These days if you check out new properties for sale online or in newspapers, you cannot escape noticing that developers and builders are offering an enticing range of freebies to buyers.
So what’s going on?
Are UK developers being kind and generous as we approach the season of joy and happiness and good things to all men and women?
Unfortunately, no. They are desperately trying to drum up sales as the property market slows – as it traditionally does at this time of year – but more importantly because of a general decline in the property market as both sellers and buyers sit on their hands as Brexit uncertainty continues.
Developers’ freebies are a dangerous warning sign to anyone buying a new property.
They are proof positive of falling demand and falling prices. They are a price discount and prices are only discounted when things are not selling.
One of the biggest property mistakes you can make is to unwittingly pay over the odds for a new property in a falling market after being lured in by freebies.
1. Freebies on offer
Here are some of the enticing freebies – incentives and discounts – you can find on offer if you are looking to buy a new property right now:
- Percentage discounts
- Fixed amount discounts
- Stamp duty refunds
- Legal fees paid
- Travel cards
- Season tickets
- Gym memberships
- Furniture packs
- Store vouchers
If things get really difficult for developers you will see them offering amazing gifts – such as cars.
Things are clearly not totally desperate for developers yet; so far in this downturn there has only been the odd report of developers offering cars.
2. The real nature of freebies
The widespread existence of freebies – as is the case now – is a clear indication that properties are not selling and prices are or should be falling.
Freebies are little more than a clever device to support demand and prop up prices and maintain profit margins.
If you see freebies, be more determined than ever to push down hard on the price you pay.
GETTING ONTO THE PROPERTY LADDER
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3. Assess whether the freebie is genuine
If you are offered a freebie, take care to assess (a) if it is genuine (b) its true value.
Carry out full due diligence checks in respect of the asking price, ignoring any non-cash incentives:
- Check Rightmove and Zoopla to note the speed and extent of any price fall in the locality in general, especially in recent months
- Where possible, compare the current asking price of the property to what it was listed for in the past; if the developer is saying there is a price discount, is that actually true?
- Compare the asking price with asking prices for similar new properties in the area; does any price discount look genuine when compared to similar properties?
If the data is telling you that property prices are falling in the locality but the asking price is not consistent with that, there is clearly an issue.
Only once you have assessed whether the asking price seems right should you go on to consider the effect of non-cash incentives being offered.
Never count non-cash incentives as cash. For instance if, after your research, you feel that the true price should be £10,000 lower, don’t accept say a furniture pack “worth £10,000”.
Typically, non-cash incentives will have cost the developer less than the stated value and will be worth less to you than a straight cash reduction in the price.
4. Dodgy discounts
It is vital to be aware that developers don’t always have the highest morals.
In the last property slump, disreputable developers pushed up list prices in order to reduce them and create large, artificial, highly attractive discounts of up to 30%.
With the trickery made possible by such large discounts, not only may you not be getting a discount, you may actually be paying over the odds.
So far in the current slump discounts of 10% are being seen. Expect discounts to rise if the slump – at present mainly confined to London and the South East – widens and deepens.
Any price discount should give cause for caution; the larger the discount the more closely it should be examined for authenticity.
Don’t just grab a discount gratefully, ask about the reasons for it and don’t proceed unless you are entirely convinced by the answers given.
There are occasions when developers will provide discounts which are entirely genuine. However, there are probably more occasions when discounts are manufactured to bring about a sale.
5. Genuine discounts
It would be wrong to suggest that every developer freebie is a con or is not genuine.
Some discount are real and totally worth having. Your task is to identify those that are genuine and those that are not.
Discounts on the last few units on a development, when the developer is keen to sell and move onto the next development, are likely to be genuine; so too a discount on a show home which is the last unit to be sold.
If a developer is in financial trouble and needs to sell fast, that may also result in genuine verifiable discounts.
However, your starting point should be to doubt every freebie until you have convincing evidence to do otherwise.
6. Mortgage complications
Freebies – real or not – can cause complications with your mortgage application and the sum you can borrow.
Some lenders will accept discounts of 5% or less without lowering the sum you can borrow.
Others will be cautious about any discount and will take the discounted price as the real price when calculating how much to lend you – reducing the amount you can borrow as a result.
Bigger discounts above 5% may cause some lenders not to lend at all.
Some lenders will take account of non-cash discounts but others will ignore them, effectively deeming that the property is over-valued, offering you a smaller mortgage consequently.
That in turn will increase the amount you need to contribute to your purchase.
In that sense, strange as it may seem, a freebie can actually cost you money.
Because of possible mortgage complications, it is best practice to ask a developer to reduce the price rather than provide an incentive.
7. Striking a hard bargain
The availability of freebies gives you the opportunity to push down hard on price.
The very existence of freebies is evidence that the developer is a motivated seller and needs or wants to sell. The developer may even be desperate to sell.
You can use that to your advantage to negotiate a much bigger discount than the developer is offering – especially if you are a cash buyer or have your mortgage arrangements in place and can move quickly.
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It may seem counter-intuitive to view developers’ freebies with suspicion, but that is exactly what you should do.
Remember, all is not gold that glistens.
You should not be afraid of freebies; in the right context they could lead to you getting a fantastic bargain.
However, they could also be a context in which you get ripped off, paying over the odds for a property while thinking you are getting a great deal.
If you are not sure about a discount or incentive being offered to you, speak to your solicitor, mortgage broker or other property professional.
A word of caution, however; if you do take advice from anyone, make sure that they are entirely unconnected with the developer and can give you fully independent, impartial advice
Have you ever bought a new house based on the freebies on offer? Please leave your comments below.
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Rebel Property Coach
My website is: www.rebelpropertycoach.com