How can you protect your off-plan property investment deposit?

Four strategies to kick-start your off-plan investment safely

One of the biggest single risks, when you invest in off-plan property, is that the developer goes bust and you lose your deposit. It’s a big and understandable fear. After all, you’re putting down money on something that hasn’t even been started yet. At the earliest stage of the development process, there may not even be a single brick laid or show home to view.

Fortunately, there are ways to make this risk virtually disappear. In this article, you’ll learn what these are.

Check the developer’s background

The first step to slash developer risk when you buy off-plan property is to ensure you only buy from a respected and reputable developer with an excellent track record of delivering on their projects.

Background checks that you should make include:

  • Names of directors and their professional experience and history
  • Company financial information
  • Their performance record, including delayed or mothballed developments
  • Court actions and insurance claims against the company

Make sure your deposit is kept in a separate account

Your developer should keep deposits paid in a separate trust or escrow account, held on behalf of buyers. The developer can then borrow money from a bank to cover the costs of building.

The bank uses a variety of financial checks on the developer, and checks on the development project before agreeing to extend financing. The number of properties pre-sold and deposits taken increase confidence in the project and the confidence of the lender when deciding to make finance available.

If your deposit isn’t held separately, you should consider very carefully whether it is safe to pay your deposit.

Ensure that there is insurance in place

Deposits are usually protected by a new build insurance policy such as the NHBC. If the builder is registered with the NHBC, the home will benefit from a 10-year insurance and construction warranty. This guarantees snags discovered within the first two years after completion, and structural problems for the first 10 years. It also covers your deposit if the builder goes bust.

The developer could also take advantage of a deposit release scheme. It allows the developer to use the deposit to start the build while assuring that your deposit is safe. Developers often use this method of insuring your deposit because it is cheaper than borrowing from a financial institution to start the development. If the developer does become insolvent, the insurer will repay your deposit.

Use a solicitor to check the contract and financial arrangements

Finally, investing in property is a big financial commitment. Off-plan property is a great investment strategy for all lifestyle goals, but to ensure its potential is met you must make sure that contracts are written to your benefit as well as the developers.

Investing in off-plan property is a complicated process, and you should employ the services of an experienced solicitor to help you – simple conveyancing won’t cut it. Your solicitor will make sure that the contract between you and the developer is fair. They will ensure that there are no clauses that penalise you in favour of the developer, and that should things go wrong, you are afforded the best protection in law.

Avoid deposit pitfalls

When you invest in off-plan property, there are similarities to making other purchases. When you buy online, you haven’t yet seen the product. When you buy a new car and pay the deposit, the car probably hasn’t been built. People pay deposits on Ferraris with a delivery time of three years, with little more than trust as the basis to do so.

There are several pitfalls when investing in property that doesn’t yet exist. You can avoid many of these by taking the right precautions before paying a deposit.

You should never pay a deposit until you have checked out the developer and are confident they can complete on their promise to deliver. The deposit you pay should be protected by being placed in a separate account and held in trust, and better still, by insurance schemes. The way to make certain that all is above board and that your deposit is safe is to employ a solicitor who is used to dealing with off-plan property deals and developers.

When we source off-plan property for investors, part of our due diligence process is to research the developer. We conduct a search at Companies House and background-check directors. If there are any red flags, we dig deeper before we are fully satisfied with credentials. If we’re not fully satisfied, we won’t continue with the developer, and we won’t offer you its properties.

Contact one of the Gladfish team today on +44 207 923 6100, and discover how we’ve helped hundreds of investors achieve their financial goals through off-plan property investment.

Live with passion,

Brett Alegre-Wood

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