Off-plan property sales and purchases in Lagos often involves buyers paying some deposit before a real estate project is completed. In Nigeria, off-plan property sales often operate very differently from the UK model, both in terms of legal protection and market practice. One key distinction is that buyer deposits in Nigeria are not typically held in escrow or stakeholder accounts, which significantly increases the buyer's risk.
In practice, this means that real estate developers often use buyer deposits as construction funding, sometimes with zero equity commitment. Thus, off-plan property buyers bear significant completion risk and insolvency risk. If a developer fails to complete the project, buyers often struggle to recover their deposits, even through litigation.
Importantly, this risk affects not just off-plan property buyers but also off-plan real estate developers, as poorly managed projects erode brand trust and commercial viability.
The Real Issue
Based on our experience advising both off-plan real estate developers and off-plan buyers, it is evident that many off-plan real estate developers do not set out to be fraudulent. In reality, many real estate developers are ambitious but undercapitalised and understructured. The result is not necessarily fraud but avoidable failure.
Here are some of the common pitfalls we have identified across multiple engagements.
- Poor Financial Forecasting: We find that many real estate developers often underprice units at launch without building in buffers for currency devaluation, imported material cost increases, and rising labour expenses. They often rely on fixed pricing despite 12–24 month inflation cycles.
- Lack of Formal Construction Budgeting: We find that many real estate developers promoting off-plan real estate projects do always not engage professional quantity surveyors or project managers. They often underestimate project costs or rely on informal internal estimates. Real estate construction often begins with incomplete funding, relying on ongoing sales to sustain progress.
- Misuse of Buyer Deposits: This is not always a case of fraud. Sometimes, buyer funds are often used as rolling capital for land balance payments, marketing costs and contractor advances.
- Overambitious Timelines: We find that real estate developers often announce unrealistic completion dates to drive sales. Common delays (e.g., approvals, material shortages, or the rainy season) are not factored in. Off-plan real estate purchasers often become anxious or hostile when project timelines shift dramatically.
- Lack of Legal or Contractual Structure: Many developers rely on informal contracts or template MoUs, lacking proper completion obligations and adequate buyer and seller remedies. This absence of structure breeds mistrust and legal disputes when problems arise.
Final Comments
Whether as an off-plan buyer or developer, it is critical to approach off-plan property transactions with professional legal guidance. Too often, promising real estate projects unravel due to issues that could have been addressed at the contract stage. In a market where trust and transparency are key differentiators, getting the legal and construction structure of an off-plan financing right is critical.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
