Buying and Selling Off-Plan Properties – Opportunities, Risks and Challenges

The buying and selling of off-plan properties is becoming a trend in today’s property market. As house prices rise, buying a property off-plan – or under construction – is proving to be an increasingly popular choice among buyers in Portugal.

Buying a property off-plan is a dream come true! Buyers can purchase a new home, with the option to personalize it, at a price that is generally lower than equivalent properties that have already been built. An off-plan property also proves to be a sound investment, as it can be resold after completion with profit margins that in some cases exceed 25%.

On the other hand, it’s in the developer’s (seller’s) interest to finance his project using his own funds and to rely as little as possible – or not at all – on banks or additional investors. The sale of a property before its completion allows the developer to raise capital through deposits and advance payments from the buyer. Put simply, the developer waives the profit margin arising from inflation and the property’s appreciation once completed, yet in return finances the construction with third-party capital – that of the buyer – which he treats and manages as his own, without paying any interest.

For all the reasons outlined above, we are witnessing an intensification of the business of buying and selling off-plan properties. This trend presents several legal challenges, with a need for all real estate players to stay up to date and think creatively. In this article, we aim to highlight some of the challenges and concerns to consider when investing in this type of property.

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As the saying goes, ‘no money, no monkey’. Capital is the be-all and end-all of this kind of investment.

It is common practice in the property market for substantial deposits (20% to 60%) to be requested in this type of transaction, rather than the usual 10% typically paid in most property transactions to secure a property.

Consequently, the buyer commits substantial sums to a deal involving significant risks due to the uncertain and future-oriented nature of the transaction,  acting as a financier without the collateral typically required by banks for such purposes.

An investment of this kind must therefore be preceded by a robust and meticulous contractual agreement that provides the buyer with the necessary security to invest his savings in the seller's project.

What rights do the parties have in the event of extreme delays in the work? Or worse, in the event of bankruptcy? And if there is a catastrophe, disaster or fire that completely destroys the building, is the seller protected? Or, if the seller wishes to increase the agreed price due to higher construction costs, can he do so?

Take a closer look at some of the concerns underlying the Sale and Purchase of Future Property:

Delay in the completion and/or handover of the property:

In most contracts drawn up by property developers, it is stated that the deed of sale is expected to be signed on date X.

This wording allows room for the dynamics of the construction process itself, which includes delays, faults, material substitutions and bureaucratic procedures that are beyond the developer’s control; however, it is vague and does not allow the parties to withdraw from the transaction in the event of excessive delay.

It should be noted that withdrawing from the transaction in such a scenario is in the interests of both parties. The buyer may wish to invest in another faster-moving project, and the seller may wish to re-enter the property into the market, where, due to the passing of time, it is worth more, allowing him to obtain a higher profit margin.

Bankruptcy or dissolution of the seller:

Experience tells us that sellers of off-plan properties are generally legal entities, i.e. companies. Without burdening the reader with lengthy discussions on this matter, and to put it very simply, it is worth noting that, in a worst-case scenario, companies are liable to their creditors only to the extent of their share capital.

Therefore, whenever the transaction is carried out through companies, it is important to analyse the developer’s structure and suggest additional guarantee mechanisms – whether personal, real or bank-based – as well as to ensure the contract is as effective as possible.

The more guarantees given to buyers, the higher the sums sellers may request in advance to promote and advance their projects. A confident buyer invests larger sums, more regularly and potentially on more than one occasion, which will be of great interest to the developer.

Price Increase Due to Alleged Change of Circumstances:

Could you have predicted five years ago the armed conflicts we are experiencing today? Most likely not. These and other circumstances have a direct impact on the costs of materials, fuel and labour – resources that are crucial to the development of property projects.

As a matter of fact, in such a scenario, it may make sense to review the conditions initially agreed upon, particularly the price. In order to avoid heated, protracted and costly court disputes regarding the relevance and terms of such a review, it is highly advisable to address these points in a contract entered into between the parties.

In all these scenarios, the provision of appropriate contractual solutions plays a central role. Clearly defining deadlines, including specific termination clauses, stipulating remedies in the event of breach, and securing appropriate guarantees are essential tools for ensuring greater certainty and predictability in the transaction. Find out more about these and other framework solutions from our team.

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Changing the current paradigm of a lack of contractual clarity is a tall challenge that requires a joint effort from all players in the property market. Do not rely on standard drafts, as these are not designed to meet your specific needs – this is the one certainty in such an uncertain business. Therefore, it is up to the buyer not to be afraid of losing the deal and to insist that his concerns are addressed in the contract; it is up to the seller to be bold and allow for distinctive contractual solutions that make him the right person for the buyer to entrust his savings to; it is up to the estate agent to mediate the interests involved and promote an appropriate and balanced contractual arrangement; and it is up to the solicitors and lawyers to study, keep up to date and be creative in pursuing their clients’ interests. Only a synergy of commitment from all the players involved will lead to a paradigm shift that is in the interests of the property market in which we all – in one way or another – operate.

A careful, thoughtful and balanced approach to purchasing will give many buyers greater security, certainty and clarity regarding an investment which, whilst involving some risk, need not be overly risky.

(This article is of a general nature and does not constitute, nor should it be construed as constituting, legal advice in relation to any specific case; consequently, its application to a particular situation will always depend on a careful and considered legal analysis of all the circumstances.)