What is a backlog?
What is a Backlog? Essential knowledge for newcomers to real estate investment. A backlog is a crucial indicator of a project's future direction and investment risk.
Let's explore what a backlog is, and the four key things investors should know about it.
What is a Backlog?
The difference between buying and selling residential properties and other types of goods lies in the time it takes from the signing of a sales contract to delivery. Residential properties take significantly longer than other goods, leading to two related terms: Presale and Backlog.
Before understanding what a backlog is, we need to understand Presale. Presale refers to reserving a house or condo over a period of time, usually divided into installments. The presale period begins when a customer makes a deposit.
A backlog, on the other hand, is the accumulated total of presales that have not yet been transferred, or the total number of pre-orders for houses or condos awaiting delivery upon completion of construction.
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Why Backlog is More Important to Real Estate Investors Than Presales
While presales only represent reservations for houses or condos, they don't involve a formal deposit or sales contract, and the transfer of ownership hasn't been completed.
Therefore, presale figures only represent reservations and don't account for actual project revenue. They can't be recorded as income in the accounting books. If payments are not made regularly, the transfer is cancelled, or the buyer's loan application is rejected, the unit becomes a forfeited property. Thus, presale figures don't offer much insight to real estate investors.
Backlog, on the other hand, is the accumulated total from each presale round. Backlog is another crucial figure indicating a project's revenue. When the backlog reaches a target, developers use it to apply for a bank loan to construct the project.
Conversely, if a project has an insufficient backlog to meet loan approvals, it may be abandoned. Therefore, backlog is a vital component that both investors and homebuyers shouldn't overlook.
It indicates the project's potential and feasibility, showing whether it will be developed to completion and the transfer of ownership. Or it might be canceled midway due to loan applications for construction.
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Backlog Recognition Timeframe
The timeframe from backlog to ownership transfer and revenue recognition varies depending on the type of residential project, which can be divided into three categories:
1. Projects launched before construction begins: The time from booking to ownership transfer is significant. For low-rise projects, it's approximately 6-8 months; for condominiums, it's approximately 1 year or more.
2. Pre-sale projects: These are projects where partial construction has already begun and are then offered for presale. The time from booking to ownership transfer is shorter than projects launched before construction begins and depends on the progress of construction before the sale begins.
3. Ready-to-move-in projects: These are projects that are completed and ready for immediate occupancy. The time from booking to ownership transfer is approximately 1-2 months.
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Backlog and the Optimal Time for Real Estate Investment
Buying a house or condo during the presale period has several advantages for investors. Because it's a prime time, developers want high presale figures, so they often offer promotions to attract customers, potentially offering units at prices lower than their original market value.
In some cases, projects may reduce or waive transfer fees, include furniture, or offer other freebies, allowing investors to profit. This differs from the period nearing completion, when prices steadily increase.
However, as mentioned above, presale only represents reserving a unit and is not an indicator of project stability like backlog. Furthermore, presale events usually occur in multiple rounds.
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Therefore, the ideal time for investors is to wait and buy during later presale rounds when the project has sufficient backlog and the likelihood of completion and ownership transfer can be assessed.
Buying during this period may offer fewer advantages than the initial presale rounds and limited unit selection, but it also carries a lower risk of project cancellation or forfeiture of deposits compared to early presale purchases.
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(Thanks to DD Property for this valuable information.)
