You may want to buy a property off-plan, before it has been built, in the hope that its value will increase by the time it is built. But there is never any certainty that will be the case and if that is your reason, you are playing with fire.
Buying a property off-plan may give you a sparkling brand new property and you may even be allowed to put your stamp on it by choosing the layout, fixtures & fittings, appliances, flooring and decorations.
An off-plan property may also qualify for the financial benefits of a low cost equity loan under the government’s Help to Buy scheme.
However, buying off-plan can carry a higher level of risk than buying a ready-built property. During the (long) period it takes to build the property, a lot of things can go wrong.
If things do go wrong, you could end up with a bag-full of problems or big financial losses.
Here are some of the main errors to avoid if you are minded to buy off-plan despite the level of risk…
1. Not carrying out full due diligence on the developer
You want to be confident that the developer, once they have your deposit, typically at least 10% of the purchase price, will have the resources, expertise and experience to actually build the property to physical completion.
You don’t want a builder who could end up becoming insolvent if the financial climate gets tough or who is unable to deal with setbacks and finish the property on time.
Carry out as much due diligence as you can – by all possible means – to satisfy yourself that the developer will deliver what they promise to build, to a good standard and on time.
If you have concerns or doubts about the developer, it is prudent to walk away.
2. Not getting an expert valuation of the price
It is tempting to accept the developer’s asking price when buying off-plan, especially as there is no property and nothing physical to value.
Some developers will not want to budge on their asking price and may only be prepared to shave off a small amount.
It is however bad practice to buy off-plan without obtaining an expert opinion as to the likely value when the property is built.
Many buyers fail to take this prudent step. However, it is not a step you should ignore lightly as it does reduce the chances that you will end up agreeing to pay above the odds – something which is made worse if there is a general fall in house prices during the construction period.
3. Not ensuring your deposit is adequately protected
If you are buying a residential property, your deposit or down payment will normally be 10% of the purchase price. However, if you are buying an investment property to rent out or a holiday property abroad, the requested deposit can be as high as 40%, and sometimes even more.
Your deposit can easily amount to tens of thousands of pounds and it’s vital to ensure that it is fully protected in the event of insolvency of the developer, the property not being completed or other problems.
You will want an unqualified reassurance from your conveyancer that your deposit is fully protected and will be available to be reimbursed to you (preferably with interest) if necessary.
Any “guarantee” offered must be vigorously investigated and ideally it should be backed up by cast-iron insurance protection, with the deposit being held in a solicitor’s account.
If your property will have the benefit of Buildmark cover through the National House Building Council (NHBC) on completion, your deposit up to 10% of the price will be protected by way of warranty. Buildmark cover is therefore of limited benefit if your deposit is greater than 10%.
4. Not having the ability to complete if a mortgage is withdrawn
Because it may take many months, perhaps over a year, to build a property from plan, a lot of things can happen in the interim – including a fundamental change in the economic climate, or your own circumstances, with the outcome that any mortgage offer held by you is withdrawn by your intended lender.
You need to have a Plan B to be able to complete your purchase if you are relying on a mortgage to complete and you find yourself without one.
You may be able to find another lender but, if not, you need to be in a position to secure funds from somewhere. If not, you will be in breach of contract and the developer will be legally entitled to keep your deposit and sue you for any losses, or force you to complete.
If, for instance, the value of the property fell significantly during the build period, you would still have to buy at the agreed price even though that meant you were buying with an in-built loss.
The unpredictability of what may happen after you sign a contract to buy off-plan is the fundamental reason why it is very risky to do so.
PROTECT YOUR PROPERTY BY MAINTENANCE & REPAIRS
Don’t ignore maintenance & repairs (the first level of protection for your property)
Budgeting for repairs is smart (how to be prepared for surprises and big bills)
Property maintenance checklist (what to do to keep your property in tip top condition)
5. Not being able to assign the contract to buy
It is highly advisable to insist that you have the right to assign or sell on your contract to buy off-plan.
You may want to sell your contract to someone else in a number of circumstances including:
- You need a mortgage to complete the sale and you cannot get one
- The value of the property has increased during the build period and you wish to cash in your gains
- The value of the property has fallen during the build period and you wish to limit your losses.
When the property market is healthy and prices are rising, buying off-plan can be very attractive and profitable.
However, the housing market can collapse in a relatively short period (as it did for instance in 2008). Further the developer can face any number of problems which mean your property does not get built or is built late or badly.
Buying off-plan will always carry an additional level of risk compared to purchasing a ready-built property. It is essential that you minimise such risk by avoiding the errors identified above.
Have you ever bought a property off-plan? Was the process trouble-free? Please leave your observations or comments below.
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Rebel Property Coach
My website is: www.rebelpropertycoach.com