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Off Plan and Developers in Bulgaria

A vicious circle has arisen on the global property market, in Bulgaria and numerous other countries, due to the financial crisis. The problem concerns off plan properties where the complex is not yet fully completed. There are three elements contributing to this situation. The developer delays or can no longer complete the project: the buyer is unwilling to complete on the property purchase: the banks have either recalled loans made to the developer or are refusing a mortgage to the buyer.

The developer

The way that off plan works means the developer uses funds from buyers to carry on building. It is inevitable that with a dearth of buyers, the developer will find funds tight, leading to long delays for completion or even complete standstill. Currently, there are many offers from developers to swap those buyers whose units are not completed to another development where apartments are finished. Some have gone further and are offering "buy as you go" packages, where in effect buyers pay the developer monthly instalmants (just as they would do a bank for a mortgage).

In the last few years there were numerous amateurs who came into the construction market, who were in reality only looking to 'make a mint'. They turned out to have little or no financial backing and only used buyers' money to undertake their project. Generally, these builders turned out low quality work.

To add to the woes, the EU has withdrawn funds which were due for infrastructure leading to and on these developments. This has left the developer to provide unexpected funds for roads and such.

The buyer

On the other side of things, many buyers who entered into an off plan purchase are now unable to obtain a mortgage to complete their purchase. Some buyers who have completed are defaulting on their mortgage payments to Bulgarian banks. It has to be said that this situation is not only occurring in Bulgaria but in nearly all countries worldwide.

The number of mortgage defaulters is one of the main reasons why the banks here are very reluctant to lend to foreigners purchasing holiday homes. Many who are defaulting are individuals who are in an unfortunate poor financial situation back in their home country and who also mortgaged at a very high LTV: plus bought at a high price.

For those who have still not completed on their property transaction, they too are often struggling financially. Finding themselves in a situation where they thought obtaining a mortgage was always going to be easy and often already mortgaged to the hilt at home, thus unable to obtain finance.

This may actually start to resolve itself. If the developer has to delay the build, then the buyer could find that mortgage lending will be eased during that time. The staged payments will be pushed out. Lending may improve and currency exchanges make a gain too. As one buyer said "I don't mind if it isn't going to be completed on time as it will give me time to raise the balance. Delaying Act 16 is fine by me".

There has been an increasing number of buyers who are bailing out just because they no longer want to continue to complete on their off plan purchase. They have seen the price of their property fall. Instead of making the quick buck they were looking for, they are now in a situation where they just don't want to buy and are simply endeavouring to walk away from their obligations for their own convenience.

Some who bought did so solely for 'buy-to-let' and are struggling to fill their rental properties.

Whilst it is true that many people are cutting back on holidays, it is also true that many still simply say "to heck with it, the recession is here anyway, I'm going to have a holiday".

However, a quick scan around some of the letting sites shows some incredibly high prices. We saw an apartment on the coast, in a development, to sleep only two people at 400 euros for a week high season. When holiday makers can find property like this available in another country at half that price, their choice is inevitable. It may be better to take half the price and rent more weeks?

The banks

The Bulgarian banks have become particularly careful in their lending, especially in the ski and sea resorts. In general, lending is restricted to 60% of LTV and more stringent criteria now apply for proof of income from applicants. Interest rates are high in Bulgaria. However, if you are funding your purchase from, say, Britain, then interest rates are at an all time low, so if you can get funding and lock into a rate, now is the time to do so.

Few buyers, little money, so less building.

The largest impact has been in the sea and ski resorts, together with the cities where there has been a mass of new builds. Completed partments with sea views in Kavarna on the northern Black Sea coastline are on sale for as little as 390 euros a sq.m, which was unheard of 12 months ago. Prices have been slashed in the south at Sveti Vlas and Sunny Beach, with prices for large 3 bed apartments as low as 64,000 euros. A new foreclosure internet site is available for repossessed properties and several agents are actively advertising below-market-valuation properties.

One of the better pieces of news from this current mess is that it has really shaken down the property development market sector. Less buildings are being constructed, less plans for permission are being submitted. Those developers who remain in the marketplace are those which are financially stable with a long term view. Bulgaria may at last have a real opportunity now to look carefully at the property market and create a situation where mass-development is prevented.

For the majority of people who have bought in Bulgaria, things have worked out fine and many have made significant financial gains, with huge numbers having got lots of enjoyment out of their properties. In general, these buyers were the ones who were very careful from the outset. In the meantime, for the less fortunate who have to sell or are forced to bail out, serious investors are gathering like vultures for the bargains.