off plan Viability of off-plan deal in decreasing market

[elvax]

On 4/10/2020 at 11:37 PM, helene schwartz said:

Hello!

I have exchanged last year on an off-plan deal (completion estimated Q1 2021), 10% deposit paid in escrow.
I am conscious that buying off-plan is especially profitable in a rising market.
I have 2 questions if anyone can help:
1. I am concerned that I will struggle to get a mortgage next year if property price take a dive and the property is valued less than the agreed price. Is this likely and if so, what would happen then?

2. My solicitor has suggested to include a rider to “mitigate the consequences of being unable to complete the transaction due to covid-19”. Is this worth it?

Thanks in advance!

Helene

That's exactly my concern too. Anyone has any thoughts on the downside risk of buying offplan in this environment?

[onkar]

Hi Both,

I am also in a position where i am exchanging and also completing on a few off build apartments over the next few months and tbh, I am not worried.

I do not think property prices will be massively affected. You should listen to the last few podcasts by both the Robs, it should fill you with the confidence regarding your concerns above!

[DezzaT]

Hi Helene

Assuming you're purchasing off-plan as an investment (rather than living in it), then there's a few risks with off-plans, one which you mentioned re: mortgage availability when it's time to complete.  If you've agreed £X, but the mortgage valuation comes back £20k less than £X, then you'll need to make up the shortfall in borrowing. This happened back in 2008 around where I live near Woolwich Arsenal, where all the new builds went straight into negativity equity so the buyers either had to make up the shortfall or forgo their deposit. 

Some things to consider:

• Who's the developer? i.e. what's their track record and how often do they meet their expected completion dates? There's examples up in Liverpool where completion dates get extended, and I believe Rob B had to extend his Crewe Junction development completion date. If the site is not currently open to workers, then that expected completion date will be pushed back.
• What's the owner-occupier / investor ratio in the development? Some lenders may not be available if there's a high amount of investors.
• Do you have a back up plan if mortgage availability is not there at completion? i.e. do you have funds squirrelled away in case you need to meet the shortfall if prices don't align with what you agreed come next year? 
• Does the purchase come with a sunset clause? Similar to your solicitor's suggestion, if there is one then it might be one way out if they don't complete on time (as long as the developer doesn't keep adjusting the sunset end date).

If you're planning to hold on to it for the long-term, then it may just be a small blip in your portfolio in 20 years time. The only thing it might do is slow the process down, especially if you're in negative equity, as you won't be able to recycle the funds out if prices drop or remain stagnant. If the boom does come after the bust as in most cycles, then you'll still be fine in the long run. Good luck!