Off Plan purchases are basically an advance payment to a developer for an uncompleted house or office. It could be for a lease meaning you don’t get to own the property but will be given the right to be the first tenant or it could be for an outright acquisition, meaning you get to own the finished product upon completion.
When you give a developer an advance payment you basically get two things in return. The purchase price for the house is sold to you as a “discount” and then you are also to an extent guaranteed ownership provided the house is completed and then you pay up the balance according to the payment plan. There really is nothing more to gain here other than the two above. People also look at likely asset appreciation as a gain but it isn’t one unless you are selling so that doesn’t count. Now, always standing in front of a gain are certain risks which can easily turn those gains into losses. And this is where it gets all murky.
Opportunity Cost – Discounts obtained for Off-Plan leases are hardly never higher than 15%. Meaning, a house that cost N50million upon completion will be offered to you at N42.5million saving you N7.5million. To get that discount may warrant that you part between 50% to 100% of the purchase price. So you give out N21million when the development is just in the design stage in the hope to gain N7.5million when it is completed. That to me is sucks considering that 95% of all projects never get delivered on time. As such, I rather wait until the project is completed before I decide to buy no matter the premium and keep my money in a fixed deposit or buy treasury bills. I could even sign an agreement to purchase the house at a fixed price and produce a bank guarantee backed by my cash. That way, the developer us sure of selling and me the buyer sure of being given the house that I want.
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Risk and Reward don’t match – What you are basically doing is funding the project for the developer at a discount. The discount that you get is also as much as the minimum profit margin that the developer hopes to make. He won’t sell to you if N42.5million is at cost would he? So, you basically advance 50% and get nothing in return except for a discount and a right to own the property WHEN IT IS COMPLETED. So, if it is never completed you basically have the courts as a recourse. No developer would complete the project for you should the cost eventually run above their minimum profit. It just won’t happen. Maybe this story will throw more light.
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Valuation Uncertainty – A advantage of buying off plan leases is that you get to buy a house at a cheap price in the hope that the value will be higher upon completion. But what if property prices suddenly drops upon completion? House rent may be N1million when you paid in advance and upon conclusion it is no N500,000. The likelihood of this occurring maybe remote but hey it does happen. The rental value of a property may also be impaired if upon moving in you discover environmental issues that did not arise at the development stage. These are obvious risk and can only be avoided if you buy when a finished product.
Fist Buyer Set Backs – It is also very common to have projects completed in phases, meaning your house can be completed before others. Whilst that also has its own advantages, the major draw back it that whilst you will always be affected by the on going construction around you. The sound of construction equipments, noise of builders all posse environmental issues during this period. People who buy at the completed stage hardly suffer any of these. Besides that also affects the rental value of the property.