Which is a better investment choice: Preselling or Ready for Occupancy?

If you are a working person who relies on monthly salaries, you may be just like the most people in your social group who after going through the arduous process of searching for the best property to buy, have eventually come to terms that PRE-SELLING properties are usually the most practical way to invest for their future home.

To find out as to why that is the case, please read on.

First, let us compare the two terms: Ready for Occupancy and Pre-Selling.

So what's the difference between Ready for Occupancy properties and Pre-Selling properties?

ready - prepared or equipped to act or be used immediately
occupancy - the act of occupying or taking possession of a building or property

Thus, ready for occupancy is a property that is prepared or equipped to be occupied or be taken possession of.

Ready for occupancy (RFO) is also known as move-in ready in other countries.

Preselling is a property that is being sold in advance which is basically a sale of a planned house or condominium.

Preselling properties have cheaper total contract price and have more affordable monthly downpayments.

1) Cheaper

Pre-selling properties are cheaper. It is buying the property before its value appreciates.

Most big-time investors buy pre-selling properties and resell them with the same price, cheaper or even more expensive with that of its ready for occupancy counterpart.

2) More affordable downpayment

Downpayment for most properties range from 20%-30% depending on the financing method.

For pre-selling properties, downpayments can be paid through monthly installments up to 24 to 36 months.

This is where the affordability comes in.

Scenario 1:

Let us say that Home Buyer A, a Php26,000 monthly earner wants to get a house and lot priced at most Php1.3M and can afford to pay at most Php8,000 per month.

The 20% downpayment for Php1.3M property is Php260,000. Since the property is still in the pre-launching or pre-development stage, the developer offers 36 months installment of the downpayment.

Can Home Buyer A afford and stays on budget with this 36 months installment? The answer is YES.

With the 36 installments, Home Buyer A will be paying Php7,222 per month. Home Buyer A took the chance and is now paying his monthly installment.

So let us say that Home Buyer B, a friend of Home Buyer A, didn't take the same chance that Home Buyer did. Home Buyer B wanted to wait until the house is Ready for Occupancy.

Home Buyer B has the same budget and the same salary with that of Home Buyer A. After 2 years, Home Buyer B is ready to get a property in the same subdivision that Home Buyer A got.

There are 2 possible scenarios:

1. All units are SOLD OUT.
2. There are few units left, but since it's Ready for Occupancy already, Home Buyer B is required to pay the full downpayment or pay it in 6-month installment or 12-month installment at most.

Will Home Buyer B afford to pay the downpayment in full or in 12-month installment at most? The answer is NO.

Home Buyer B needs to cash out Php260,000 or pay Php21,666 for 12 months.

After another year, Home Buyer A finally moved in his own home. He has fully paid his downpayment and is now paying his amortization in almost the same amount.

Home Buyer B, continues to look for properties that are Ready for Occupancy and with an installment payment that within his budget. Home Buyer B, keeps on looking and looking. 

After 3 years, he is still looking. He is also finding it hard to look for a good property that is Php1.3M below. Prices have gone up.

What happened to Home Buyer B? 

What should Home Buyer B do to afford a Ready for Occupancy property at the time that he rejected the property that Home Buyer A had accepted?

Scenario 2:

Investor A purchased 5 units of preselling studio for 1.2M at a pre-launching event.
Developer increases the total contract price per unit at 10% every 3-6 months.
Let's say that the price increase happens every 6 months.
10% of Php1.2M is Php120,000.
The property takes 2 years to build.

1st Increase: Php120,000 (New Price: Php1,320,000)
2nd Increase: Php132,000 (New Price: Php1,452,000)
3rd Increase: Php145,200 (New Price: Php1,597,200)
4th Increase: Php159,720 (New Price: Php1,756,920)

For the Php1,200,000 studio unit, he was able to actually save Php556,920. That is over half a million.

If this investor purchased the property in SPOT CASH, he usually gets 5%-10% discount.
Let us say that he was indeed given a 5% discount for each of those 5 units.
He gets Php60,750 off for each and that is Php303,750 for all 5 units.

The discounted total price of the Php1,200,000 is Php1,139,250. Since he purchased 5, he had cashed out Php5,696,250 but the total current value of his purchases is Php8,784,600.

Being in the real estate industry for a few years now, I noticed that first-time-to-be home investors who have no basic knowledge of the real estate market are usually jumping on to Ready for Occupancy properties. Most of the time these aspiring home owners have a budget even lesser than the average pre-selling properties in Cebu real estate market.

There is no denying that Ready for Occupancy house and lot; or condominiums give us the convenience and assurance of our investment; but that also means we may need to pay a lot more for our purchase.

If you have more investment questions, feel free to contact us.