Property overseas: Buying at a discount

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Every month, Zoe Dare Hall shows how experienced investors make a profit from buying and selling property abroad

Making money from an overseas property can seem like hard work at present. All the wrong things - mortgage costs, maintenance bills, air fares - are going up, while wavering exchange rates may mean the value of your investment is heading in the other direction.

Owner Invest in the news | Telegraph, Overseas Property 10th May 2008

Buying below market value is one way to build in profit from the start, even if prices stagnate or fall.

"It protects buyers against corrections in market price and movements in the exchange rate," says Russell Bragg from Premier Resorts.

Royal Suites Marbella - Discount investment property

Buying at a discount has further benefits. It should make your property easier to sell, as you will be less concerned about getting the highest possible sale price. And you receive the same rental income as a similar property owned by someone who paid full price.

Why are prices reduced?

"Developers cut the price to kick-start cashflow and sales momentum in the early stages of the development," says Bragg. "For a developer, getting off to a bad start could mean increased finance costs, which could remove their profit margin."

It is also a way of rewarding the buyer for taking on the added risk of investing in a development in its early stages, and the inconvenience of buying on what may be a building site for years. "Buyers will expect a better deal in those circumstances," says Bragg.

"Buying when there is nothing there is an act of faith. Investors do their homework. They buy before the public launch and they expect 20 per cent off the launch price. They may also buy several properties at once and negotiate a discount. This might not suit the average overseas home buyer, but still, the early bird catches the worm."

Prime time for a discount

Far from seeing discounts dry up, the current climate is driving developers to offer more "under market value" opportunities, says Lance Nelson from Jet2Let Property. "In some cases, developers' finance depends on their making a certain number of sales first, so they are keen to get early sales sorted," he says.

He cites frontline beach apartments at Hania Beach in the Egyptian resort of Hurghada as an example. "You can currently buy for £700 per square metre where most similar local developments in a similar location are charging £950-£1,100. The trick is to register to get the pre-launch price as a fully refundable deposit. Then, when due diligence such as planning permission and final plans are available, you are safe to commit."

Is the discount genuine?

To calculate if a property has genuinely been priced under market value, you need to compare its value per square metre with properties of a similar size and type locally. "If you are buying off-plan, expect prices to be 20-30 per cent lower than equivalent properties on a resort that has already been built," says Bragg.

"Ask to see a bank valuation or arrange for an independent valuation and ask what bank guarantees the developer has in place. If the developer is guaranteeing rental returns, ask to see the independent research that substantiates their forecasts."

And don't be seduced by incentives such as cashback or golf club memberships. "I'd walk away," says Bragg. "They are effectively a false discount, as you won't be able to offer the same incentives when you resell."

What the experts say

"With new developments, pricing properties under market value may be the developer's way of promoting it to the masses. But with resale properties there could be more serious undertones. If something is obviously under market value, you should ask why?
Serge Cowan, Unique Living

"Buying off-plan is the best way to buy under market value. Make sure the resort has full planning permission and is properly funded so it is not dependent on sales to be completed."
Russell Bragg, Premier Resorts

"The agent selling you the property should be able to explain the due diligence they have undertaken to ensure that the developer is reputable and that the 'under market offer' is too good to be true."
Lance Nelson, Jet2Let Property

"Making sure that a decent amount of capital is already built in to the purchase price is an important step towards protecting yourself against an uncertain and volatile economy. It will also go some way to making sure that the bank will look favourably on a mortgage application."
Mark Bingham, Owner Invest

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