There is an upside and downside to any financial decision. The upside is obviously the potential gain, while the downside can be either the opportunity cost of taking no action or the risk of making a poor one. In most cases, the risks associated with getting in on the ground floor can be mitigated, reducing the cons and offering a lot more pros.
This is definitely the case if you are buying a condominium in Phuket. With new build condos, it may be months, or even years, after signing your purchase agreement until you actually set eyes on your new unit. You will likely get to tour a showroom configured and furnished to look like your new condo, but you will have to base your decision to buy on marketing literature and architectural drawings.
That is the reason why, when a development may not even have broken ground, it is called ‘Buying off-plan’
But why are off-plan purchases so popular?
The early bird gets the worm
The early bird gets the worm, as the saying goes. When investing in an off-plan condo, the early birds get first choice on the best units.
The first units to be snapped up are almost always those on the high floors and/or those with sea views. Units overlooking the swimming pool also go quickly. As a foreigner it is especially important to be an early bird because foreign freehold ownership is capped at 49% of the total unit area.
Being among the first to buy these highly prized units means it is easier to resell your condo in the future because the highest demand will always be for the best views.
With off-plan condos, early birds actually enjoy two separate worms. They not only get to choose from the best available units, but they are also offered with attractive discounts.
If a condo is still in the planning/construction phase, the discounts offered can be too good to ignore. Occasionally there are added incentives like a free upgrade to freehold, or a furniture package at no extra charge.
If you view your condo not only as a home, but also as an investment, an off-plan condominium can provide greater capital appreciation thanks to these early bird discounts.
It is common for new-build condos to offer attractive guaranteed returns, and for off-plan buyers the developer may even enhance the terms. Typically this is either an enhanced annual yield or an extension of the guaranteed return period (e.g. an extra one or two years).
Payment by installment
When buying off-plan you are not always required to pay the full amount upfront. A reservation deposit is standard practice, with a larger payment to follow after a few months. After that, however, payments will only become due following completion of specific stages of the construction.
It is not uncommon that your final payment is only due 24 months after signing the purchase agreement. In other words, you may enjoy the benefit of an early bird discount, and still not be asked to pay 100% of the purchase price upfront.
Personalize your condo
Buying off-plan often gives you the option of changing certain aspects of your unit before the foundations are even laid.
It is commonplace that you can personalize your interior, including selecting a suite of furniture to suit your tastes. It may also be possible to voice your preference for the types of finishings and fixtures for the kitchen and bathrooms.
When buying off-plan, you sometimes need a bit of foresight and vision. This is especially true if the site has yet to be cleared for construction, and it is difficult to visualize what the development will look like.
But investors in off-plan condos are driven by the ability to pick and choose the best units, the fact that they are able to personalize their unit, and by the early bird discounts which make off-plan condos more affordable.
However, there are risks associated with any investment, and an off-plan Phuket condo is no exception. In order to mitigate any risks, you should always seek competent legal advice before buying a property – especially if that property has not yet been built.
Our article on the benefits of buying condos off-plan expounded on the virtues of being an early bird, but it also cautioned that there are inherent risks.
This true of any investment, including property, so if you are buying off-plan, you should always be aware of the potential stumbling blocks.
If you are investing in a property “pre-construction” it stands to reason that the obvious risk you face is that the condo development is never finished. This is not an indictment of buying in Phuket; this is a risk you run the world over.
If a developer is relying on off-plan sales as a significant component of their financing, but sales are for any reason are underwhelming, the project in question may never get off the ground.
Investors whose only financial commitment thus far is a deposit could still see some money back, but they may struggle to receive more than that if they have already paid multiple installments.
Developer goes bankrupt
Some developers may have issues that go beyond their struggles in selling out one specific development.
While a general weakness in the real estate market is one possibility, a developer can also overextend itself. Some developers take on too many projects at one time, but having ‘too many balls in the air’ can put pressure on their finances.
As an investor, you need to understand that this possibility exists, and do the necessary due diligence to find a developer who is not over-exposed. This is where the right lawyer is instrumental, as they may even have past experience with risky developers and can advise you to avoid them from the start.
Environmental Impact Assessment (EIA)
It is also possible that you will encounter some unanticipated hurdles related to the actual parcel of land on which the development is intended to sit. Even after initial planning permission has been given, we have seen projects delayed or abandoned as a result of changes to regulations/legislation.
It is possible that, when off-plan sales commenced, an Environmental Impact Assessment (EIA) had not yet been conducted. If any problems are identified by the EIA, it could have negative repercussions for investors and developers alike.
Expectations v. reality
When buying off-plan, it is also possible that the final product could differ significantly from the brochures and marketing materials which persuaded you to buy in the first place.
When it was amended in 2008, the Condominium Act addressed this exact issue. Today, all marketing materials issued by a developer are legally tied to the purchase agreement.
If the finished product differs greatly from the marketing material, this is technically a violation of the Act, and of the contract the developer signed with you. Unfortunately, most variations and/or flaws are not evident until construction has been completed.
These quality control issues can be minor or quite significant, but even if a developer is obviously in the wrong, it is possible that you could nevertheless struggle to get compensation. This is another reason why you should seek out developers who are renowned for their quality and reliability.
Paying a deposit
When you decide on the unit you want, you will typically be asked to pay a reservation deposit. But in order to safeguard your deposit, you must ensure you have a competent lawyer.
Most lawyers can not really start the due diligence process until after your deposit has been paid, but a skilled lawyer will make sure that your deposit is fully refundable if their due diligence identifies a problem with either the development or the developer.
Buying an off-plan condo certainly has its advantages, but there is also a certain element of risk involved.
But these risks can be greatly mitigated if you are careful in your choice of developer, and you hire a qualified lawyer to help you navigate any potential minefields.
by Thai Residential Phuket Property Guide
This article is from the 2018/2019 Thai Residential Phuket Property Guide. To download the 2019/2020 Guide visit ThaiResidential.com