How to minimise risks when you invest in off-plan property
Many would-be property investors argue that buying off-plan property is too risky. They’ve heard horror stories about investors who have lost their deposit because the developer has gone bust. They ask why on earth anyone would pay out for something that isn’t yet complete and might not be for another year or longer. At the other end of the scale, the best off-plan property investors don’t care about recessions and invest with an almost 100% certainty of making money.
In this article, I’ll look at the risks of investing in off-plan property and how you can cut those risks to the bone.
Get real about the risks of investing in off-plan property
I’m not going to tell you that there are no risks when investing in off-plan property. There are risks in all investment opportunities. I’ve known stock market investors who have lost millions overnight because the company they invested in went bust. The 50% plus probability that a new company will fail within five years doesn’t stop entrepreneurs from starting new businesses.
When you invest in off-plan property – or any property, for that matter – it’s important that you get real about the risks of property investment. Yes, there are risks: but those risks are no different to the risks you take when you book a big family holiday a year in advance or reserve the venue and caterers for your wedding. Other big risk-takers include:
- Buyers of luxury cars like Ferrari, Lamborghini or Aston Martin, who wait up to three years to sit behind the wheel of their new car
- Airlines that put down millions of pounds for new planes which are years away from getting off the ground
Whenever you make a big ticket purchase or investment decision, if you go into the deal with your eyes wide open not only will you have less worry about the risk, you’ll also be able to take the actions necessary to reduce any risk to a minimum (like booking your holiday through an ABTA travel agent, for example).
Let’s look at the major risks of investing in off-plan property and how to reduce those risks.
Off-plan property risk number 1: The developer goes bust
It happens – most often to new, inexperienced developers who have overpaid for land or haven’t got the right financing in place to make their numbers stack up. But developers don’t go bust as often as the media would have you believe. When a developer goes bust, it makes headlines. The media love sensational stories. To get to the truth behind the headlines, property investors should never believe all they read in the newspaper – the majority of off-plan developments are completed on time and within budget.
Stick with developers who have a track record, and make sure your deposit is protected.
Off-plan property risk number 2: The property doesn’t meet the agreed standard on completion
It’s hard to envisage what the property will look like when you’re working from nothing but drawings and a plan. The developer may run into problems and have to spend more money on getting the foundations put in than it believed it would have to. They cut the budget in other areas to compensate.
Visit the development regularly (or have someone visit for you) and stay in touch with the developer to ensure that the build is progressing how you expect. Again, make sure that the contract is watertight, and that any shortfall in expectations is made good by some form of discount or compensation. Before making the final payment, make sure that you inspect the property with a fine-tooth comb by snagging the easy way.
Off-plan property risk number 3: The property doesn’t rise in value as expected
It is a market risk. No one can tell what property prices will be in six months, never mind two years or more. There is a risk that you buy an off-plan property, and it falls in value – the same as when you book a holiday and find it cheaper elsewhere, take a new job and discover you could have got more money at a different company, or invest in existing property and a recession hits property values.
To cut this risk, do your property research and only buy in the best places to invest in property UK. Whatever type of property you buy, make sure the property fundamentals are in place before you invest. You’ll want your investment property supported by shops, schools, transport links, major employers and major investment.
Off-plan property risk number 4: Oversupply destroys your rental potential
You might find that when the development is complete, you face big competition for tenants because so many of the properties are now owned by buy-to-let investors like you. If 50 or 100 apartments come onto the market at the same time, your property could get lost in the crowd.
Again, research is key. Ascertain that there is a rental demand to support the new development (and other developments in the area). Ask the developer how many properties will be sold to buy-to-let investors. Take advantage of investment opportunities that are complimented by rental guarantees.
Off-plan property risk number 5: Your investment property is difficult to sell
Whether you want to sell before completion or shortly after, you may find it difficult to do so. Often this difficulty is due to price expectations (or needs).
Make sure that when you purchase off-plan, you do so at a good discount to valuation. The bigger the discount, the easier you’ll find it to sell because you’ll have more negotiating room on price while maintaining a good profit margin.
Get real about risk reduction when investing in off-plan property
Ok, now that you’ve got real about the risks of investing in off-plan property, let’s get real about reducing those risks. Like my dad used to tell me, you’ve got to put the effort in to reap the reward. Here are the six things to do when you invest in off-plan property to reduce risks to a minimum:
- Research the location, to ensure that it benefits from the property fundamentals to support property values in the medium and long term.
- Research the developer, to make sure they have the track record and financial backing that will give you peace of mind and ensure they don’t run out of money halfway through the build.
- Make sure that the contract of sale includes clauses that protect your investment. The contract will detail elements of investment that include the schedule of payments, standards of finish, and penalties for late completion. Always make sure that your solicitor reviews thoroughly, and that your solicitor is experienced in dealing with new build and off-plan property investment.
- Visit the site regularly, and keep in touch with the developer to ensure that progress is ticking along as it should.
- Get the right financing in place early. Use a buy-to-let mortgage broker to find the best deal and the one that is most suitable for you and your investment objectives.
- Work with an experienced partner who can guide you and make sure you avoid the mistakes that can damage your wealth.
Take advantage of Gladfish to maximise profits and minimise risks
We’ve been helping first-time and experienced investors make the best off-plan property investments for more than ten years. Working with developers that have the best track records, we ensure that investors get exclusive access to early-stage investment opportunities. It is the time when we can negotiate great prices for investors. These discounts will help support your investment, as will our unique set of investment guarantees – which includes rental guarantees.
With access to some of the best off-plan property solicitors and buy-to-let mortgage brokers in the business, you’ll also benefit from an end-to-end sales progression process that takes the stress out of investing in off-plan property and keeps property investment simple.
Contact one of the Gladfish team today on +44 (0)207 923 6100, and start preparing for the profit potential of off-plan property investment with the minimum risk.
Live with passion
Brett Alegre-Wood
