If you have the heart and soul of a gambler or love extreme sports and activities such as skydiving or bungee jumping then you may be the ideal candidate for off-plan real estate investing.
Buying property off plan in Portugal, i.e. buying houses or flats where construction has not yet started, is becoming increasingly popular in Portugal. Faced with rising prices for existing properties and a shortage of new-build properties, especially also due to the new need for space, low interest rates and greater savings, this modality is attracting more and more investors. Although this type of purchase offers some advantages, the risks should also be considered.
Pre-construction profits are often among the highest in the industry. At the same time so are the risks. You will find the greatest highs and lows that can be found in the field of real estate investing lie beneath the umbrella of off-plan profits and many of the big names we know so well in the real estate investing field have made much of their fortunes through speculation and pre-construction sales.
Before I go any further, one word of caution should be spoken. While the potential for profits in this particular corner of the real estate market are unconventionally high the risks are also abundant.
This is speculative real estate at its very best and as we have all learned in the past, when the bubble bursts in a specific market those who have the most invested are the ones who often loose most heavily.
In hot markets, such as now, you often need to buy the units before the project has broken ground in order to get the lowest price for your investment and the highest potential payout. But beware: as with any purchase contract, it is always advisable to conduct a thorough analysis and gather all available information and data on the property and the project before signing, due to the high investment involved.
In this way, as a buyer, you can make a proper assessment of the future property you wish to purchase, the seller (construction company/developer) and the risks of the project, which in some cases may take several years to complete.
One of the points that should be included in the pre-sale contract is the deadline for the conclusion of the final purchase contract and the conditions for its conclusion. Some of the terms of the contract are usually the following:
Submission of the property to the horizontal property regime (if the property to be acquired is an autonomous fraction);
Final registration of the property under the horizontal property regime in the Land Registry Conservatory and the Municipal Land Registry;
Issuance of the certificate of habitability;
Deposit of a copy of the housing-related documents at the Municipal Registry;
Permission from the bank to cancel the mortgage registration if the promoter resorts to bank financing;
Proof of non-existence or waiver of statutory preferential right, if any.
It should also be noted that the validity date of the building permit should be taken into account when setting a deadline for signing the final contract.
Once you have acquired the unit(s) for sale, start looking for buyers for these units.
In emerging markets such as the Golden Triangle in the Algarve, it is not uncommon for the same property to change hands many times and have several owners before the unit is completed. Each takes a small piece of the pie for their efforts, with those who get in earliest often taking home the biggest piece of the pie.
You may be wondering why this is, and the answer is quite simple. When developers try to get financing for their buildings in these large complexes, they often need to pre-sell a certain percentage of the units in order to convince the banks that there is a decent market and to generate some of the revenue needed to get the project off the ground, so to speak.
So real estate investors buy these units at rock-bottom prices because they are essentially paying for the idea of the unit (which has not yet been built at this point and sometimes does not even have a building permit) and not for bricks and mortar real estate.
The closer the project is to completion, especially in markets where property is in high demand, the more the value of the property increases and the higher the profits for those who have managed to hang on.
The risks, however, are many. A number of things can go wrong with a project like this, not least the fact that the demand for housing is met before the unit is actually built. This has already happened and will continue to happen. Recessions, business closures, the collapse of the economy and tragedies in the surrounding area can also occur before the property is completed, leaving everyone who invested heavily in the project a little bit high and dry, losing their profits and possibly their investment. These projects usually take a long time to complete, which makes the risks even greater and the predictability of these events even more difficult.
However, if you manage to pull it off, many investors see more than a hundred per cent return on their investment, making it a popular type of investment with many, despite the fairly large risks involved.