Dubai: If you buy a house, apartment off-plan, you buy it before it is built, when only the plans for it exist. A brand new property, a locked-in price and a customised finish – there’s a lot to like about buying a house off-plan. But as with any big investment, there are risks you need to consider too.
But what exactly is an off-plan property? It is simply a property before a structure has been constructed upon it. Pre-constructions are usually marketed to real estate developers and to early adopters as developments so that the purchaser can secure more favourable finance terms from their lenders.
So it could mean buying when the building is still in its design and planning phase, or you could be looking at a near-completed project waiting on the final touches.
The risks and rewards can vary depending on the stage it’s at, and also what your plans are for the property – is it a home for yourself, or an investment opportunity?
What are the general risks and perks of buying an off-plan property?
• Key perks: Ability to save and make more money versus a ready-to-move-in property
Perhaps the most attractive selling point of buying off-plan is the possibility of a discount. Your developer may be willing to accept a lower offer in return for a guaranteed buyer at the end of the project – giving them certainty they’ll be able to pay off any finance they’ve taken out on time.
The earlier you commit to buying the property, the higher the discount you’re likely to receive – which is the reward for taking a chance on a house you haven’t seen yet.
Saving extra cash on your purchase price is an obvious advantage. This might also take the pressure off if you’re trying to sell your property, giving you time to wait for an offer you’re happy with.
If you’re an investor interested in buying off-plan, you’ll likely want to buy the property as early as possible when the discounts are potentially higher – because at the end of the day it’s an investment.
If you’re planning to rent your new property out, this could make your mortgage payments a little lower, and your profit each month a little higher. Though you could be waiting as far as a year before you can move tenants in.
Another benefit however is the potential to secure a number of properties from the same developer if you’re after a larger portfolio. Not only is this an opportunity to secure a further discount, but managing multiple properties in one location could prove easier and cheaper to manage.
If you’re aiming to sell or ‘flip’ the property (with the aim of making a profit), putting your deposit down a few years in advance could allow you to secure the property for less than it may be worth when completed.
And if you decide to let go sooner rather than later, somebody might be willing to take the right to buy the property off your hands before its even ready. If the property’s market value on completion has already gone up since you bought it, you could make a profit even earlier.
• Key risks: Market might not work in your favour, the project could be delayed
You can never be sure that the market will work in your favour. If you’ve got plans to sell your off-plan property either nearing the end or once it’s finished – you need to have a backup plan in case you can’t get the offer you want, or you can’t sell it at all.
Do you have the finances in place to buy the property, meaning could you secure a mortgage? Would you be open to becoming a landlord, even in the short-term? It does pay to be prepared if things don’t go to plan.
Another risk you need to consider is that the project could take longer than anticipated – which is fairly common given the complexities of building a property. If you’re buying an off-plan home and you’re expecting to move in on a certain date, any delays could cause a number of problems.
For example, if you need to move out of your current home to let a new buyer move in, or if your lease is up on a rental property. Furthermore, if you’ve got a mortgage offer which is due to expire before your new completion date, this could leave you having to start an application from scratch.
If you’re a landlord on the other hand and have tenants lined up to move in, this could also prove very frustrating if timelines are pushed back.
However, major delays to a building project tend to happen much earlier on in the process. Around three months before it’s due to be completed, work becomes less complicated, and the deadline you’re given should then be met.
If you’re a landlord-to-be, this could benefit to you too. You can choose to keep the property fairly neutral to appeal to more tenants, and select finishes that are easy to maintain and keep clean.
For example, deciding on hard floors rather than carpets, or choosing hard-wearing kitchen surfaces. This could see you save money on upkeep in the future.
Although there certainly is a risk associated with an off-plan property mostly due to delays or cancellations on an international scale, how are these risks reduced for an off-plan property buyer in the UAE?
UAE authorities monitor the developers’ financial stability and also mandate them to provide a bank guarantee amounting to 20 per cent of the project cost to get an assurance of project completion.
FAQ #1: Can I be denied a mortgage after I have out down my deposit?
The period between putting down your deposit and finally completing on your off-plan purchase could be as much as a couple of years, and a lot can change in the market during that time.
Even if you received a decision in principle when you first approached your lender, this doesn’t guarantee you’ll get the same offer when it comes to completion. And once you’ve put down the deposit, you’re obligated to go through with the purchase.
To avoid this problem, speak to your lender for guidance, and make sure you don’t stretch yourself when you make your initial offer.
In the time between paying the deposit and completion, ensure your circumstances don’t change. For example, don’t lease a new car with much higher payments each month.
FAQ #2: Will I get compensation if apartment is not delivered on time in the UAE?
In the UAE, you can make a compensation claim for delay in the handover of the property. The delay is a breach of the contract from the side of the developer and the real estate company.
But one of the conditions of this case is that the handover of the property should have been done effectively. This condition is not met before the actual handover of the property, therefore it’s a breach of contract.
So you can request the competent dispute resolution authority to direct the developer to hand over the completed apartment immediately or you may seek repayment of consideration amount, monetary compensation and interest payable by the developer to you.
In order to do so, you need to file a case to terminate the contract and recover all the payments that you paid, in addition to the legal interests on the amount until the last payment. Some estimates show that these are estimated at a maximum of 12 per cent of the amount of the judgment in Dubai.
If the off-plan project is cancelled by a resolution from Real Estate Regulatory Agency (RERA), the developer must refund all paid amounts made by the buyer, in accordance with a 2007 regulation relating with ‘escrow accounts’ for real estate development in Dubai.
FAQ #3: What if I’m not able to complete payments on an off-plan property?
In case of buyer being unable to make payments on his off plan investment, the developer has following rights.
The developer may disregard the sale contract, retain up to 40 per cent of the purchase contract’s value and return the remaining amount to the buyer within a year of the date of contract cancellation or within 60 days upon the re-selling of the property, whichever is earlier.
If 80 per cent development has commenced, developer may keep all the money and cancel contract or developer may deduct 40 per cent of purchase price and cancel contract. If 60 per cent completed, developer may deduct 40 per cent of purchase price and cancel the contract.
If the off-plan project is more than 80 per cent complete, the buyer should make the rest of the payment stated in the contract or otherwise request RERA to auction the property to collect the remaining amount. The buyer will pay all expenses arising from the re-sale.
Furthermore, if construction has started but hasn't reached 60 per cent, the developer may deduct 25 per cent of purchase price, refund the remaining (if any) and cancel the contract.
If the off-plan project is between 60 per cent and 80 per cent complete, the developer may also disregard the sale contract, retain not more than 40 per cent of the purchase contract’s value and return the remaining amount to the buyer within a year of the date of contract cancellation.
If the off-plan project is less than 60 per cent complete, the developer may also disregard the sale contract, retain up to 25 percent of the sale contract’s value and return the remaining amount to the buyer within a year of the date of contract cancellation.
If the off-plan project did not go through for reasons beyond the developer’s control and without negligence, the developer may disregard the contract, deduct not more than 30 per cent of the payment and return the remaining amount to the buyer within 60 days upon the re-selling of the property.
So essentially, investors who cannot fulfil their obligations can have their sales contracts null and void as per the law.
Buying off-plan enables investors and homebuyers to buy a property at a lower price than if they wait for the construction of their chosen property to commence or when it eventually is completed.
In addition, buying off-plan may be the only way to get a property with a specific location or set of features as the choice may be limited once construction starts or finishes.
Property investors or property speculators purchase off-plan property with the aim of making substantial capital gains. This financial return may occur because developers who sell off-plan property often offer financial incentives or discounts to early adopters.
In addition, there may be an opportunity for capital growth in a rising market and with a development cycle of typically 12-24 months.
Off-plan property is typically deemed attractive if there is a high level of infrastructure in the immediate area such as a new educational institutions, hospitals or, or expresses roads, either already built or due to be built within the next few years.
One of the risks of choosing to buy an off the plan property is that unexpected delays to the construction can occur. If this happens it can affect your plans, leaving you in need of temporary accommodation or for investors can affect the amount of rental income you were anticipating.
When purchasing off the plan, you also run the risk of paying too much for a property if the market enters into a decline.
As many builders don't allow you to see the property until construction has completed, there is the risk that the quality or layout of the build may not be what you had in mind. So be mindful of all the above mentioned risks.