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Off-plan property: What you need to know before buying off-plan

Last updated: 16th April 2019

You’ve probably heard horror stories about people who’ve bought property off-plan and lost thousands of pounds.

But you’ve probably also read about people who’ve made huge profits by buying off-plan. So which stories are true?

Well, both of them. Buying off-plan can be very risky or extremely profitable: and it depends on where and when you do it, and which steps you take to protect yourself.

By the end of this article you’ll know:

  • What buying off plan means
  • How the process works
  • Two ways to profit from buying off plan
  • What can go wrong…
  • …and how to protect yourself

What does buying off-plan mean?

Buying off-plan means committing to buy a property before it’s finished being built.

This often means before it’s started to be built, but not necessarily: even if the property is well on its way to being finished, it’s still technically an off-plan purchase.

The benefits of buying off plan

Is it cheaper to buy off plan? Yes: developers usually offer a discount to make up for the risk of buying something that hasn’t been built yet, and the inconvenience of not being able to move in right away.

This is good for you, and worthwhile for them because it removes risk from the project: it will keep their financial backers happy if they have sales confirmed early on.

This opens up two ways for you to profit from your discount:

1: “Flipping” the property before it’s finished

When you commit to buying a property off-plan, you have to put down a deposit – with the rest only being payable when it’s finished. The deposit is often as low as 10%, but it can be higher.

Say you buy a property off-plan for £200,000 by putting down a 10% deposit of £20,000.

A year later, the property is still being built – but rising property prices in the area mean that the market value of the property when it’s finished will be £220,000.

You might be able to find someone willing to pay you £40,000 for your right to buy the property when it completes – which effectively means they’re locking in a price of £220,000 – because they think prices will go up even further.

This will leave you with a £20,000 profit from your £20,000 investment in the deposit – a 100% ROI!

This sounds great, but we don’t recommend having this as your primary strategy unless you’re extremely confident in the future of the property market and are comfortable taking on significant risk.

The reason is obvious: property prices don’t always go up! If they fall, or even stay the same, you won’t be able to sell it on – leaving you committed to buying a property you don’t want, and maybe can’t afford. Property speculators have lost a lot of money in the past by using this strategy at the wrong time..

2: Holding the property and locking your price in

This is the approach we recommend: buying a property off-plan that you want to hold for the long term, and treating the discount as a bonus.

Say you get a 10% off-plan discount. This effectively gives you a buffer against property prices falling: if prices fall by 5%, you’re still ahead of where you would have been by waiting until construction was complete.

Of course, you’re more likely to want to buy off plan in a rising market – so if prices go up, you benefit from the capital gains and the effective size of your discount goes up too!

This method locks in the price of a property you want to buy anyway – in return for putting down only a small percentage of the purchase price.

How to buy off-plan property: the process

  1. You’ll pay a reservation fee, which is often in the range of £1,000 to £5,000. This is normally deducted from the deposit you have to pay later.
  2. Your solicitor will go through the same legal process as when you’re buying any property, including local searches and looking at the contract. When they’re happy, you’ll pay the deposit and exchange contracts. At this point, you’re legally committed to buying the property: if you don’t, you’ll lose your deposit.
  3. You’ll monitor progress, and arrange your mortgage as construction is coming towards the end so it’s ready in time for completion.
  4. When the build is complete, the developer will serve notice to complete – giving you a certain amount of time to finalise the purchase.
  5. You’ll pay the rest of the purchase amount, and the property is yours!

The risks of buying off-plan – and how to protect yourself

There’s risk in any property purchase, and a few extra risks to think about when it comes to buying off plan.

The good news is that almost all the horror stories you hear about off plan disasters can be avoided if you follow these steps…

The market might fall

Buying off-plan is best done in a rising market – but not one that’s red-hot.

You might think that you’d do best in a market that’s booming, because prices would grow the most during the off-plan period. And that’s true…as long as the market keeps booming until you collect the keys.

That’s a dangerous bet to make, because a boom is always followed by a crash! Take our free course on the property cycle to learn more about this idea, and understand why.

Of course, you don’t want to buy when prices are falling either. But if you buy when prices are rising gently, you’ve got the best chance of capturing some growth without being caught out by the market turning.

The developer might go bust

It happens: developers can get into trouble with a couple of bad projects or have problems securing finance, and end up going bust before the development you’ve bought on is finished.

To avoid this causing you major problems, you need to make sure your deposit is protected. There’s no legal requirement for the developer to do this: if the contract says they’re allowed to just take it and spend it, they can.

So read the small print, and make sure either:

  • The deposit is held in escrow, so the developer can’t get at it until they’ve delivered the property
  • The deposit is protected by an insurance policy that will pay you back if the developer fails to complete the property

The insurance option is the most common, because it allows the developer to use the deposit towards the construction costs (helping their cashflow), while still giving you protection.

In almost all cases, insurance will only protect deposits up to 10% of the purchase price. So if you put down more than 10%, it’s likely that some of your deposit will be at risk.

Of course, even if your deposit is protected it’s a situation you’d rather avoid. So do your research into the developer’s track record, make sure they’ve successfully completed similar projects in the past, and look out for any negative mentions of them online.

You might not be able to get get a mortgage

On big developments, the off-plan period might be as much as a couple of years – and a lot can change in the mortgage market over that time.

Mortgage offers usually last for a maximum of six months, so you can’t lock your mortgage in at the same time as you reserve your plot. That opens up the risk that when you do come to arrange a mortgage, you might not be able to find a willing lender.

If you have the whole of the mortgage market open to you, it’s extremely unlikely that this will happen: in a rising market (which is the best time to buy), there are usually more lenders coming into the market than leaving.

However, if your personal circumstances or the type of property you’re buying mean you’ve only got a couple of lenders to choose from now, you might want to be cautious – because if those couple of lenders change their policies, you could be left without any options.

Get advice from a specialist mortgage broker before you commit, and you should be able to get a good idea of whether this is something you need to worry about or not.

The project might be delayed

There are so many variables in construction that it’s surprising if a development doesn’t end up completing at least a bit later than planned.

In the contract when you exchange, the developer will need to commit to a “long stop” date. If they can’t deliver the completed property by this completion date, you’re free to get your deposit back and walk away if you want to.

Delays can be frustrating if you’re waiting to get a tenant in and benefit from the rental income. But in a rising market, delays can be a good thing: you’ve already locked in your price, so until it completes you’re still getting the upside without having to put in all the cash!

As long as the developer is giving you regular updates and the reasons for the delay make sense, it’s frustrating but not a big deal. But if you’re getting nothing but silence or excuses that don’t quite make sense, it might be time to get concerned and start asking pointed questions.

Is it right for you?

Buying off-plan property isn’t right for everyone all the time – it depends on the type of property you’re targeting, and what’s happening with property prices locally.

But what you shouldn’t do is write it off as being “too risky”. Yes, there are risks – and those risks can never be eliminated, but they can be controlled. If the advantages of getting a discount and locking in a price in a rising market are compelling enough, you should be sensible – but not be put off completely.

To learn more about the process of buying off plan and the research you need to do, take our free course at Property Hub University.

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