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Justification risk

01.05.2010
Author: Hope PASHKOV
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The global financial crisis has taught us to make decisions more carefully and responsibly, especially when buying real estate. However, reasonable caution often borders on suspiciousness – is it worth giving up a bargain purchase just because we are talking about a house that has not yet been built?
How good and predictable everything was a couple of years ago! It was easy and practically safe to make a decision to buy a property abroad. It is enough to study beautifully designed catalogs, choose the developer you like, a promising project at an early stage of construction and conclude a deal, sometimes without even visiting the site. And that's all – you can be sure that in due time the construction will be successfully completed and one happy owner of a house by the sea, in the mountains, or in the center of one of the European capitals will become more.
Now, most real estate professionals recommend their clients not to take risks and prefer completed complexes to those under construction. However, there are still many projects under construction on the market that are very attractive in terms of location, unique features of architecture or infrastructure. It also happens that a buyer simply likes a project that has not been completed yet – and, despite all the persuasions of specialists, he still wants to purchase property in it.
Let's try to figure out whether it is worth buying a house under construction now, during the financial crisis, and if so, how to reduce the risks when buying.

Let's weigh all the advantages...
What are the advantages of buying a property at an early stage of construction?
The sale of real estate under construction often begins long before the builders begin to dig the pit, and the sooner the buyer makes a deposit, the greater the discount he will receive. The developers' advertisements state that buyers at the initial stage of construction are offered a discount of 5 to 20% in relation to the price of the finished object, which will be completed in 2 or 3 years. An investor who buys more than one unit of real estate will receive an even greater discount.
Good discounts on off-plan purchases provide an opportunity to make a profit. If you sell a house as soon as construction is completed, you can get a good capital gain, especially against the background of a growing market. At the same time, in a number of countries, it is possible to assign real estate before the final completion of the purchase procedure, which avoids the cost of paying for registration of ownership, since the certificate at the end of construction will be issued in the name of the final buyer.
As a rule, in the early stages of construction, buyers are offered flexible payment terms – when signing a contract, the first payment is made in the amount of 10 to 30% of the cost of the object, and the rest is paid in installments according to a certain schedule until completion of construction.
An undeniable advantage when buying a home in the early stages of construction is a wide range of offers. You can choose a comfortable layout, the optimal floor, the best views, etc.

...And the cons
The risks that may arise when buying an object under construction can be divided into two groups. Firstly, it is a delay in the delivery of the object for a significant period of time or the completion of construction – as the saddest event. The second group includes cheaper construction and lower consumer characteristics. At first glance, these changes may not be noticeable, but if you study the specification that is specified in the contract, then as a result you will find many discrepancies – the wrong finish, lack of planned infrastructure, lack of a management company, etc
. In order not to make a mistake when choosing a developer in such a difficult time, even for large developers, you need to figure it out the main economic reasons that lead to increased risks. This is primarily a credit crisis, a drop in consumer demand and, as a result, the lack of current financing for construction. It is obvious that the most stable now are those developers who build not with borrowed funds, but with their own, and whose financing does not depend on the pace of sales.
We are faced with a seemingly simple and at the same time difficult task – to find such a developer. By what signs can it be determined without resorting to a thorough check of the company by lawyers, although during a crisis it is precisely such an "investigation", which in international practice is called due diligence, that would save you from a risky decision? How to determine the reliability of a company and its sources of financing by direct and indirect signs, and who can help with this?

How to reduce risks
The simplest and most logical solution is to get acquainted with the detailed history of the company's activities. This information is available on the company's website, in catalogs, and in the press. Look at how many projects have already been built, what is the structure of the company's activities – whether it builds only housing, or also implements commercial projects (offices, shopping malls). Request detailed price lists of other properties, this will help you find out how many apartments have been sold, how many are reserved and how many are available. Check out the payment plan.
It is very useful to find out how the construction is financed. Usually, information about the borrowing of a bank or an investment group is available to consumers at the company's office. Carefully read this information, ask about the proportional ratio of sources of financing for construction. If for some reason they refuse to provide you with such information, try to consult with the company's lawyers. Any self-respecting developer has several copies of the necessary set of documents, which are available for review at the company's office, and at the request of a potential buyer, copies must be made personally for him.
The general advice can be given as follows: to minimize the risks, the construction should be completed by at least 70%. In this case, even if there are any difficulties with sales, it is still likely that the housing will be completed with its own funds or with a bank loan, approaching 100%.
At the same time, each country has its own peculiarities. So, in Cyprus, all major developers have bank guarantees for financing their projects, which are based on the pledge of the land on which construction is being carried out. Given that the Cypriot banking system was less affected by the crisis, it can be assumed that in this country the risks of buying new buildings at the off-plan stage are less than in other countries.

And yet, and yet...
But even if the project is built and delivered on time, the risks of the investment plan remain. So, according to leading English market analysts, buying real estate at the off-plan stage can bring good capital gains in a growing market, however, in times of high loan rates and falling demand, there is a risk of remaining with an object that, upon completion, will cost less than it was paid for at an early stage.
Further, when the market is in a state of lull or decline, it may be difficult to resell real estate – and after all, any real estate market cannot be accurately predicted for 2 or 3 years ahead. This will lead to the freezing of funds, which is often unacceptable for an investor.
This is exactly the situation that is currently happening in the Bulgarian real estate market – many developers who were supposed to rent out their properties in the summer of 2009-2010 cannot compete with a huge number of cheap properties – from 30,000 euros per studio in already built complexes – which are being sold by private investors. Many people have to either freeze their projects or put them up for sale entirely as an investment project. Only projects that have real competitive advantages can boast of good sales rates and stable prices.
Those who plan to rent out their property also have something to think about. Having bought a property in a large complex, you may face the problem that several dozen more identical properties will enter the rental market at the same time. In such conditions, it is difficult to achieve the desired high rental rates.

Caution first of all
So, buying an off-plan property is a very tempting, but also a high–risk strategy. New buildings are widely and very competently advertised, a team of smiling, polished professionals is attracted to the sales of new buildings, but the simple truth is that from the moment of making the first deposit to receiving the keys to the house, anything can happen to the real estate market.
Of course, this scheme can work, and it has worked perfectly for many years. However, those who have a budget that does not involve financial insurance should once again weigh the pros and cons. In any case, enter into such transactions very carefully, carefully assess the risks and benefits of the purchase, as well as the state of the market for new buildings in the region and the country where you plan to make the transaction.

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