Twelve Tips for Buying Pre-Construction Property

buying pre-constructionIt’s the only legal back-up you have for one of the most expensive purchases you will make.  Yet it’s something that most buyers don’t check. Worse, those few that do take the time to check usually don’t understand it.

I’m talking about the sale contract…and if you’re buying a pre-construction property overseas, you really need to pay close attention to it. Pre-construction contracts have more variables than a normal sale, so make sure it’s watertight and covers all contingencies…before you sign on the dotted line.

Trying to fix disputes or problems after the fact in most overseas countries is near impossible.

Now, I always recommend that you get a decent in-country attorney to research any property you buy, and that includes checking the sale contract. But you should also read your contract yourself.

Here are twelve basics to look for:

1. Standard Clauses. Ask your attorney if the contract has all the standard clauses that apply in the country you’re buying in. Also ask if there are any non-standard clauses in the contract.

2. The Seller. Make sure that the seller of the property listed in the contract is the legal registered owner of the property. If the seller is the legal representative of the owner, or a corporation controlled by the owner, you need an addendum to your contract stating the relationship between the seller and the legal registered owner.

3. The Language. The legally-binding version of a sale contract is the one in the language of that country. So, in Panama, sale contracts are in Spanish. In Brazil, it’s Portuguese. Don’t accept an English contract from the seller unless English is the official language of the country you’re buying in. Have your attorney translate the Spanish or Portuguese contract into English for you before you sign.

4. Transfer of Title. I have seen contracts where on completion the developer gave you possession of your condo. You got the keys, you could move in, and start living there. But even though you had possession, the developer had given himself an unspecified period of time to actually transfer the title. This is not what you want. Once you make your final payment and close the sale, have the property title transferred into your name. This takes us nicely to tip #5…

5. Mortgages, Taxes, Liens. Once the property title is in your name, you want it free and clear of the developer’s outstanding mortgage, his unpaid taxes and any liens slapped against the property. Again, I have seen more than one sale contract where a developer with a hefty bank loan had not included a mechanism to clear that off each individual unit as he closed sales.

6. The Unit. The contract should state the number of your unit, the property title number (or the number of the main land parcel if buying a condo), and the size of the unit. It should state the views- if the unit is ocean view or beach views, for example. You should include the unit floor plan, clearly showing sizes, layout and views, as an addendum to the contract, too. You can link the size of the unit to the price of the property, so you pay less if you end up with a smaller unit than promised. This can work in reverse, though, if the developer delivers a larger unit than expected.

7. The Price. The contract should state the total price of the unit, in both numbers and words. It should state the currency. It should outline a payment method, and the payment terms (Buyer will pay 10% of the purchase price on signature of this contract, to Seller’s bank account; an additional 20% six months after signature, etc.).  It should include a chart showing when monthly payments are due, including balloon payments, if you are using developer financing. This brings us on to point #8…

8. Adjustments. With developer financing, you’ll often see an adjustment clause in your contract. An adjustment means that your monthly or quarterly payments can increase. Don’t leave the adjustments to the discretion of the developer, though. They should instead reflect real changes in construction or labor costs, by tying the adjustments to an official government inflation index. Here’s another common adjustment scenario. You agree to pay $100,000 for your condo. A clause states that the developer can increase the price by a fixed percentage (normally 5%-10%) at closing. Again, the increase should tie to official figures that prove that the cost of labor or raw materials did rise during construction. If you’re a cash buyer, ask the developer to remove adjustment clauses.

9. Timeframe. Your contract should have a start date for construction…and a finish date. These should be as precise as possible. You can ask for penalty payments if the developer is late delivering. Investigate extension clauses; developers usually allow generous timeframes for project over-runs. I’ve seen developments completed 4 years behind schedule, and buyers could do nothing: their sale contracts had no fixed completion date.

10. Building spec. Your sale contract should detail what the building will look like…the materials used…and the standard of the finishings.  The more detail you have in the contract, the better. If the developer promises a furniture pack, for example, have an addendum that outlines exactly what you get…down to the brand, color, and size. Do an inspection before you make your final payment to make sure you’re getting what you pay for. Your contract should include a timeframe for fixing any faults or shortcomings in the property.

11. Assignment. Check that you can sell your unit before completion. As you’re buying pre-construction, you aren’t really selling a condo…you are assigning your sale contract. Some developers allow it, some don’t. Many that allow it ask for a payment (usually a percentage of the sale price or the profit you make).

12. Penalties. With pre-construction contracts, the norm is that if you back out of the sale any time after signing, you lose not just the condo, but also any monies you have paid to date. (In Brazil, one of the few exceptions, you get some of your money back.) I’ve seen contracts though where you not only lost the monies you had paid, but faced a “fine” of an equal amount on top. Penalties apply for tardiness, too; whether you are late with a stage payment, or late to close the sale, you’ll pay either a fine, or interest on the outstanding balance. Make any penalties reciprocal. If you lose the 30% you paid if you pull out of the sale, for example, then state that the developer will have to pay you the same amount if he pulls out.

This list isn’t exhaustive, but it covers the main points.

Before you sign any sale contract, make sure you understand all the terms and conditions. Cover all the “what-ifs”…what happens if you need to back out, or can’t come up with the final payment to close.

Remember, spending a little extra time working closely with your attorney to fine-tune your contract is a worthwhile investment that will save both time and money in the long run.

You can find the original version of this article on pre-construction tips here.  Margaret Summerfield is a director of Pathfinder, IL’s preferred real estate advertiser. Margaret scouts the globe for real estate deals and writes about these in her free Pathfinder e-letter.

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