Take advantage of off-plan property and minimise the risks
Off-plan property is a property that is planned, but not yet built. It’s become popular with developers and property investors. In this article, you’ll learn:
- Why developers sell property off-plan
- Some of the advantages for property investors
- The major risks of investing in off-plan property
- How to minimise those risks
Why do developers sell property off-plan?
During the last few decades, developers have been searching for different ways to finance developments. With traditional lenders tightening their belts and charging high rates of interest, developers prefer to sell off-plan property. The advantages for the developer include:
- Gaining initial financing fast
- The ability to evidence demand for the project to the lender (which helps to secure further financing)
- The project can commence earlier
By selling at least some of a development off-plan, the developer moves the project towards completion more quickly. This type of financing is cheaper than bank financing. These two factors alone mean the developer makes bigger profits.
Why do investors like off-plan property?
Buying off-plan has become popular with investors for several reasons. The main one is that when selling an off-plan property, developers sell at a discount to valuation. The earlier you buy off-plan, the bigger the discount you’ll get. And the discount is based on the price at the time you agree to buy, not at the time of completion.
Let’s say you buy an off-plan property at £300,000, with a discount of 15% from £345,000. Your completion date is in 24 months, and you pay a 10% deposit to reserve the property. If the property market stays positive, and rises by, say, 10% in those two years, your property will be worth £379,500 when you complete. You’ve made a profit of nearly £80,000 before you even have the keys.
You also get to stage your payments. It means you can plan for financing in advance.
Also, the period between agreeing on the purchase and completion gives you the breathing space to consider your options as to how to benefit from your investment property. Will you let it out, or will you sell it? Maybe you’ll remortgage to release equity and make a second investment.
Are there risks you should understand?
As with any investment, there are risks associated with buying off-plan property. Here are the main risks summarised:
- The property developer could go bust before the development is completed. In this case, you might not get your deposit back.
- The property market could fall between the time you agree to purchase and completion date. If the fall is large enough, this could tip you into a notional loss.
- Another potential risk is that your mortgage lender withdraws its offer. It is rare, but it does happen, especially if completion is delayed or the property market has fallen.
- Upon completion, there is excess supply in the market, and it doesn’t achieve the rental value you expected.
What can you do to minimise the risks of buying off-plan property?
The potential upside from off-plan property development is huge. We’ve helped hundreds of investors, both beginner and experienced, to maximise that potential by minimising the risks. Here are six things you can do to join the legions of successful off-plan property investors:
Research the development
You want to make sure that the development will produce to its promise. Examine the local market, and make sure that the property fundamentals are in place before you invest. You’re looking for:
- Shops
- Schools
- Transport links
- Major employers
- Major investment
Watch for signs of urban regeneration, but ensure that the market will not be flooded with new properties. Speak to local estate agents and letting agents get a feel for the types of property that are in demand around your proposed investment.
Research the developer
Only buy from developers with a good track record. Ask about their financing arrangements, and other developments they have completed. Make sure they complete on time. Ask to see testimonials from previous off-plan buyers, and pay a visit to a work-in-process. It will give you some idea of the developer’s ability to deliver not only on time but also to the quality promised.
We always work with developers that have a good track record of performance. And we like it when the developer is committing its money as well as asking for money from investors.
Gather a team of great property professionals around you
Perhaps the biggest mistake that beginner investors make when buying their first off-plan property is not taking advice. Here are three property relationships which will prove invaluable:
- You’re going to need to employ the services of a solicitor. And not any old solicitor. You want a solicitor with off-plan property experience. They’ll be able to check every clause and every detail of fine print. It’s important to make sure that what you believe you’re buying is what the developer is selling. Timing is everything when you’re buying off-plan. A missed payment could null and void the contract, so your solicitor has got to be on top of their game from day one. Only off-plan property experienced solicitors have the knowledge you need.
- Another professional that you need to get on your side is a quality mortgage broker. Again, you’re looking for a mortgage broker with extensive experience in the property investment market. You’ll need a buy-to-let mortgage, and specialist brokers know where you’ll get the best deals. They know what questions to ask you to make sure the product and provider you go with is perfect for you. Never underestimate the benefits of using a buy-to-let mortgage broker who’s experienced in the off-plan market.
- Finally, use an off-plan property investment specialist. When we work with investors, we guide them through the process of buying off-plan. We’re there with you every step of the way. We’ll recommend only professionals with invaluable experience. We work only with developers with great track records, and we get some of the best discounts in the industry. Watch my property rant to see how we get the discounts we do.
Contact one of our team today on +44 (0)207 923 6100, and you’ll have taken the first step to profiting from off-plan property.
Live with passion
Brett Alegre-Wood
