Attractive if prices are rising
Buying off plan is a particularly attractive strategy if property prices are rising, especially if they are rising fast. However future prices cannot be predicated with any certainty. IT IS CLEARLY A DANGEROUS STRATEGY IF PRICES ARE FALLING, ARE EXPECTED TO FALL. OR MAY FALL.
The pluses of buying off-plan include:
1 – You benefit from any increases in the value of the property from the date you contract to buy to the date your legally complete your purchase.
2 – The increase in value may be big enough to enable you to recover the deposit you paid on signing the contract – you may therefore be able to own the property with none of your own money in the deal.
3 – Rather than legally completing the purchase when the property is ready to be occupied, you may be able to sell on your right to buy the property to someone else, taking your profit without needing to take on a mortgage or own the property.
If the value of the property increases by more than the deposit you paid, you will have what is called a ‘no money down deal’ – something property investors are always delighted to achieve.
The downsides of buying off-plan
Buying off-plan carries several significant risks. The biggest danger is that the price of the property will fall not rise. Further any fall could be quite steep. In the last property recession, Nationwide figures showed that prices fell by 15.9% in 2008.
THE LONGER THE BUILD PERIOD THE GREATER THE RISK THAT MARKET CONDITIONS WILL CHANGE FOR THE WORSE.
If there is a price fall, you will remain contractually bound to buy the property even though it is worth less than the agreed price. It may prove impossible for you to get a mortgage or a mortgage for the full amount needed.
If you can’t get a mortgage when required, or can’t pass the contract to someone who is able to proceed, the developer may keep your deposit and sue for breach of contract. That will result in you incurring substantial legal fees and charges, and you may have to pay the developer ‘damages’ or compensation.
There are several other risks when buying off-plan:
The builder may go bust
The completion of the property may be delayed, allowing more time for things to go wrong
The standard or quality of the workmanship may be poor.
There are other potential problems. Your circumstances (personal or financial) may change for the worse with the passage of time – that is more likely the longer the period from signing contracts to completing the purchase.
YOU MAY BECOME UNEMPLOYED AND UNABLE TO SECURE A MORTGAGE TO COMPLETE THE PURCHASE. The lender may withdraw any mortgage offer if the economic climate turns bad.
Here are some prudent steps you can take to minimise the risks when buying off-plan:
1 – Before signing the contract, obtain a valuation by a RICS surveyor to minimise the risk of agreeing too high a price
2 – Ensure that the contract can be ‘assigned’ or sold to another buyer if that becomes necessary
3 – Carry out thorough due diligence checks on the track record of the builder or developer.
If you are planning to rent out the property when completed, it is important to double check the market rent which can be realistically obtained – and not just rely on the say so of the developer or its agents.
GENERALLY BUYING A PROPERTY OFF PLAN IS A VERY RISKY STRATEGY. The rewards can be high but they have to be weighed against the downsides. It is not a strategy recommended for property investor newbies.
Anyone looking to buy off-plan should carry out due research and seek professional advice from the outset.