What Are the Risks of Buying Off-Plan Property?

What Are the Risks of Buying Off-Plan Property?

Buying a property off the plan implies that the buyer enters into a legal agreement to purchase a property at the initial stage of development or before the beginning of development. So, it is basically purchasing a promise, which the seller is bound to fulfill according to the agreed terms.

Buying off-plan properties have become more common in the UAE in recent years. So, it is important that buyers are fully aware of the risks involved in off-plan purchases.

Let’s take a look at the potential risks of buying properties off the plan:

Developer May Go Bust

Your developer can go bankrupt before the completion of a real estate development, especially if the company is not well established or reputable. If this happens, you are likely to lose your deposit, as the line of the creditors would be long.

So to play it safe, you should research a developer’s background and their previously constructed properties to see if they are reliable. Plus, always make sure to check the status of the escrow account of the development.

Delays in Project Completion

A delay in project completion is not a rare scenario, given that the developer has to depend financially on the bank, potential buyers and investors. However, delays leave you in a complicated situation as a buyer because you cannot move in according to your planned date; thus, forcing you to arrange for a temporary accommodation. Or as an investor who plans to rent out the property, you will be missing out on rental income.

The Fluctuating Real Estate Market

Real estate markets fluctuate a lot. So, you may have found a good deal but the resale price can be far less than what you have expected if the market situation changes. Depending on factors like an increase in housing developments in a similar area or market price fluctuations, the resale value of your property may not be the same as what you have estimated earlier.

The Possibility of Starting All Over Again

Some contracts may have a clause that safeguards a buyer’s deposit after a contractual time limit; a buyer gets the deposit refunded if construction is not completed within a certain timeframe. It may sound great but it leaves the buyer in a starting-all-over-again state – from searching for the right property to make the purchase – while the developer can sell the property at a greater profit upon the completion of the project. It is an opportunity cost for the initial buyer who had his time wasted and missed the potential surplus from the rising values of the property.

Completed Project Could be Different

An off the plan property is nothing more concrete than a sketched plan on a paper. So, you cannot be assured that you will get exactly what you saw on the project plan. Chance is that the completed unit falls below your expectation.

To avoid this risk, the contract must require your developer to substitute items of similar quality or brandsv to that specified in the contract for “finishes and fittings.”

Penetration of Top-Tier Developers

It can turn out to be a nightmare for investors. When too many large-scale developments are completed in the same area within nearly a similar timeframe, an oversupply of housing stock plummets capital values and decreases rental rates. So, the buyers eventually get less-than-expected values for their purchased units because values drop sharply when the market becomes oversupplied.

Anti-Flipping Stance of Developers

If you have the intention to sell your off-plan property, go through the contract carefully to check what the developer’s conditions are regarding reselling of the property. Many developers may want you to pay a certain percentage of the total amount before you can resell it. For example, Emaar (the largest real estate development company in Dubai) and Aldar (the largest in Abu Dhabi) require the buyers to pay a minimum 50% of the purchase price before reselling the units or apartments.

If you want to ensure risk-free purchases of off-plan properties in the UAE, you have to be aware of the abovementioned risks and take precautions to avoid them by any means. In summary, your purchase will be risky, if you:

  • Purchase from a developer that does not have enough good reputation, track record, or financial strength to back the project.
  • Invest in a property that is less likely to give good resale values.
  • Buy a property in an area that is unlikely to thrive in the coming years. For example, buying a property in Dubai Marina is definitely worth it because it is a prime location but a less prosperous or potential area will not add value to the purchased property.