What are the risks associated with buying real estate early in the construction process?

Buying real estate during the construction phase

Purchasing real estate during the construction phase, more commonly referred to as off-plan, has become one of the most popular strategies for investors seeking bargains. At this stage, apartment prices can be reduced by between 10-20%, making such opportunities particularly attractive. However, buying at this stage comes with many risks that potential buyers should be aware of.

The main risks of off-plan shopping

Let's look at the risks associated with real estate purchased under construction in a few key categories.

1. Probability of construction freeze

The first aspect is the probability of “frozen” construction. This problem is relevant not only in Russia, but also in other countries of the world. Some construction companies, lacking the necessary finances, continue their activities relying on funds received from the sale of not yet built projects, as well as on borrowed money. Thus, this business approach is extremely risky, as lack of sales may lead to a shortage of funds, which will immediately affect the progress of construction works and may lead to suspension of processes.

2. Delays in completion dates

The second risk is related to delays in construction completion dates. This, although less critical, is still a very serious option. Sometimes the developer may not have enough funding to fulfill its obligations, which inevitably forces it to slow down. In such cases, delays can stretch for many years. We have seen many projects that have failed to be completed on time or stopped altogether after economic crises.

3. Difficulties with paperwork

The third key point is the difficulties associated with the processing of all the necessary documents. In different countries, the process of obtaining permits can take several months. In an effort to speed up the process, some developers start work before all approvals are received. In countries where construction control is insufficient, there are situations when developers neglect even the basics of legality. As a result, several years later, the housing for which money has been paid may be at risk of seizure, as its construction is recognized as illegal. It can be extremely difficult to obtain compensation in such cases, as by that time the construction company may have ceased to exist.

4. Fraud by sellers

Cases of fraud on the part of sellers cannot be ignored either. Unfortunately, cases of unscrupulous behavior on the part of developers are quite common. One of the most common schemes of deception is a “double” or “triple” sale. In such a situation, the same object can be sold to several buyers at the same time. When construction is completed, conflict situations arise when several people claim rights to the same apartment. Courts usually side with the first buyer, leaving the others dissatisfied and forcing them to go to court to get their money back, if the construction company still exists by then.

Conclusion

In conclusion, it should be emphasized that although the idea of buying real estate at the construction stage may seem profitable, it carries significant risks. Before making a final purchase decision, it is crucial to thoroughly analyze the developer, study its reputation and previous projects. Making an informed decision can help you minimize potential losses and be satisfied with your purchase.

In today's world, fraud takes many forms, including some rather primitive schemes. For example, some companies launch large-scale advertising campaigns, make tempting price offers, collect money from clients and soon declare themselves bankrupt. Usually the assets of such developers are quietly transferred to new subsidiary structures with changed names and addresses. In such cases, buyers find themselves in a difficult situation and are often unable to recover their investments.

Risks on international markets

When analyzing international markets, the risks for investors are significant, especially in those countries where economic difficulties are met with shortcomings in legislation related to the construction sector and protection of the rights of investors. Stanislav Singel, head of Gordon Rock International, emphasizes that the greatest dangers await investors in countries with troubled economies and underdeveloped laws.

Crises in the construction sector

Some regions, such as Bulgaria, Montenegro, Spain and the United Arab Emirates, are considered risky destinations for Russian citizens. Between 2002 and 2008, these countries experienced a real construction boom, with new buildings popping up in almost every corner. Developers, using funds from sales and borrowings, sought to realize as many objects as possible, even when they were just beginning to be designed. However, with the onset of the economic crisis, sales were jeopardized, banks cut off financial support, and the construction sector faced serious problems. As a result, many construction companies were unable to complete their projects, even those that had already been sold.

Financing mechanism for construction projects

“In these countries, banks allocate funds for construction in stages, depending on the level of sales. To receive the next tranches, developers need to show certain volumes of purchases. The faster they sell their properties, the faster construction progresses. As soon as demand weakens, the construction process is delayed,” says Singel.

Problems with investor protection

The situation with investor protection also leaves much to be desired: laws provide little or no protection for the interests of buyers, and regulatory authorities are often unable to adequately fulfill their construction oversight functions. For example, in Bulgaria and Spain, state regulation has allowed massive development of coastal areas, which has led to an oversupply of real estate in these areas.

Legislative shortcomings

Legislative regulations in these risky countries do not provide buyers with any guarantees when purchasing properties under construction. In addition, there are no effective self-regulatory mechanisms, such as ethics committees of professional associations, as these markets are at an early stage of development.

Real estate situation in Montenegro

In recent years, Montenegro has seen a marked increase in construction work on vacant land. However, unfortunately, not all projects are carried out with proper assessment of future prospects and compliance with legal norms. There are cases when residential buildings are erected on plots for which, according to the general plan, it is forbidden to build housing. This leads to the fact that some citizens may be left without housing and may not receive any financial compensation.

Reliable markets for investment

When it comes to reliable options for investing in real estate during the construction phase, it should be noted that the most secure markets are:

• United Kingdom
• U.S.
• Austria
• Switzerland
• Israel
• Germany
• France
• Canada

In these countries, the system of state control over construction is well-established. Each area receives a limited number of building permits based on the master plan, which ensures strict oversight of compliance with all norms and requirements. In several of these countries, financial aspects are also regulated: developers cannot demand that clients pay more than the stipulated amount at any stage of construction.

Example from Germany

For example, in Germany, almost all construction projects are financed through bank loans. When a loan is provided, the bank acts as a sort of guarantor, which adds an extra layer of security for buyers. Additionally, in some countries, there are mechanisms for state property insurance.

In France, for example, the government protects the interests of buyers when they purchase properties under the leaseback program. In the event of a developer's bankruptcy, government authorities take measures to find a new company that will continue the construction and fulfill all obligations to investors.

Steps Before Buying Real Estate

If you have decided to take the risk and invest in real estate during the construction phase, it is important to take several key steps before making any financial investments:

• Developer's research:Conduct a thorough investigation into the developer's information, with important aspects being their reputation and experience in the field.
• Project review:Examine the quantity and quality of previously completed projects.
• Property rights:Make sure that the land where the construction is taking place actually belongs to the developer.
• Reputation in the market:Familiarize yourself with the developer's reputation in the market.

It is recommended to avoid collaborating with companies that have only one or two completed projects. Even having three projects may not be enough to consider a developer reliable. The company should have a proven track record of successful work and ownership of assets.

Information from construction companies

Serious construction organizations typically showcase a portfolio of completed projects on their websites, as well as publish financial reports and current news about ongoing construction. This information can be extremely useful for potential buyers looking to make the right choice when investing in real estate.

An important aspect of the financial stability of a construction company is its ability to attract credit resources from local banks for project implementation. For example, if a financial institution is willing to finance the purchase of a residential property in a new development, this can be an indicator of the high reliability of the developer company.

An additional sign of the seriousness of a specific project is the involvement of renowned international real estate agencies and consulting companies in its implementation. It is also essential for the developer to have all the required documents that comply with current legislation, including a permit for construction activities.

Familiarization with the legislation

Before entering into an agreement with a developer, it is crucial to familiarize yourself with the legal norms of the country where you plan to invest in real estate. Make sure that the laws of that country protect the rights of investors and guarantee the possibility of recovering invested funds if necessary. It is also helpful to find out if there are mechanisms in place to impose penalties or cancel the contract in situations where the developer fails to fulfill their obligations.

For example, in Brazil, an investor has the right to impose financial penalties on a construction company if the quality of the work performed is found to be unsatisfactory.

Choice of payment method

When purchasing real estate during the construction phase, it is advisable to carefully choose your payment methods. There are many options available, and some developers, especially in the Russian market, may require full prepayment.

• Such schemes usually involve significant discounts, but this can become the riskiest approach for the buyer.
• It is considered much more reasonable to agree to installment payments that occur during the implementation of the project.
• Ideally, the initial payment should be no more than 20% of the total cost of the property, and the final payment should be made only after all construction work is completed and the state verification procedure is carried out.

Conclusion

Thus, adhering to all the aforementioned measures will help you reliably protect your investments and significantly reduce the risks associated with purchasing real estate abroad. It is important to remain vigilant and carefully analyze market offers to avoid unpleasant situations and financial losses.

Be careful when choosing a developer and the terms of the contract to ensure that your investment experience is successful and profitable. It's always better to prepare in advance and conduct a thorough analysis than to face unexpected difficulties later on. A comprehensive approach to assessing risks and legal aspects will help you achieve the best possible outcomes in your investment endeavors.

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Conclusion

When purchasing real estate at an early stage of construction, there is an opportunity to save significantly; however, this process is not without risks that every potential buyer should keep in mind. In my article, I have tried to examine the main pitfalls associated with such transactions to help the reader understand all the possible consequences of their actions.

Main risks

• Construction freeze.We see that in different countries, including Russia and other states, there are cases where companies start construction without having sufficient resources. Such situations can lead to unexpected work stoppages, leaving buyers without housing and without money.
• Delays in deadlines.Developers, often facing a shortage of funds, frequently delay the process, which can negatively impact buyers' plans and their financial situation. Especially after recent economic crises, property owners need to carefully analyze the reputation of the development company.
• Issues with documents.In some countries, obtaining all the necessary permits can take a long time, and developers may start work without proper approval. This creates legal issues that could lead to the confiscation of housing just a few years after purchase.
• Fraud by developers.Double and triple sales, bankruptcies where all assets go to a new company — these are just some of the ways unscrupulous companies can deceive buyers.

Final recommendations

Considering all the aforementioned risks, it is important to approach the purchase of off-plan real estate with utmost caution. Markets such as Bulgaria, Montenegro, and others require special attention due to the lack of effective regulation and protection of investors' rights.

As a buyer, it is essential for you to thoroughly research the market you have chosen, the reputation of the developer, and the legal aspects that regulate construction and protect your rights. By paying attention to all the potential risks, you can avoid unpleasant situations and make your real estate purchasing process safer. Ultimately, a conscious approach and good awareness can be your key to successful real estate investment.