Buying properties off the plan is an exciting method of investing that has a great deal of potential for profit. But there are very real risks involved in this type of real estate investment. Make sure you know the risks and the potential rewards before you dive in head first.
Buying Off the Plan: Pros and Cons
Buying off the plan when it comes to real estate investing can be an extremely profitable way to do business in high demand real estate markets. What it is, is buying property at today’s prices even though it hasn’t yet been built. In some instances, ground hasn’t even broken on the projects before entire buildings are sold out or “on contract.” The idea behind this type of real estate investing is that you can buy at today’s prices and bank on the fact that real estate investments are going to increase in value by the time construction is complete and units are ready to be “lived in.”
The Good News about Buying Off the Plan
There are plenty of benefits for buying property off the plan. The first and perhaps biggest benefit is that in boom markets, the value of a property can easily increase substantially by the time construction is complete. This means a huge payoff for what is a minimal investment in many cases. How is it that this would be a minimal investment? Another benefit is that you don’t need all the money to make the purchase at the time you make the offer and “buy” the unit. In many cases, earnest money of five to ten percent is adequate to hold the property for you. There are also many tax benefits to making this type of investment. Be sure that you get the specifics from a qualified accountant before you invest so you can be certain that the investment you’re making will serve you better in the end.
The Downside of Off the Plan Investing
While the good is really good, the bad with this type of investment is really scary. First of all, there are a lot of scams going on so do your homework about the company you’re investing with. Make sure you’re not getting into some sort of scheme that will ultimately take your deposit and run. When you consider that many of these properties sell for half a million dollars or more, even five to ten percent is a sizeable amount of money. The second problem is that there are no guarantees that the property bust will continue or that prices will continue to rise. It is very possible to get stuck with properties that are worth less than what you offered for them and now you have to come up with the money to buy the property and make good on your offer. This often leads to short sales and in addition to the loss of the investment and deposit (again not an insignificant amount of money by any standards) but also to the potential loss of your good credit score.
The Bottom Line for Buying Off the Plan
In the end, there are a few things you’d do well to remember when buying properties off the plan. You should never buy from developers that don’t have a good reputation or are unknown. You should also ask around and talk to people who have invested with them (with good results) in the past. Get specific information about every aspect of the sale and what is included in the sale of the property. Study the market. Yes, an upward cycle or real estate boom is exciting. But don’t invest more than you can afford (even if it would be painful) to lose. Don’t risk your livelihood or retirement on what could amount to an expensive gamble. When you have everything in order before going into the sale you will be better prepared to buy with confidence. Be aware of the risks and mindful of the potential. Good luck!