Buying property off plans

Buying a property in Tenerife before it’s even been built is not as ludicrous as it may sound. This method of buying has seen spectacular profits for purchasers over the past couple of years in the Canary Islands and beyond, but how does it work?

Basically, buying ‘off plans’ means just that. You reserve a property on a new development before the construction is completed – often before it has even started. In some cases, even before the developer has been granted the Licencia de Obra (licence to build).

So what’s in it for me?

Bargain basement prices
Because you’re being asked to buy an architect’s drawing and an empty plot of land, the prices are tagged accordingly. In addition, normally you only have to pay approximately 30 per cent of the purchase price as a deposit and then nothing more until completion of the construction, which can then be financed by a 70 per cent mortgage.

Pick of the crop
Buying off plans affords the purchaser to have the first choice of individual properties on a development. Normally, when there’s property for sale in Tenerife, the penthouse, corner units and ground floor apartments with private gardens go first.

Up, up and away
As construction begins and the development begins to take shape or a show home is completed, the price is increased substantially as others looking at buying property in Tenerife can see what the homes will look like.

Gift wrapped
Once the development is completely finished, other purchasers are naturally willing to pay more for the finished product decorated with gardens and pool rather than a flat plot of cement and rubble. Would you buy a property that you couldn’t use for 18 months? Yes, if you’re a wise investor.

Be gone, Mr Taxman!
As an additional bonus, if you sell the property before completion, ie before you take possession of the escritura (title deeds), there is no Capital Gains Tax to be paid, no matter how big a profit you make.

What’s in it for the developer?
At the time of pre-construction the developer is eager to sell as many units as possible to minimise his risk and to negotiate lower interest rates from their investors, thus the properties are priced extremely competitively at this stage.

Remember, a 30 per cent deposit is often all you need to invest off plans. Many raise this money by releasing equity in property they already own by remortgaging. A case of borrowing money at a relatively low interest rate and investing it into an investment paying a substantially higher rate. You do the maths!

Ok, we’ll do the maths:

Off plan asking price: €100,000 (May 2004)
Deposit payable: €30,000

Just before the property is completed in May 2006, you sell it for €130,000

You’ve made €30,000 profit in 18 months, a return of 30 per cent on the asking price but a real return on 100 per cent on your initial investment of €30,000.

Buying off plans on a property in Tenerife is a prudent investment for those who don’t mind waiting before taking possession of their home and those looking for a substantial gain on property purchase.