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The early reservation of properties on new complexes about to be released
It has become a favourite opportunity for private and institutional investors alike to make reservations of a number of units on a new development by placing down a customary 10% deposit as early reservations on prime complexes in the best locations. Builder/developers follow a well-tested – principle of pitching "first release" prices in order to demonstrate to the market, not to mention their investors, that sales have taken off with a bang. The general rule is to increase sales prices for the second release, usually after one-third of the properties have been sold, by around 15% and the third and final release by a further 10%. This means that the sales value increase from first to last sale seldom shows less than 25% and very often substantially more. But 25% on a property price usually means as much as 100% on the Willow capital employed! At any time after the first price increase the properties are then put on the market. Prime positions offered at the same price as secondary. The purchaser "buys" the private contract, a common transaction in Spain, the purchaser pays direct to the builder the contract price and to Willow the deposit paid + the uplift i.e. the profit. FOR EXAMPLE: After full cost analysis and project evaluation Willow contract with a developer to buy a property off-plan at a first release price of 100,000 euros. The developer wants 10% deposit ie 10,000 euros from our Willow Investors. As the project developed and the show home opened the prices were increased as predicted by a mere 10% making the contract for our Willow property now worth 110,000 euros. A purchaser is then found who completes with the developer by paying the remaining 90,000 euros due on the original developers contract plus Willow receives the original deposit/capital outlay of 10,000 euros plus the uplift of a further 10,000 euros ie 100% profit on the Willow capital employed! 10,000 out, 20,000 back! Combine this with the fact that we usually "bulk buy" so we are granted a discount we cannot fail to lose. Of course, Willow could have held on to the end of the development and benefited by the further increased price levels. That is a decision that, from time to time, we take based on general year on year profit criteria. |
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