The risks of investing in real estate projects, phase by phase

Anyone investing in a real estate project wants to know what could go wrong before signing on the dotted line. The risks of investing in real estate projects are not distributed evenly throughout the project's duration. They shift with each phase, from acquisition through permitting and construction to the final sale. By examining these phases individually, you can more clearly identify where a project is vulnerable. In this article, we will walk you through them and show how a sensitivity analysis can make these risks visible.

In short

• Every real estate project consists of four phases, each with its own risk profile: acquisition, permitting, execution, and sale.
• The greatest risk usually lies at the end, concerning the sale price and the time it takes to sell.
• A sensitivity analysis shows in advance what happens if prices, costs, or timelines fall short of expectations.

Why look at risks per phase?

A real estate project is not a snapshot, but a series of decisions. The foundation is set during acquisition; much depends on the local municipality during the permitting phase; contractors and materials dictate the execution; and the market determines the outcome during the sale. Each phase has different causes for delays and cost overruns. An investor who only looks at the projected final result misses where that result might come under pressure along the way. That is why it pays to ask what could go wrong in each phase and how significant the impact would be.

At Dutch Value, every project undergoes <a>six tests</a> in advance: location, market, costs, planning and execution, sales strategy, and legal certainty. These tests generally follow the same phases. They do not eliminate risk, but they make it identifiable. We do not present projects to investors if they are not convincing on any of these points.

Risks during acquisition

Acquisition is the moment when most outcomes are determined. An purchase price that is too high is difficult to recover later, no matter how well the renovation goes. The same applies to the location. The setting, view, and privacy are fixed the moment you sign, and a mediocre spot will always remain a mediocre spot. That is why acquisition is the phase where diligence pays off the most.

Legal status of the property

In addition to the price, the legal status of the property is crucial. Is everything currently on the site properly permitted? Are there any liens, debts, or restrictions registered against the plot? Do the land registry records match reality? In Spain, these are not theoretical questions, and an error here can delay a project by months. A thorough legal audit before purchase is therefore not a formality, but a core component of the <a>notarial process</a>.

Permits and planning

A renovation in Spain requires the correct permits from the municipality. The processing time varies by municipality and the type of work, and it is not always possible to predict exactly. Delays in this phase do not cost construction money, but they do cost time. And in a real estate project, time has a price because capital remains tied up and fixed costs continue to accrue. A realistic schedule therefore includes a margin for the permitting phase.

Even more important is the question of what can actually be permitted. A renovation plan based on an extension that the municipality does not allow is calculating with a sales value that is not achievable. That is why the feasibility check for permits should take place before the purchase, not after. In our article on <a>renovating in the high-end segment</a>, you can read more about which interventions add value.

Execution and construction costs

During execution, the risks lie in costs, quality, and scheduling. Material prices can rise, contractors can fall behind, and demolition sometimes reveals defects that were not visible beforehand. A cost estimate without a buffer assumes that everything will go according to plan, which is rarely the case. A standard practice is to include a reserve for unforeseen costs in the budget. Additionally, having a fixed network of contractors and craftsmen helps, as it avoids having to renegotiate planning and quality for every single project.

Where are the biggest costs?

For high-end villas, the largest expenses are usually in the facade, the glass installations, the technical systems, and the outdoor space. This is precisely where the difference between solid and cheap execution is most apparent, and it is exactly what buyers look for. Cutting costs on these items lowers the budget, but also the sales value. A good budget makes these trade-offs in advance, rather than under time pressure during construction.

Sales and exit strategy

Everything comes together at the end of the project. The sale price determines the profit, and the time on the market determines how long the capital is tied up. For most projects, this is the phase with the highest risk, because the market at that moment is beyond the developer's control. A project that is technically perfect can still underperform if demand in the high-end segment cools down. That is why every project must have a well-developed exit strategy, not just an expected sale price.

What if the sale takes longer?

In practice, a longer sales period is a more realistic risk than a sharp drop in price. The question is how long a project can sustain slower sales. Fixed costs such as maintenance, insurance, and local taxes continue to accrue as long as the property remains unsold. Those who calculate this in advance know how much leeway they have and when a price adjustment is wiser than waiting.

Alternative exits

A sound exit strategy includes more than one way out. Consider temporary rentals to bridge the waiting period, a phased pricing strategy, or selling to a different target group. Each alternative has its own effect on the final result and the project duration. The point is not that an alternative must be as attractive as the base scenario, but that there is a plan in place if the base scenario does not materialize. You can read why demand in the high-end segment on the Costa del Sol has remained stable for a long time in our article on the appeal of the Costa del Sol.

A calculation example: how a sensitivity analysis works

A sensitivity analysis shows how the result changes if one or more assumptions fall short. The example below is fictional and intended solely to illustrate the methodology. The amounts are rounded and do not reflect any existing or future project.

Suppose a villa is purchased for €1,500,000. In this example, we estimate the acquisition costs, including taxes and notary fees, at €150,000. The renovation is budgeted at €500,000, including a reserve for unforeseen costs. This brings the total investment to €2,150,000.

In this example, we assume a sales price after renovation of €2,700,000. After sales costs of €80,000, an indicative net profit of €470,000 remains. This is the base scenario.

• Sales price 10% lower, €2,430,000: the indicative net profit drops to approximately €200,000.
• Construction costs 20% higher, €600,000: the indicative net profit drops to approximately €370,000.
• Both simultaneously: the indicative net profit drops to approximately €100,000.
• Sales price 20% lower, €2,160,000: the project ends with an indicative loss of approximately €70,000.

The example shows that the sales price is the biggest lever. A 10% shortfall in the sales price carries more weight in this example than a 20% overrun in construction costs. That is precisely why the purchase price and location are so decisive. A good analysis calculates these scenarios in advance and presents them to the investor, rather than just showing the base scenario.

The greatest risk rarely lies in the construction. It lies in the price at which you buy and the price at which you sell.

What investors often overlook

When evaluating a project proposal, the focus is often on the expected return. As a result, a number of points receive less attention than they deserve.

• The sales period. A project that takes three months longer costs money, even if the sales price remains the same.
• The size of the reserve. A budget without a buffer for unforeseen costs is a budget that relies on luck.
• The repayment hierarchy. In the event of setbacks, the chosen model and the agreements determine who is repaid first.
• The quality of reporting. Timely information during the project duration makes it possible to make adjustments.
• The self-interest of the initiator. A party that invests alongside you shares the same risks as you.

These points are also covered in our checklist with six questions you should ask every real estate party.

How the chosen model determines your risk

The same project can have a very different risk profile for two investors. This depends on the model in which they participate. With profit sharing, your return follows the project result entirely, meaning the scenarios from the calculation example directly affect you. With fixed interest, the compensation is contractually set and independent of the project result, potentially with mortgage security on the property. Even then, a risk remains: that the project performs so poorly that the agreements cannot be met. The hybrid model lies somewhere in between. In our article on profit sharing, fixed interest, or hybrid, we compare the models side by side.

Frequently asked questions

What is the biggest risk of investing in a real estate project?

For renovation projects, this is usually the sale: a lower selling price or a longer sales period than expected. These risks are largely outside the initiator's control and have the greatest impact on the result. Careful purchasing in a good location is the most important way to mitigate that risk.

What is an exit scenario?

An exit scenario describes how a project is concluded and how capital is returned to investors. The base scenario is typically a sale after renovation. A complete exit scenario also describes what happens if that sale takes longer or yields less, for example through temporary rental or an adjusted pricing strategy.

What is a sensitivity analysis?

A sensitivity analysis is a calculation that shows how the result changes if one or more assumptions fall short. Think of a lower selling price, higher construction costs, or a longer duration. This allows you to see in advance how much margin a project has before it becomes unprofitable.

Can I lose my investment?

Yes. Investing in a real estate project carries the risk that you may lose all or part of your investment. The extent to which that risk affects you depends on the project, the chosen model, and any securities. A full risk section in every project proposal should make this clear to you in advance.

Can I exit early?

As a rule, no. Your capital is project-bound and cannot be withdrawn early unless otherwise agreed upon contractually. Therefore, only invest capital that you do not need during the term of the project.

Conclusion

Risks are part of real estate investing. What makes the difference is whether they are identified, calculated, and documented in advance. That is why you receive a substantiated dossier with every Dutch Value project proposal, including a risk section, sensitivity analysis, and exit scenario. Always discuss a proposal with your own financial advisor before making a decision.

Would you like to know how we test a project against these points? In a personal meeting, we would be happy to walk you through the risk section.

This article is general in nature. Past results and market developments offer no guarantee for the future.