Off the plan real estate investments are basically investing in projects in their very earliest stages; the land is purchased, some basic designs are just beginning to take shape, and perhaps the developer has begun to apply for necessary permits. No concrete progress has been made, however. This kind of investment can offer excellent returns, but also requires more care and has several points to consider.
With Mexico’s solid tourism growth and thriving economy in general, there are many new real estate and tourism projects worth consideration for early investment. The fact that there is less professional data available on the Mexico real estate market means that opportunities like this are not all seized by larger investors, leaving more off-the-plan opportunities to be discovered by smaller-scale, individual investors.
At this point, developers are really just getting the ball rolling. They are simply looking for the funds to begin the project and cover basic expenses, or perhaps to gain a loan from the bank. The developer knows that they will see the more significant income (and profit) when plans are 100% finalized and construction has begun. For this reason, they will offer the lowest prices at this point. This option, then, offers the greatest difference between the initial investment and the future value of the property. Even in comparison to the final sale prices of individual units, an off-the-plan investment will offer a considerable margin of increase – in all cases, greater than purchases later on in the project when the developer has raised prices.
When a project is still in the early stages of design and planning, an investor has more leverage to negotiate terms. For example, an investor may choose the best unit, the one most suitable for their needs, the most ideal location within the building or complex, etc. Basically, the earlier and less defined the project the more negotiation power the investor has. This leads to the next two points.
In many cases, a unit can be personalized to suit the investor’s needs or tastes. They may, for example, request a larger walk in closet, larger balcony or an additional bathroom. Accessibility items for wheelchairs, for example, could be requested based on the buyer’s needs or on future market considerations. This kind of personalization can usually be requested throughout the early pre-construction stage, so long as the construction has not advanced beyond the point of integrating them. However, the advantage of this early, off-the-plan stage is that as mentioned above, the investor has more negotiation power already and can request these items at less or even no additional expense.
Likewise, the investor could request specific items in the design of common areas, such as a certain type of pool or design of green spaces. This can also be true of features such as elevators or entrance security (manned or automated, etc.)
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In short, the investor has considerably more negotiation leverage on items such as choice of unit and personalization of the unit, and can even have a say in design features pertaining to the development as a whole.
When considering an off-the-plan investment in Mexico, an investor will want to investigate the reputation, experience and professionalism of the developer. A good developer will not only have a good sense of the demand of the market (making for good design) but will also have experience in administering wild card issues such as dealing with the government to attain building permits, the condo regime, etc.
The developer should also have a good deal of experience in administering the direct expenses of construction. Fortunately Mexico’s economy and currency have become very stable over the past five years. Large or rapid fluctuations in exchange rates, which could create a nightmares for administrating raw material and labor costs, simply don’t happen and have been replaced with stability that is inspiring confidence from investors worldwide. This is a very positive factor for developers and thus a very positive factor for early, off-the-plan investors.
Closely connected is the quality of the plan. Since the work has not begun, and the design is not even complete, a well-organized plan should be in place; the part of the design that exists should reflect market demands and be feasible.
An investor should enquire what studies have been completed to ensure feasibility of the project. They should also consider how many other investors have confidence to support the project at an early stage and who these investors are.
Items that make the plan more solid will give an investor less negotiation power; however, it is important to look for the basics of reliability and good planning from the earliest of stages.
Looking at the idea mentioned in the first part of this article from the other end of things, the higher investment potential and the greater the negotiation power of the investor, the more risks there are to be managed. Finding a reputable developer and seeing a well-organized plan are two ways to reduce risk. Another step is to ensure that the contract clearly spells out terms and conditions of funds – exactly what is offered in return for these funds, any extras that have been negotiated, under what conditions the funds will be returned, etc.
Escrow accounts can also be used to add another layer of protection. In many cases, developers do not need all of the funds immediately, but only need a guarantee of their availability when the time comes. Release of funds from escrow can be planned accordingly. In most cases, funds invested at this early stage will probably need to be released sooner than in a regular pre-construction investment, but this nevertheless offers another possibility to manage risk since funds would not be released until certain progress has been made and conditions met.
As mentioned above, the fact that information on Mexico’s real estate market has been less sophisticated leaves greater opportunities for smaller investors. However, this also begs the question; How can an investor find the right project for an off-the-plan investment?
Finding a professional who has the right connections in the industry is key. For example, Top Mexico Real Estate’s “Match-Maker” program is designed to help investors find other investors or specific developers that meet each other’s needs – especially in cases where an investor has a specific need or plan that goes beyond the usual buyer’s search situation.
A well-connected network of real estate professionals (brokers, lawyers, developers, etc.) will be the best way to find an off-the-plan investment that offers good potential but is still unknown enough to be a great opportunity.
