Is Buying Pre Construction a Good Idea?
Buying pre-construction can be the best decision you make when purchasing property abroad… or it can be a complete nightmare. There are several variables that come into play including the market you’re buying in, the developer you’re buying from and you.
What Does Pre-Construction Mean?
Purchasing a property off-plan (another term for pre-construction) means buying in a development that hasn’t yet been constructed. Your only indication of a development is the architectural plans. Quite often, you’ll find that developers offer deep discounts if you’re willing to purchase off-plan, and that these projects sell out before a shovel even hits the ground.
Why Do Developers Sell Pre-Construction?
In order for developers to stay in business, they need funding from investors. In addition, construction finances from a bank are usually reliant on a certain number of pre-sales. To increase the return on investment, a developer will strive to hit that target number as soon as possible. This urgency is mutually beneficial for both the developer and the investor, and the developer will feel a bit of weight lifted knowing the lots are already sold, reducing some of the risk involved in pre-construction. It’s a win-win situation though; the developer feels good about being able to offer low prices, and the investor is able to purchase in a financial climate that’s comfortable. No one can predict what could happen two years down the road when the properties are developed.
As long as you’re working with a reputable developer, (click HERE to learn more about the developers Where International works with) banks are eager to lend the required funds. Having pre-sales in place reduces the bank’s risk and the developer is able to secure the construction funds at a competitive rate.
Who Buys Pre-Construction?
Because it can take a few years for you to take possession of the actual home, those who purchase off-plan are either investors or folks pre-planning their retirement. If you’re ready to move right now, purchasing pre-construction may not be your best bet.
Do Your Homework Before You Buy Pre-Construction
If you’re purchasing as an investor or there’s any chance that you may not live there forever (and who can ever predict such a thing?!), you want to make sure you’re buying in an area that’s going to appeal to the general public. When it comes time to sell your property, you want to ensure there’s a market looking to buy in your vicinity, and that you have something that will be attractive to the majority of people, whether it’s renters, homebuyers or another investor. Keep in the loop about similar projects already or up-and-coming in the area as well.
How Pre-Construction Leverages Your Money
Of course, we’ve already mentioned how you can score an incredible property for a low price if you buy off-plan, but we would be remiss to not discuss how buying pre-construction can leverage your money. It’s true that payment terms will vary from one project to another, but regardless of the terms, you’re leveraging your returns to some extent. A standard deal will start with some kind of down payment, say 5%. There will be subsequent payments as construction progresses and will end up with you having paid between 5% and 80% - with final payment due when the keys are handed to you.
Lets put this into perspective… you buy a pre-construction property for $100,000, with a down payment of 5% and the balance being due upon completion in two years. Even if the property increases by only 10% during the build process, you’re up 100% if you were to sell. And this is using a very modest increase of only a 10% property value increase. It’s not uncommon to see property values rise much more during a build process.
When Does Buying Pre-Construction Make Sense?
In order to maximize your return on investment, you want to purchase pre-construction in the early to mid stages of an area’s appreciation cycle. If you wait too long and buy pre-construction at the top of the market, you risk losing your entire investment – maybe even more then that – if you’re bound to a contract.
The bottom line is, buying off-plan really only makes sense in a rising and active market. If there’s no activity, the risk of the project not being completed is very probable.
As you can see, purchasing your property pre-construction can have major benefits. Yes, there’s no doubt about it, there is an element of risk involved, but quite frankly if you’re a foreigner buying land abroad, you’ve already got a bit risk running through your veins!
We’ve got some incredible deals with our partners in Costa Rica and Honduras to purchase pre-construction property. And the best part? We’ve already done the research for you to confirm that these markets are definitely on the rise.