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Investing Off-Plan

What Is Investing Off-Plan?

Investing off-plan is where a purchaser makes a commitment to buy from a developer property that has not yet been built, or that is in the process of being built i.e it is not completed. The developer also makes a commitment to sell the same property to the purchaser and, in the case of deals negotiated by Silverhouse Property, at an agreed price.

It is general practice for many developers in the newer Central and Eastern European countries to include 'indexation' clauses in preliminary purchase contracts. These indexation clauses allow the developer to increase the price the purchaser is to pay in line with the market so, if a city sees a 25% increase in proprty values over a year, a purchaser can find that they are, come completion, expected to pay £125,000 for the apartment that they though they were paying £100,000 for a year earlier.

Silverhouse Property insistes on fixed price contracts and, together with our partners, we are able to negotiate far better terms on various different contratural points in order to provide our clients with safe guards and protection.

We are happy to discuss the changes we make to standard contracts offered by developers.

Why Does Investing off-plan exist?

If you are a developer building 10 or 300 apartments you do not want to wait until they are all fully finished and 'ready' in order to start the sale process....far better to take a deposit months or years earlier and know that you will receive the balance almost as soon as the last lick of paint has dried on the walls......this surety of sales enables the developer to be planning and budgeting ahead for their next project at an earlier date and to be able to move on quickly to the next job.

Additionally developers are generally highly geared (they borrow money from banks to fund their projects prior to receiving monies from the purchasers of their apartments) themselves in order to maximise their own returns and, as a result, can find themselves under great pressure early on in a new development to show sales before second stage funding will be released by the bank.........so they push early off-plan sales and good deals can be had on early phases of developments by shrewd investors.

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Why Should YOU Invest Off-Plan?

Buying off-plan in cities where the property market is driven by local demand, is great. By the nature of an off-plan development the apartments have to be very competitively priced in order for the developer to sell such a volume at once or the market has to be very good....either way it's a good situation for the purchaser.

Off-plan investment in a rising market is a great tool for a property investor. Should you pay a 25% deposit on a £100,000 property a year before completion and the market rises 25% then you would be looking at a 100% return on investment in one year...better than my local building society offers!

How Should you Invest Off-plan?

The minimum deposit you put down the better. Poland deposits have dropped to as low as 15% in some cases as it's a rapidly maturing market. In Romania you are looking at a market at an earlier stage (and one currently offering higher capital growth) and the payment structures reflect that....you're not looking at 100% before completion but 40% or more prior to completion is common. This also reflects the builders difficulties in obtaining bank funding as again, they are at an early stage of their westernised property market development cycle.

Such off-plan purchases also open up the possibility of paying a deposit, seeing a large uplift in the property price before completion and then taking out a mortgage based on the new value of the property (not the purchase price) and taking back your say 20% deposit to reinvest elsewhere. Not necessarily recommended in all instances but an interesting option to be considered.

The Foreign Advantage

We're used to the concept of buying off-plan in the UK. In many CEE countries property purchases have all been cash purchases until recently. In these countries people will see a new development going up, they will check the prices and think I'll have one of those later - I'll just wait and see what they look like when finished. They are surprised when they come back 18 months later and find that they are now 20, 30 , 40% more expensive. This is short term thing as people catch on fast and are doing so now!

Are There Risks?

Yes. If the market drops then you would be stuck having paid a deposit ... which it is likely you would lose if you pulled out without good reason. In Manchester recently investors having been walking away from deals leaving the 20% deposits they put down 2 years earlier, this is due to oversupply in the market and consequent weak prices and rental returns. Don't throw good money after bad is the sensible thought. The markets we are looking at are not like this and we'd be happy to discuss your area of interest.

Are there Other Risks?

Care has to be taken as to the contract and pre-contract signed with the developer. Most buyers end up with what they are given and, unless you're lucky and dealing with a very scrupulous developer, this is a bad mistake.

Call today to discuss your own requirements: 0800 11 20 111

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