothing until completion of the property when the rest can be financed on a 60-70% mortgage (however a number of off-plans are staged in 3 to 4 payments).
How this model plays itself out in practical application can be seen in the example below:
Purchase Price: $ 100,000 (September 2006)
Deposit payable: $ 30,000
Let us assume that you sell the property in September 2008 (assuming the maximum wait period for almost any off-plan project) just before completion and that you sell for $130,000 (this is a much lower return than has been achieved in recent years). Your profit is $30,000 which is obviously on the $100,000 asking price a 30% return, but remember, all you have had to pay is a $30,000 deposit so your actual return on cash invested is 100%. You've doubled you're investment money.
Many people also finance the 30-40% deposit by through releasing equity for their existing property and so do not actually have to have any liquid cash to take advantage of this profitable investment opportunity.
As we will learn in this article, however, these are just some of the many reasons why off plan offers are so attractive. Tax benefits, capital growth expectations, and rent-ability also play a major role.
Why do developers offer it?
The developer is obviously very keen to sell as many properties as early as possible to minimize the risk to themselves and to obtain better interest rates on their development loans from banks and investors. To help sell the properties at this early stage the prices are normally extremely competitive for the reason above and also because there is often little to show potential purchasers except a floor plan and artists impressions of the finished development.
Liquidity is also a major consideration. I recently met with one such developer here in Bucharest, Romania. He was keen to sell 10 apartments from his yet unfinished resort apartment complex at significantly reduced prices in order to acquire the cash to purchase adjacent land for a future development.
What are the potential risks?
The biggest potential risk is also the most obvious. The property becomes part of a development never completed. The best way to ensure that this doesn't happen is to buy from a reputable seller with a solid track record of past performance and from a developer with a similar sterling record. Some off plans are offered in developments that have close relations with banks, even offering mortgages available covering even the initial payment. This is another sign of the credibility and bank-ability of a specific project.
Clearly, the early the investor gets into the project the more risk he or she technically is taken on. This must be waged against the greater profit that may come from getting in at a lower entry level that should be below the current market value.
How is such a high return possible?
The following factors all help increase the value of a development during and after construction:
1) Lower than 'market' prices offered by the developer initially.
As discussed above, the developer is keen to sell the properties as quickly as possible so prices are normally very competitive.
2) Best properties get sold first.
Normally when a development is released a pattern emerges, i.e. penthouses, corner units and ground floor with private gardens tend to sell first which then in leads to price rises.
3) Show home available/building commences.
As soon as the main structure of the development starts to take shape and/or a show home is opened prices normally increase substantially as prospective purchasers can see much more easily what the finished development and individual homes will look like.
4) More units sold.
As the developer starts to sell more and more properties the original prices will continue to increase which obviously means that if you wish to sell your property it is obviously going to be worth more.
5) Final Completion achieved.
Once the development is finished you will be the owner of a brand new apartment/house in a new development. The person who wants to buy at this stage will be prepared to pay significantly more for somewhere they can move into or rent out immediately rather than when the development was just a plan on a piece of paper and a plot of land or a semi-constructed dwelling.
The reasons listed above explain why prices should normally increase as a development is built. It is not uncommon for a property to be bought and sold again before a brick has been laid and even sold again several times before final completion.
NO CAPITAL GAINS TAX
One of the reasons for the popularity of selling before completion is that there is NO CAPITAL GAINS TAX to be paid at all if you make a profit however big by selling before completion. This is a form of 'property flipping.?
HIGH FUTURE CAPITOL GROWTH OUTLOOK
When you purchase an off-plan property at the right price and in the right area high capitol growth is to be expected. This is the reason why developing countries like Bulgaria and Romania, receive a good deal of the off-plan investment business.
Capitol growth averaged 17% last year in Spain while Turkey averaged 34% growth overall.
Depending on the time frame which you desire to hold onto the property for, you will have to decide whether to flip your property before completion of the construction and avoid capitol gains tax or hold on to your property and reap the likely capitol gains and equity growth you would receive for holding on to your investment for a longer time period.
Also, as so many off plan properties are located in resort destinations, you'll have the ability to go on what amounts to an all expenses paid vacation as often as you like and leave a property management company to rent our your property on a daily, weekly or monthly basis, creating an additional stream of revenue which in will help pay off your investment cost including mortgage.
Cold Hard Numbers
Let's assume that you purchase an off plan and benefit from a modest 15% savings against the current market value of the property and reap a below average 10% per annum capitol growth rate during a two year construction period.
Off Plan Investment Cold Hard Numbers
Example
Assuming a purchase at $120,000, representing a price 15% lower then current market value.
General Figures
Sale Price: $120,000.00
Automatic Profit vs. Current Market Value: $18,000.00
Upfront Costs:
Possible 2% Agent Brokerage Fee: $2,400.00
30% Deposit: $36,000.00
Legal Fees: $1,200.00
Mortgage Broker fee 1%: $1,200.00
Total $40,800
Capitol Growth at 10% per year, 2 years on Market Value Price $28,990
Profit at Point of Purchase $18,000
Total Profit in 2 Years
$45,400
Percentage Return on Investment (Upfront Costs) 226.45%
This is one of a number of models for profit on an off plan investment. You may put down a higher deposit or have less wait time for the construction to be completed but on the other hand, benefit from higher capitol growth. Or, you may choose to keep your property after construction has been completed, thus paying the entire cost of the property but between rent and capitol growth likewise see tremendous profit.
Off Plans closer to Completion Stages
Off Plan properties that are relatively close to completion
The best thing about these opportunities is the increased piece of mind that your property is part of a real and viable project.
While the above profit models will be in some ways different from those used above they are not necessarily any less compelling. You'll still be buying at a lower then market value cost and you'll be able to reap rental profits in a shorter time period or sell shortly at a higher cost. You'll also have a shorter wait time to do a flip on the sale, if you desire to take that route, or inversely to move in.
Off plans that have 3-4 stage staggered payment plans
A number of projects, especially those with shorter wait times for completion require payment in 3-4 stages, with secondary payments coming several months after the initial payment is made.
You're odds of securing a mortgage on these secondary payments should be more probable because of the advanced stage of the development and can then be assumed quickly by the new buyer should you choose to sell the property near the point of completion. Else wise, your rental income can begin to cover these payments in a relatively short time frame.
Also, those developers requiring more stages of payment may be compensating for this request with a particularly attractive purchase cost.
It all really boils down to how compelling the particular offer is. You may be getting in at an extraordinary price or in a particularly hot project with increased profit potential, which makes the increased payment demands worthwhile.
Then again, you might not be.
By seeking a qualified guide in the process, you'll know which off plan investment is right for you.
Recapping some of the strategic advantages of investing in an off plan:
? You always buy under current market value ensuring an automatic profit
? You benefit from growth of property value while development is under construction without having paid the full property cost
? Ability to avoid Capital Gains Tax
? It takes little time and effort on your part
? Invest in regional hotspots without leaving your home but have a potential holiday getaway.
? Ability to 'flip' property after putting down as little as 30%
? Property management firms can rent out your property, creating a regular stream of income/paying off the mortgage on the property.
In Romania, where my offices are based, it is not uncommon for an apartment building complex to be 70% sold out before groundbreaking. The reason is quite simple. An apartment bought off-plan in a beautiful, new building in desirable location can be purchased for less then one in a run-down ?Soviet style' concrete block. Buyers are willing to wait as new apartments in already completed buildings are available only at premium prices. As this market develops, capitol growth has and will likely to continue to happen at a staggering rate. Informed investors know this as well and this is the reason that half of all investors in off plan here are foreign.
Each market is motivated by both different and similar features. While, I am particularly compelled by the opportunities available with off plan opportunities in Romania, each investor must consider his or her personal needs before making a final decision. As buying off plan can also be a lower-entry cost for those wishing to have a second home in Europe or elsewhere, there are those investors who will want to buy in the area or areas that are most appealing to them while offering a solid return on investment. Those motivated strictly by specific profit investment goals on short or long term holds will want to make there decisions based solely on active market factors.
Smart off plan acquisitions provide the ultimate opportunity to leverage an investment opportunity, staying liquid, and reaping the most profit possible in the worlds hottest investment locations with littlest possible stress.
It's all based on a principle you probably learned in elementary school 'the early bird gets the worm.? Off plans are the juicy 'worm' of the real estate market.
due to technical requirements portions of this article including charts have been deleted, please contact the author for more information.
