What could turn your off-plan investment upside down?
Off-plan property investment can be very lucrative. You could bank very quick profits in a rising market, and benefit from higher demand from renters, which increases buy-to-let rental income. Your maintenance and repair bills are likely to be lower than for existing property, too. But the road to wealth through off-plan property investment is not without its potholes, cracks, and other obstacles that could derail your strategy.
Here are seven things to watch out for when investing in off-plan property, and how to prepare for them:
1. A falling market
One of the biggest risks to your investment is the risk that the property market turns south while you’re waiting for your property to be completed. If this happens, you could find it difficult to raise the finance to complete, or you may not make the capital gain you were expecting. In the most severe of circumstances, the developer might try to slow down the build – which probably won’t help you.
You can reduce this risk by investing with shorter completion dates. Negotiating bigger discounts to market value will give you a bigger cushion, should the market take a temporary fall.
2. Developer risk
There is always a risk that the developer will go bust. If they have cost the project incorrectly, or can’t raise the finance, they thought possible, and cash flow problems could scupper the project. Ways to slash developer risk when you buy off-plan property include:
- Only buying from reputable developers, with a good track record of delivering development projects on time
- Using a solicitor experienced in off-plan property contracts, who should seek to ensure that your deposit money is protected
3. The property fails to meet your expectations
When you sign the purchase contract, you will do so with certain expectations of the finished property. For example, internal space, fixtures and fittings, and quality of build. What is delivered may not meet these expectations. Developers may have used subcontractors who have cut corners.
Either inspect the property regularly during the build or have someone do it for you. Also, ensure that you snag the property the easy way – with an experienced person by your side, and with a representative of the developer present.
You should also consider visiting other sites that have been completed by the developer. It will give you an idea of the quality of finish it can produce.
4. Financing falls through
Though this doesn’t happen very often, the mortgage lender may withdraw the offer of a mortgage. There are several reasons this could happen. It may be that regulations have changed, or lenders’ rules have been tightened. You may have lost your job. The market valuation may have fallen.
An experienced buy-to-let mortgage broker should be able to overcome many of these issues. They have their fingers on the pulse of the mortgage market. They know which lenders have the best rates and the least restrictive rules. Also, you should make sure that the sale contract allows you to sell before completion. However, remember that you have signed a contract to buy the property – you are still liable to complete.
5. Completion date is delayed
When you made the decision to invest, you did so in good faith that the build will be completed on time. However, sometimes completion is delayed. It may be through no fault of the developers (bad weather or planning issues, for example). But this doesn’t help you. Your investment strategy includes the timing of completion.
To eliminate any negative consequences of completion delays, ensure that the contract of sale includes clauses that stipulate refunds or reductions, and, in the worst-case scenario, a complete refund of any money you have paid to date.
6. Your property is on a building site
When you buy off-plan property, you will usually buy in a phased development. If the building is to continue for three or four years after you have completed, your property could be in the middle of a building site – not very conducive to obtaining those premium rents you were expecting.
Always make sure you know how long the building work is expected to continue after your property investment has completed. While buying early in the project is likely to reap the highest capital gain, your investment strategy may be to buy later.
7. Other developments nearby
The existence of other developments (or planned developments) nearby could be taken as proof that your location choice is spot on. However, you could also find your property suffers from a large amount of unwanted competition when it comes to letting.
Search local planning applications, and enquire what is happing with derelict or underdeveloped land near to the project. Research the location, and make sure that the local economy can support a growing population. An extra 1,000 homes are not bad news if there is likely to be demand for 1,500!
Follow the Scout’s motto – be prepared!
Whatever property you decide to invest in, if you know the pitfalls beforehand you can prepare for them. “Hope for the best and expect the worst,” as my property mentor always used to tell me. If you are prepared for the worst and create your investment strategy to mitigate the risks, you’ll discover that the best usually happens.
I don’t believe in luck, but if I did, I’d say that we make our own. Contact one of our team today on +44 (0)207 923 6100, and we’ll help you to avoid the pitfalls of off-plan investment while achieving all the potential rewards.
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