Buying Off Plan Doesn't Mean Buying Alone
Written by Heather Wright Friday, 04 November 2011 06:57
Blind faith doesn’t have to leap alone as it turns out- at least in the matters of Real Estate- particularly in the area of pre-sales purchase.
Scores of economic data from various bodies have surfaced over the last few weeks suggesting that the housing market in this country, while currently positioned to slow down, will continue it’s steady upward climb. Most notably as many other aspects of the economy are displaying weakness; it is the housing market that seemingly is the mighty oak in the middle of the country’s economic landscape- with roots that are deep- and unflappable in headwinds coming from other corners of the globe.
Seemingly, more and more Canadians are becoming aware of the value of a real estate investment, and are eagerly seeking investment and residential opportunities off-plan, or pre-construction.
The question is how can Mortgage Professionals and REALTORS® best fit in to, and advise those looking to enter this burgeoning market?
Buying Off Plan
For investors looking for their own piece of “the next big thing”, buying property off plan can be very lucrative. In the excitement of the prospect of great ROI, investors should be mindful of the relationship between risk and return. There are, of course, ways to mitigate this risk, to at the very least, reduce vulnerability, and increase chances of getting the most for your property dollar.
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Buying Off Plan Doesn't Mean Buying Alone
Written by Heather Wright Friday, 04 November 2011 06:57
In true off-plan developing, the buyer relies on the vision of the developer, and on research and information about things like market conditions, need, price trending etc. etc. The off plan purchase is generally of benefit to both the purchaser, and to the developer. The developer gathers necessary capital to fund the building- and the purchaser often gets to buy property at a lower cost, than they would later on down the development road, as developers often offer these properties at a discount, as an incentive for buyers to provide much needed capital at the early stages of a project. Often as well, purchasers do not have to shell out the whole property price right away, but can put forth a down payment, and then deliver the rest in instalments over an agreed upon time period.
For homeowners, there is value, because they often have first dibs on what property they would like, ahead of the crowd. In a particularly hot market, it may be the only way to get access to these types of property. For investors, there is significant upside, as there is often a very healthy market to resell these contracts before completion- usually for more money than they paid, before they even need to start paying a mortgage- and interest costs.
There is truth behind the adage, “Seeing is believing.” For all of the possible upside, there does exist some downside to this as well. The purchaser must trust the developer- not just in their vision, but that this project will come to fruition according to the vision. Lots of things can go awry, as there are lots of variables involved.
One of the most attractive possibilities in buying off plan is the likelihood that you are paying today’s prices now for property that will be higher priced in the future. This, of course, only works if prices don’t go down- which can leave property investors hoping to turn a profit on the property in a bind.
One of the most telling things about buying off-plan is the language surrounding it. It could be a good investment. It might be very profitable. There is a likelihood or possibility for growth. What this suggests, is that there are many variables at play- and it is worthwhile to sit down and process each as part of due diligence. You can’t fully remove the “ifs” from the equation, but you can weigh the pros and cons until you are in a comfortable level of risk tolerance to see if this type of an investment or purchase is a good fit.
Jay McInnes, Sales Agent, Macdonald Realty agrees: “Buying "off-plan" can be a very good investment if all of the assumed timing is precise and everything that was represented by the developer in "pre-sale" comes true. This could mean that you get a very unique product in an
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Buying Off Plan Doesn't Mean Buying Alone
Written by Heather Wright Friday, 04 November 2011 06:57
up& coming / quickly developing area with minimal money down to secure your spot; best case scenario, you can sell the property at completion for more than you purchased it for and make a financial return. Or of course you have bought a property with minimal down in an area that will offer you a positive cash-flowing investment for your rental portfolio.”
I’ve Got Your Back
As is true in any situation where there is speculation and risk, vulnerability can be reduced by bringing in expertise to assist in evaluating risk in context- and in weighing out the probabilities between risk and reward- between things that we know- and the variables that we cannot control.
Although, is some circumstances, buyers and investors feel that they are comfortable doing their own due diligence- there is no question that the best decisions are made with having all of the facts in front of them- and the best way to access all the information is to enlist the services of someone who has it, entrenched in their training and experience, which is why it is often a prudent move to engage both Mortgage and Real Estate Professionals as part of the process.
The relationship between a builder or developer and a prospective buyer is a little different than your traditional buyer/seller relationship. The question is, what particular value do Real Estate and Mortgage Professionals bring to the table in this situation- and how best to articulate that value to those seeking these kind of properties?
As McInnes says, REALTORS® can help to vet and verify builders- to help a purchaser make a well-rounded decision in deciding to buy: “(REALTORS® can help to) Make sure it is a reputable developer, and make sure that it is a good investment for the location. (A REALTORS® will) stay in constant contact with the developer making sure that the buyer is getting the amendments to the disclosure statements as soon as they come out. We also keep the buyer in the loop of any potential changes with what was initially conveyed on behalf of the developer.”
As Karen Blomquist, Mortgage Broker, Mortgage Intelligence says, financing for off-plan properties is not always straightforward, and prospective buyers would do well to have an expert helping them navigate the channels: “Purchasers should be knowledgeable about the
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Buying Off Plan Doesn't Mean Buying Alone
Written by Heather Wright Friday, 04 November 2011 06:57
programs available by working with a mortgage broker. (For example) If the purchaser has no resources to get started and they are not using a large builder financing would not be available. Depending on the property the land may need to be owned outright.”
There are three types of financing available for new construction properties; the Builder/Contractor builds home with your money, Self-Built Home or Builder built home with their money. Depending on the type of financing required, the purchaser can either choose from a Completion Mortgage, a Progress Draw, or both, and buyers benefit from some guidance through the options.
What to Look For with a Builder
There is no question that there are ample builders and developers to choose from. What it comes down to is track record, accountability and trust. Because of the number of variables in buying a property off-plan, it is essential to look into the past and practice of a builder to try to predict what a buyer can expect in the future.
McInnes agrees- that it comes down to a question of credibility “Plain and simple, people should look for credibility in their Builder- for someone who has done reputable and successful work in the past. Not that it is easy for a developer to just take your deposit and flee the country, but you want to know most importantly that the assumed finishings that are advertised will be the reality at the end of the project. As well as that the developer is going to get the project finished ON TIME- when they say they are going to be complete by.”
“ There is of course a legal "inside" & "outside" date that the developer has until to get the homes to the owners by, but if those dates are not consistent with the reality of the development, then a lot of potential opportunity costs for the money the buyers have tied up in the development could easily be lost.”
Blomquist can’t stress enough the importance of selecting a good builder/developer- because you are buying into a lot more than the property at hand, and she says that CMHC agrees: “When you decide to buy a brand-new home, choosing the right builder is as important as choosing your home. When you purchase a home, you also "buy" the company that will build it. Your satisfaction will depend on their experience, their skills and their commitment to customer service. An important part of the home buying process lies in determining that you are dealing with a builder who has these qualifications and is able to meet your needs and expectations — for the home and for the buying experience.”
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Buying Off Plan Doesn't Mean Buying Alone
Written by Heather Wright Friday, 04 November 2011 06:57
Red Flags
While there can be exceptions to the rule, there are some red flags that should cause a
potential buyer to take notice- or to run swiftly in the other direction.
Says McInnes:”Amendments to the disclosure statements being late or not given. Construction
progress slow and not on schedule. Sales slow and not hitting targets allowing for a green-light
on financing from lenders to the developer.”
Prospective buyers should be looking at things like warranties, after-sales service policies to know what they are in for after the deal closes.
Similarly, they should consider getting third party information- either from customers that have purchased prior ( if that is possible)- or from Better Business Bureau- or from local building association. While a buyer can never fully know what to expect, they can perhaps manage expectations if they know what others have experienced before them. Similarly, this gives value and credence to a professional opinion from a REALTOR® or Mortgage Broker for or against a certain developer.
Buying off plan is not for everyone. But for those that are so inclined, the prospect of capturing a meaningful asset is very real. Real Estate and Mortgage Professionals have role to play, not only as advisor, and in sharing of information- but empowering buyers in terms of knowing what questions to ask- and what answers will be satisfactory to mitigate risk to reasonable levels.
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