Purchasing housing in a new building through forward contracts

What is a forward contract with reference to purchasing an apartment?

A forward contract is a legal document that states the obligations of the seller and buyer for a specific asset for an upcoming date under certain conditions. With reference to purchasing an apartment in a new building, the underlying asset is “property rights to a future apartment”. This means that the buyer undertakes to take ownership of this apartment within the specified period, and the seller undertakes to hand it over to the buyer.

It is important to note that the market value of the apartment and the price specified in the forward contract may differ. A forward contract sets a price for a future date, and it may be higher or lower than the market price at the time the contract is made.

The likely difference in cost is influenced by various factors: risks in the real estate market, expected changes in the cost of apartments, as well as financial aspects taken into account in the contract. A forward contract gives the parties the opportunity to fix the price and terms of the transaction on an upcoming date, which can be useful for both the buyer and the seller to reduce risks and plan financial obligations.

Forward contract: the way it works in the construction industry

In construction industry, a forward contract can be used to sell apartments in new buildings even before the completion of construction work. The buyer and the developer enter into an agreement to sell the apartment at a fixed price, but the apartment handover occurs after completion of construction. For certain reasons, this can be beneficial to both parties.

Forward contracts: the client pros and cons

Benefits for the client

1. Preventing double selling. Entering into a forward contract, the buyer receives a guarantee that this property cannot be sold to other parties.
2. Risk coverage. Forward contract is perceived as a guaranteed way to avoid risks associated with changes in the market price of real estate. The buyer can garner price stability for a future apartment.
3. No costs for additional services. One of the important advantages is that forward contracts do not require notarization of information and other paid services of third parties.
4. Tax optimization. Forward contracts can help reduce tax liability for the buyer. They allow you to optimize taxation and reduce the final cost of the property.

Drawbacks for the client

1. Risk of untimely completion of construction. Construction may be delayed and the client will get the apartment later than expected.
2. Loss of flexibility. The client cannot change the details of the apartment layout after concluding the forward contract.

Forward contracts and their features for the developer

Benefits for the developer

1. Financial stability. It is easier for the developer to plan finances and manage risks, because they know the sales price in advance.
2. Provision of demand. Forward contracts help provide demand for real estate before construction is completed.

Drawbacks for the developer

1. The risk of having to fulfill obligations. The developer is obliged to hand the apartment over under a forward contract, even if their benefit from this transaction may decrease due to changes in market conditions.
2. Fix price. The developer loses the opportunity to receive higher profits from rising real estate prices.

Types of forward contracts

Forward contracts are classified according to several main parameters:

1. By signatories to the agreement
   Forward contracts in real estate can be concluded between different signatories to the transaction. These could be banking institutions, lenders providing financial support to buyers, and, of course, the clients themselves going to buy an apartment.
2. By type of underlying asset
   It is important to remember that an apartment is a physical asset, so forward contracts for the purchase of apartments are classified as commodity forwards. They are based on a physical asset – a specific apartment in a specific building.
3. By type of contract
   Regarding the purchase and sale of real estate, the following types of forward contracts are used:

• Currency contract. Whenever payment for an apartment is made in foreign currency, currency forwards help buyers and developers avoid the risk of currency fluctuations.
• Deliverable contract. These contracts set out the terms of the asset hand over on a specific date, defining the characteristics that the property must meet, such as renovations or furniture.
• Non-deliverable contracts. Used to determine the difference between the fixed price of real estate and the market price at an upcoming date, which may affect the exchange of financial flows between the parties to the agreement.

Risks associated with forward contracts

Purchasing real estate through a forward contract can be profitable, but it also comes with certain risks. Here are some of the main ones that may arise when concluding such a contract:

1. 1. Risk of the buyer's inability to complete forward transactions
   One of the principal risks is that the buyer may not be able or intend to pay the contractual amount at a future date. This may arise due to the buyer's financial difficulties, changes in their financial situation or other unforeseen circumstances.
2. Risk of delays in completion of construction work
   Delays in completing construction work and putting the residential complex into operation can lead to inconvenience for both transaction parties. Buyers may pay the cost of the apartment but not gain access to it on time, which may lead to additional costs and hassle.
3. Risk of difficulties in obtaining compensation for non-compliance with conditions
   If one party fails to comply with the terms of the forward contract, the other party will likely have difficulty with compensation or taking legal action. This may require additional efforts and means to protect your rights.
4. Misuse of investments risk
   Buyers may invest significant funds in a forward contract, and if such contract is not executed due to various circumstances, this may result in misuse of their investment. Losing an investment can be financially damaging.
5. Lack of approval documentation risk

The developer must have all the necessary documents for the construction and sale of apartments. Failure to obtain the necessary permits may result in legal problems and delays in the execution of the contract.

Purchasing an apartment through a forward contract can be a profitable decision, but parties must be aware of the risks associated with this type of transaction and pay special attention to the terms of the contract and real estate market conditions.

Stages of selling an apartment through forward contracts in Ukraine

The process of purchasing an apartment through a forward contract comprises the following stages:

1. Conclusion of a contract. The buyer and developer enter into a forward contract, which determines the price, time limits and other terms of the transaction.
2. Making a deposit. The buyer usually pays a deposit to confirm his intention to buy an apartment.
3. Construction. The developer goes on with construction of apartments.
4. Completion of construction. After completion of the construction of apartments and receipt of all necessary permits, the apartments are handed over to buyers.
5. Property handover. Ownership of the apartment is transferred to the buyer, and they enter into possession.
6. End of the contract. Once the property is handed over, the forward contract is considered fulfilled.

To summarize, it is worth noting that purchasing an apartment in a new building through a forward contract is one of the ways to purchase real estate, which has its own advantages and disadvantages for both the client and the developer. It is important to carefully consider all aspects of this type of transaction and be well aware of the substantial risks and rewards involved before deciding to enter into a forward real estate.