The pros and cons of buying off-plan

Buying off plan refers to purchasing a property based on the drawings and proposals submitted by the developer, often before work on the property has even begun. There are many advantages to buying off plan, but it is not without potential downsides. Following is a look at the benefits and pitfalls of buying off plan.

Sales of off-plan property in the UAE have been robust in recent years, with some new developments selling out within 48 hours of their release. In many cases, off-plan buyers have seen their properties appreciate significantly before they have been given their keys. But with so many new developments in the emirates on offer now and in the coming years, is buying off plan still a good idea and what should buyers consider before making their purchase?

Off-plan benefits

"The biggest advantage of buying off plan is that buyers get into the development earlier on," said Billy Rautenbach, operations director with Better Homes, a real estate agency in the region. "The price for the property is lower than it would be at resale, especially when you get it at launch."

Off-plan buyers also can benefit from favourable payment plans, as they do not have to pay the entire purchase price of the property up front. Buyers usually are required to make a down payment between 5-20 per cent, with the balance of the amount paid over a period of one to seven years, Rautenbach said.

In some cases, developers offer special incentives to entice customers to buy off plan. For example, Damac recently had a promotion in which buyers of any property worth Dhs35,000 or more would be placed in a draw to win a luxury car.

Off-plan buyers also may get first choice on available units in the development, but unlike many other markets in the world, off-plan buyers in the UAE usually do not have the option to change the specifications of the property while it is in the planning or building stages. "That is a short fall of our market," Rautenbach said.

As a result, many customers end up spending extra money on their property when they move in because they don't like some aspect of the finish. However, according to Rautenbach this is likely to change in the future, as developers will be forced to become more flexible as additional properties are delivered and the market cools down.

In most cases buyers can sell a property before it is built (often for a tidy profit), but they have to get the developer's permission to do so. Many developers require buyers to have paid at least 25 per cent of the purchase price before giving them the green light to sell the property. If the purchaser has paid less than that amount, they typically are required to pay an administrative fee of one to three per cent of the purchase price.

Buying property off plan in Dubai was further regulated this past June when the emirate issued a new escrow law guaranteeing that instalments paid by off-plan buyers are used to construct the development in which they are investing, and that construction milestones are reached before the next payments are due. The new law applies to all developments currently under construction and all future off-plan developments.

"The introduction of the new escrow law in Dubai has been crucial to protecting the interests of property investors. Buyers can be assured that their monies are safe and secure because it is held by a third party bank," Rautenbach said.

Off-plan pitfalls

So what are the downsides of buying off plan? Delays in delivery of the finished product are common, which means buyers may not be able to move in when they had planned. This can also create cash flow problems for the purchaser.

Buying off plan also is risky because you cannot see what you are getting. Buyers have to base their purchase on the word, reputation, and past record of the developer, as opposed to seeing a finished product first hand.

Also, off plan buyers have fewer financing options, as finance companies usually are reluctant to provide funding if they are not able to see the finished property, Rautenbach said.

In some cases, developers have signed agreements with banks to be exclusive mortgage providers for a specific development, but not all developments have this option. If the developer does have an exclusive arrangement with a mortgage provider, then the buyer is tied down to the applicable mortgage provider and is not able to shop around for better rates and prepayment options.

Off-plan dos and don'ts

"The first rule of buying off plan is let the buyer beware," Rautenbach said. Buyers must do their homework before buying off plan, including reading all documentation, especially the sales and purchase agreement, which contains important information about proof of ownership, resale restrictions, penalty clauses, and building delay penalties. Buyers should be clear about the details of all of these provisions.

"Some buyers who come in from Russia and Europe have a lot of cash, are in a big hurry and want to close a deal in a few days. By doing so they are taking a big risk because they are not giving themselves any time to do research on the property they are buying," she said.

A common mistake that off-plan buyers make is entering into a reservation agreement that commits them to signing the sales and purchase document, even if it has not been written yet.

It is also important to make sure the documents are clear about whether the property is freehold or leasehold. Furthermore, people who are buying a property with the intention of obtaining a residency visa should ensure that in fact the visa comes with the property and find out all the steps that need to be taken to obtain it.

Buyers should always do as much research as they can about the developer. "Some developers have developed exceptional properties that have done well on the resale market, while others have built properties with poor quality that have not done well," Rautenbach said.

Don't assume that the big name developers are the only good ones. There have been some less well-known developers, such as Al Fattan and ETA Star, that have been building quality developments in the region for nearly 20 years, she said. It also helps to know if there is a master developer. In some cases the master developer will have some control over the secondary developer.

Finally, use a reputable agent, as the documentation can be complex and difficult to read, especially if English or Arabic is not your first language. An attorney also might be helpful, and they are becoming more common during purchases, but their utility is slightly limited because there is very little for them to negotiate, Rautenbach said.