Building permits and pre-sales in real estate crowdfunding: the two signs that a project is serious
The project looks good: a good area, an experienced developer, flawless renders and an eighteen-month term. In a corner of the listing, almost as an afterthought, it says "permit being processed". Eighteen months later, building work still hasn't started, because the local council has yet to grant it.
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That small line, and the one about pre-sales that usually sits right next to it, tell you more about what you are going to go through as an investor than almost everything else on the listing. They are the two signals that show where a project really stands, and therefore how far it still has to go before it pays your money back.
The building permit: without it, nothing gets built
It seems obvious, but it has consequences that are less so.
To build or refurbish a building in Spain you need a building permit granted by the local council, and until you have it you cannot start. The problem is that the time it takes to obtain one does not depend on the developer: it depends on each council's workload, on whether the project complies with planning regulations first time round and on no requests for further information cropping up along the way. In some cities it takes a few months; in others, going beyond a year is perfectly normal.
On the listing you will basically come across three situations. Permit granted, which means that obstacle no longer exists. Permit applied for or being processed, which means the project's timetable depends on a third party that is in no hurry at all. And deals whose very aim is to obtain that permit or to rezone a piece of land, which are a different type of investment: there the permit is not a prerequisite, it is the business itself, and timing risk is the main risk.
None of the three is good or bad in the abstract, but each one implies a very different likelihood of the timetable slipping.
Pre-sales: someone has already said yes
The permit tells you whether it can be built. Pre-sales tell you whether anyone wants what is going to be built.
A pre-sale is a home sold off-plan before it exists, usually with a signed contract and part of the price paid on account. It does three things at once. It confirms there is real demand at that price, and not just in the business plan. It brings forward part of the money that will later be used for repayment. And very often it is the condition the bank sets for financing the construction, which means that without a certain level of pre-sales the project may be left without the financing it needs to get under way.
The nuance lies in what counts as a pre-sale. A reservation with a small deposit that is easy to get back is not the same as a private contract with a significant percentage of the price already paid. The first shows interest; the second is a commitment. If the listing just says "70% pre-sold", it is worth knowing which of the two lies behind it, and at what price the homes were sold compared with the price used to calculate the return.
How to read the two together
Separately, each tells you something. Together, they pinpoint where the project stands.
With the permit granted and high pre-sales, the project is at an advanced stage: the two big external obstacles have already been overcome and what remains is to build and deliver. With the permit granted but few pre-sales, it can be built, but the question is how quickly it will sell and whether the rest of the financing will come through. With the permit pending and high pre-sales, there is demand but no permission, and the timing depends on the council. With no permit and no pre-sales, you are at the earliest stage, where the most things have to go right and where it is easiest for the timetable to slip.
It is reasonable for an earlier stage to come with a higher estimated return, because it takes on more uncertainty. If it doesn't, that is a question worth asking.
Estimates published by the platforms.
The knock-on effects of these two signals
The permit and pre-sales don't just tell you about the term. They affect almost everything else on the listing.
The value of the asset, and therefore the LTV, changes a great deal depending on whether or not the permit has been granted, because land with permission to build is worth considerably more than the same land without it. The collateral is affected too: enforcing a mortgage over a plot without a permit leaves you with an asset that is harder to sell. And delays, which are the most frequent risk in the sector, largely start here, with permits that take longer than expected and sales that move more slowly than the plan said.
And behind it all, the developer
There is a third signal that doesn't appear in any box, but it helps you interpret the other two.
A developer that has delivered twenty developments in that same city knows how long that council takes and knows how to sell in that market. One that is building there for the first time, or that has never completed a project of that size, reads the same timescales with a good deal more optimism than is usually borne out. Their track record of permits obtained and homes delivered is the context that turns two boxes into useful information.
