Property value falls before completion

Professional investors prepare for the worst and profit from the best

When property markets are rising, off-plan property investment can produce incredible gains. By investing in property, you unlock the potential for your cash to earn a spectacular real yield. With off-plan property, a 10% rise in the value before you complete could give you an immediate capital gain of 100% on the money you invest. But what happens if the market value falls? What are your obligations, and what is your risk? What can you do to protect yourself from falling property values?

How profits in off-plan property can rocket through the roof

Before we tackle the questions that we’ve posted above, let’s look at just how profitable an off-plan property investment could be.

Let’s say that you invest in an off-plan property which is valued at £300,000 today. It is due to complete in two years. You pay a 10% deposit: £30,000.

Before you complete, you have a valuation carried out to satisfy your mortgage lender. The value of the property has increased by 10%, to £330,000. If you were to sell now, you would make £30,000. That’s a 100% profit on your deposit. But the profit you make could be even better than this.

The power of the discount on off-plan property

When you invest in off-plan property, you will be offered a discount to its current market value. It is offered by the developer to incentivise the investor. How big that discount depends upon several factors, though the earlier you buy in a development’s lifecycle, the larger the discount is likely to be. There are, however, four general rules to bag the biggest discount on off-plan property investment:

  1. Buy early (the earlier the purchase, the more discount the developer should offer)
  2. Buy in bulk (the more properties you buy, the bigger your bargaining power)
  3. Buy quickly (have all your finances ready)
  4. Buy before sales are made public (buy off-market)

Now, let’s say that in our example above, you negotiated a 10% discount from the current market valuation. Instead of paying a total of £300,000 upon completion, you would pay only £270,000. Your 10% deposit would be £27,000. Where the property to increase in value by 10% before completion, you would make a gain of not £30,000, but £60,000 (£330,000 – £270,000). In percentage terms, your invested cash (the deposit of £27,000) would have made 222%!

It is great. The potential profit is huge. But what if market values fall before you complete?

You’ve signed the contract: you must complete

When you invest in off-plan property, it is a legally binding contract. You must complete the purchase. If you don’t and the developer has to sell for less than your purchase price, you will have to make up the shortfall.

Another important issue to consider in falling markets is your mortgage. The lender may not extend the amount of financing you had originally planned.

Therefore, it’s important to be fully prepared for a fall in the market value of your off-plan investment:

  • Ensure that you can cover the deposit required by the mortgage lender
  • Use a mortgage broker to get the best financing deal
  • Save cash into a reserve fund
  • Consider other ways to make up any shortfall

Understand how the off-plan discount works in falling markets

The discount you negotiate doesn’t only help to boost your potential profits; it also helps to protect you in a falling market. Again, we’ll work with the example above.

You’ve agreed to buy a property at a 10% discount to market value: a purchase price of £270,000 instead of £300,000. If the market value falls by 10%, you have lost nothing. You will simply be buying a property at the price that you previously agreed. A bit of a downer (you were hoping to make a large profit) but not the end of the world. The discount acts as a buffer in falling markets.

Should you complete or walk away?

In our example, should you walk away from the deal, you could lose your deposit and be forced to pay the difference between the agreed purchase price and the price at which the developer now sells the property. The potential cost to you is £57,000. It’s far better to go ahead with the purchase. If you have arranged your finances diligently, you will be able to wait for the market to recover before selling at a profit.

However, we don’t advocate flipping. Property is a long-term lifestyle investment. If you have bought in the best places to invest in property UK, you should be able to let your property to great tenants. You may benefit from the income produced by positive cash flow, as well as capital gains when the property market turns around, and values start improving again.

Investors who don’t complete on off-plan property that has reduced in value are usually beginner investors who are poorly prepared, haven’t done due diligence, and haven’t taken advice. They’ve bought from a poor developer, in a poor location, and haven’t had contracts checked by an independent and experienced solicitor. And they haven’t negotiated the best discount.

Prepare properly to profit

The best property investors started off as inexperienced beginner investors. If this is you, then you should take steps to benefit from a property mentor. Seek the best advice, and take notice of successful, experienced investors. They are lucky because they know how to invest, where to buy, and how to reduce their risks. They consistently find great property deals, benefit from leveraging in property investment, profit from using other people’s money, and make returns that other investors can only dream about.

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. Get access to our up-to-date research, benefit from your own personal property investment mentor, and take your first steps to building a profitable and growing property portfolio.

Live with passion,

Brett Alegre-Wood

Brett Alegre-Wood
November 1, 2017


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