You may have heard stories of the fantastic gains to be made buying off-plan. All you have to do is put down a small deposit on a yet-to-be-built property - and then 'flip it' - flipping being the process of selling it on before you have to complete.

 

For instance, you might reserve a £50,000 apartment in a new development in Romania (where property is increasing in value by 25% a year) without ever visiting the site (and before the foundations have even been poured) for as little £2,000. Then, prior to the apartment being released, you might sell it to someone who lacked the same foresight as yourself for, say, £70,000. The result? An £18,000 capital gain for negligible outlay and negligible risk. If you think this sounds too good to be true, you would be absolutely right. Unfortunately, unscrupulous and unregulated property promoters make wild and exaggerated claims about buying off-plan which often result in investors losing tens of thousands of euros. Not that it isn't possible to build a lucrative property empire with the help of some well-chosen off-plan purchases. It is - and it needn't require much capital, either - as I will explain in a moment. However, to succeed you need to follow a number of golden rules.

The first step to off-plan profits is to understand the opportunity. For a developer the time between starting on a project and completing the final sale can be years. During this period they have to fund the entire cost of building and marketing and they also face the risk that factors beyond their control (problems with the contractor, falling property prices, rising interest rates, a natural disaster and so forth) will affect their eventual profit. Therefore, with a view to 'locking in' buyers - and as an aid to cash flow - they will sell off some or all of the properties well before they are finished. In order to reward purchasers for committing at this early stage the developer may offer various incentives - usually in the form of a discount on the completion price. However, in developments that are almost guaranteed to sell out and where prices will almost definitely rise quickly, there may be no incentive other than the certainty of knowing that you will be able to buy your chosen property at the agreed price. Of course, no developer expects you to pay the full price of your property until it is finished. Instead, they will ask you to pay a reservation fee (usually no more than a couple of thousand euros and often less) and, on exchange of contracts, a deposit. This deposit will be as much as the developer can get away with. The better the development the higher the sum but a range of 10% - 30% is normal. There are likely to be other costs, too, such as survey and legal fees.

So, when you buy off-plan you are - effectively - gaining three money-making advantages. Firstly, you should be achieving a saving on the eventual price. This saving may be worth as little as 5% - but on, say, a £300,000 property - that's still £15,000. Secondly, you only have to find a fraction of the eventual price until such time as you complete the purchase. This allows you to gear your investment. Thirdly, you have however long it takes until the property is ready to decide whether to flip it, rent it out or occupy it yourself.

It is the ease with which you can buy off-plan that catches many investors. What they don't realise is that:

It must also be remembered that much can go wrong. The developer may go bankrupt; the development may not meet the intended standards; some unconnected event such a stock market crash may affect demand. There is much you can do, however, to protect yourself against all these eventualities. What's more, when you get it right the rewards are substantial. However, you need to follow these Golden Off-Plan Profit Rules:

If you are serious about making money by buying off-plan - and it would understandable, given its huge potential - then there is a good book on the subject by Alyssa and David Savage called 'How To Profit From Off-Plan Property' (published by www.taxcafe.co.uk).


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