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Investment Potential of Pre-Construction Projects in Tenerife

As a result of the moratorium on building in Tenerife, there are a limited number of projects in the South of Tenerife; however this should have the effect of causing prices to increase as demand will outstrip supply. Consequently, for people investing now, there are very substantial gains to be made.

Basically the way it works is that building companies sell at the early stages of the project, apartments or houses at prices that represent a significant discount from the normal price, at least 10% less than market value, and take deposits from non-residents of 20% of the selling price, which is fixed for the duration of the contract (even less for those with residential status). The purpose of this is to minimize the amount of bank lending needed by the building company to finance the project. However the big benefit to the purchaser needs to be explained arithmetically.

Taking a theoretical, but typical scenario, at the beginning of a two year project, a property is for sale for 200,000 euros and the builder asks for 20% initial payment, then a second payment, also of 20%, 12 months later. So for 12 months you have invested 40,000 euros, and the next 12 months another 40,000 euros. However the property, as it is being built, will increase in value by at least 10% per year on the total value of the property so by the time the property is completed, it has increased in value by 40,000 euros plus another 20,000 euros that was discounted off the price in the first instance, making the likely selling price around 270,000 euros. In broad terms, you should nearly double your investment in two years.

Additionally, you can normally sell the contract at any time during the course of the project, however the best time is in the last six months, when profits will be highest.

So what’s the downside? – well the only way you could lose is if property values dropped dramatically, but with the aforementioned moratorium on building, and the huge level of demand, there is not one property professional here who is predicting anything other than continued steady increases. The example given above uses a very conservative annual increase in value of 10%, (ask anyone who owns property in Tenerife how much it has risen in value in the last ten years.) And don’t forget, as soon as the building company sells a percentage of the properties, some increase the prices by 5 % or more. So why not follow these top ten tips, and invest your way into property ownership and profit.

Top Ten Tips

Always try to get in near the beginning of the project when you can select the best properties at the lowest prices. If you come in halfway through, sometimes the properties that remain will be less desirable and may have have incurred price increases from the beginning of the project.
Always make sure the area you are looking at is among the most popular areas locally. The most sought after areas in South Tenerife include, Fañabe, San Eugenio Alto, Torviscos Alto, and in the area of the Bahia del Duque Hotel, but the newest and best are La Caleta and Adeje Golf. The resorts of Los Cristiamos, Las Americas and Golf del Sur are good for investors buying to rent.
Always ask to see the contract in English, not just the one page reservation agreement, but the full contract.
Use a reputable estate agent. Most building companies will pay a commission to the agent, so you get him working for you for free.
Remember, when you pay the reservation deposit, usually around 6000 euros, (4000 pounds), this is non-refundable.
If you read the contract and don’t understand it, use the services of a lawyer.
If your property has views, but has land in front, make sure you find out if permission to build on that land has been given. Your lawyer can check this at the town hall.
If you want to make the final payment by mortgage, make sure your circumstances will enable you to get the mortgage. If you are unable to complete, you will probably forfeit part of your deposits.
Remember, one day you will want to sell it, so avoid studios, and if your budget permits, try to stretch to a 2 bed property.
Do not be afraid to ask questions, the seller owes it to you to provide full explanations and you owe it to yourself to know exactly what you are doing.

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