The usefulness of housing as a basic necessity for humans cannot be over-stressed. Unfortunately, access to affordable housing has continued to elude the average Nigerian. In light of this, various housing schemes have been devised to make ownership of houses better, cheap, and even flexible than the traditional method of sale. One of such schemes is the “Off-Plan” sale of properties.
What is an Off-Plan Property?
The term ‘off-plan property’ refers to property available for purchase before it has been constructed. This is where the phrase ‘buying off-plan comes from; typically (but not always) relating to apartments. In layman’s terms, If you buy a house, apartment, etc., off-plan, you buy it before it is built, when only the plans for it exist.
Off-Plan property is marketed to Property investors or property speculators who purchase it intending to make significant capital gains. This financial return may occur because developers who sell off-plan property often offer discounts to early adopters.
Generally, a deposit of just 10-20% of the property’s value is required to secure an off-plan property. If buyers then occupy the property, they may choose the government fully endorses the projecttheir preferred fixtures and fittings, etc.
Buying off-plan properties can either be highly lucrative or highly risky.
Off-plan property is sometimes marketed to property speculators who purchase it to profit by taking advantage of any discounts and selling into a rising market.
Things to Consider Before You Buy
Before you decide to buy or invest in off-plan property, you need to consider things such as the benefits, the risk, and the process involved.
Advantages of buying off-plan properties
- Off- Plan property can be purchased below market value. The developers usually offer a discount to make up for the risk of buying something that hasn’t been built yet and the inconvenience of not moving in right away or taking possession.
The buyer benefits from off-plan properties and the developer because they usually have sales confirmed early, even before completion of the project (property). It’s a win-win situation.
- For the landowner or developer, it allows developing the property with less financial constraints due to the certainty of availability of cash for the project based on the agreed payment plan with buyers. Typically, once the buyer deposits 10-20% of the agreed payment, even if the developer was having issues with cash flow to complete the house, that will be sorted, and with the remaining part for the purchase payment completed by the buyer, the development of the house will be stress-free for the developer in terms of finance.
- 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. You potentially have your input into things and determine the quality of fittings and fixtures of their properties, such as interior design, kitchen finishing, and tiles. Investing in off-pan property gives an investor early-bird access to an in-demand area.
- Since off-plan properties are new or refurbished builds. This guarantees a modern form that benefits from modern features such as innovative home technology, environmentally-friendly specifications, and other requirements that new figures have to apply to. This generally leads to potentially higher rental prices.
How to Make Money Investing in Off –Plan Properties
Off-plan property is typically deemed attractive if there is a high level of infrastructure in the immediate area, such as a new university or express roads, either already built or will be made within the next few years. You can flip the property before completion.
Let’s say you buy an off-plan property of 60 million Naira, putting down an initial deposit of say 6 million Naira (10%)
As demand increases, months down the line, and the property prices in the neighborhood rise by 5%, meaning the house that is still under construction will now be worth 63 million Naira upon completion. You may be able to find a buyer looking for a home to live in or an investor willing to buy the off-plan property off your hands.
Risks of Buying an Off-Plan Property
- No investment goes without risk and if the buyer is buying the property as an investment rather than as a home, the property might not increase in value to the expected extent. It might fall or stay the same, and you won’t be able to sell it, leaving you committed to buying a property you don’t want.
- Another risk with the off-plan property is that the finished property may not meet the buyer’s original expectations, either because of personal reasons or material defects.
- The constructor may go out of business before the construction of the property is completed, and the buyer may not be able to recover the money paid in advance. There have been many cases of this happening when the construction sector was particularly hit hard by the recession. The developer might go bankrupt after the deposit has been put down but before the property has been completed.
- There is also certainty about the completion date of the property. Off-plan property may take longer than expected before being completed due to the developer’s inability to accurately predict the properties’ delivery date. This delay may also result from the low turnout of investors who, in most cases, are the primary source of finance for the project, leading to the loss of some investors who finance their projects through loans or mortgages. Banks are increasingly willing to offer mortgage lending on off-plan properties but can stipulate that the property must be completed within a specific time-frame and may withdraw the offer if it is not.
- Diversion of funds; Property developers in Nigeria are known for their competitive behavior. Instead of using the funds invested to finance the proposed project at hand.
They start competing with other firms and divert the funds generated into financing other projects or initiating a new one which makes the project longer than expected. In the worst scenario, they spend funds on irrelevant things.
- Legal restrictions and unapproved projects; Buying properties claimed to have their excision (land that the government had released to the indigenes of the area who owned the ground before the government acquired it) in progress is different from building approval or governor’s consent in progress. This is why you need to your resourcefulness to avoid being duped.
Off-plan properties are marketed at times before commencement of work on-site. Although, the best time to buy an off-plan property is at its prelaunch price. You should confirm if there are no building restrictions or encumbrances from the government. Always make sure that the project is fully endorsed by the government before you invest in such.
How to Reduce the Risks
The good news is that most of these risks can be lessened quite quickly as the government fully endorses the project long as you invest in the right market or location and work with a reputable developer with a proven track record.
- Do your research on the prospective area that you are looking to purchase your off-plan property in. Make sure it’s in a good location. Off-plan investments are a preparation for an area’s future, so you want to ensure that it is worth your while.
- When it comes to location, Abuja, Lagos, and some parts of Ogun State offer Nigeria’s best off-plan investment prospects. This is because the demand for residential housing in these two locations is strong and growing daily. Thus causing house price growth and rental yield growth for the area.
- Again, always look into the developer’s track record to get an idea of the quality of their project and how long it took to complete the project.
- When you want to buy off-plan property, make sure your initial deposit is protected. You need to read the contract thoroughly and make sure either your deposit is held by a third party so the developer can’t get at it until they’ve delivered the property or the warranty is being protected by an insurance policy that will pay you back if the developer fails to complete the property.
But to reduce the risks involved in buying an off-plan property, get advice from an expert realtor, and you should be able to get a good idea of all the risks involved and how you can control them even if they cannot be eliminated.
Process of Buying an Off-Plan Property
The process of buying an off-plan property can be slightly different from what some people may be used to. Therefore it is essential to understand the process involved before deciding to purchase off-plan properties. The process is as follows:
- Research different developments and consult a mortgage advisor to discuss your circumstances and how they may impact your investment, Some of which includes ;
- Having enough cash for a deposit (10-20% of the agreed payment).
- Get clear on what you want. Are you buying the property for residential purposes or as an investment to maximize returns over the long term?
- You will likely pay a reservation fee or an application fee indicating your interest to buy the off-plan property. Prices vary depending on the developer, and these fees are usually deducted from the deposit paid at later stages.
- Arrange for the legal process of your property purchase to be handled by a professional lawyer. It is essential to confirm the status of the property at the relevant lands registry to find out the title and ownership of the property, ensure that the requisite building approvals have been obtained, and ensure that the property is not encumbered. The lawyer will check the company’s history, legal searches and go through the contract.
- Research should be carried out to now if the developer has title to the property. It is worthy to note that only the legal/beneficial owner of a property can pass good title to a prospective buyer.
In other words, entering into a contract of sale with a developer with no property title may have grave consequences for the buyer. Thus, you must confirm the party’s role with whom it is dealing, i.e., whether it is the developer or the property owner. You have to verify that an agreement to develop the property exists between the parties (Landowner and the developer).
- If everything is okay, the lawyer will give you the go-ahead to complete all paperwork and signatures, exchange contracts with the seller, and make payment of the deposit.
- Here you will monitor the progress of the construction to check for any defects, if possible. For overseas investors, you might require your solicitor to prevent the build quality at every stage of construction. They should ensure that the developers do everything by the book and that the home you purchase is built to the best possible standard. This will give you peace of mind that everything in your new home will work correctly.
- Pay any installment payments agreed as per your contract.
- Ensure that another survey is also conducted close to the completion date so that you can be sure that there are no issues to worry about.
- Be ready for when the project is officially completed. When the build is complete, the developer will serve you a notice (2-4 weeks) before the completion date – giving you a certain amount of time to have everything in order and finalize the purchase.
- You’ll pay the rest of the purchase amount, and the property is yours!
When deciding whether or not to purchase an Off-Plan Property, it is not uncommon for buyers to merely rely on the “reputation” of the seller without paying close attention to proper documentation where each party’s rights and duties are precisely defined.
The risks surrounding such transactions make it essential for prospective buyers/ sellers to seek sound legal advice to protect their investments.