Why Buy Off-Plan? by Michael Johns

Most of the best, and certainly most profitable opportunities when investing in property require you to make a commitment to buy prior to the property being completed.  This obviously requires careful consideration and risk management.

In most cases, the closer you are to completion, the lower the risk.  And a good agent / developer will structure deals and put certain conditions in place to reduce such risks.

But why does this concept even exist?

From a sellers (developers) perspective, if they are able to sell their properties before completion, they can either use the deposit money to fund the build, or they can structure a deal with a financer / funder so that their interest payments and costs are reduced depending on the amount of committed sales.

In order to attract buyers to buy off-plan, developers must offer incentives.  As we try to focus on developments in prime locations, sometimes, the fear of missing out is enough.  In recent times, we have sold developments of 15 to 20 apartments out in a matter of day, just on the strength of the location and the lack of comparable opportunities.  But in most cases, there is usually an off-plan discount or other incentive such as a free furniture pack or free legal fees.

Let’s look at some of the advantages of buying off-plan:

  • Staged Payments – buying before completion usually means that an initial deposit is required as opposed to paying the full amount straight away.  In a buoyant market where prices are increasing, this means that you can secure a property at a lower price without committing all of the money to it.  Spreading payments out can also be handy for those who are waiting for other properties to sell or waiting to receive a bonus at work for example.

TOP TIP – When buying early in the process, developers are more likely to be flexible on payment terms.  If you are waiting for money to come in, construct a payment plan which makes it easy for you and request this.  This will not always be possible due to constraints usually laid down by financing companies but it is always worth asking and it usually results in at least a counter-offer which is more advantageous to you.

  • Best Plots – buying early will usually give you access to the best plots, whether it be a great view, south-facing balcony, corner plot or the best internal design.  The best plots are usually taken by off-plan investors.

TOP TIP – Choosing the right plot can make a huge difference to the growth, rentability and re-sale of your property.  Good agents will always view properties that they sell and also know the popular choices based on which apartment types have already sold.  Ask your agent to recommend a plot and give reasons why in terms of rent, growth and re-sale.

  • Flipping – this is a strategy that can be dangerous but can also be extremely profitable, particularly for those early buyers who secure the best plots within a development or area that has experienced good growth.  It is common to see the best plots being bought up by early investors with the intention of selling the properties on prior to completion to either other investors, or more commonly, owner occupiers who want a better plot when buying closer to completion when only the less desirable plots are available.

TOP TIP – Flipping should always be a secondary strategy unless you are a professional as the investment should stand up as a good investment in case flipping is not possible or profitable enough.  A large number of factors can affect the buyers ability to make money from flipping but your first port-of-call is to ensure that the contract of sale is “assignable”.

  • Incentives – most off-plan investments will carry an off-plan incentive although these are not always offered in the marketing material.  It is always important to understand why the incentive is being offered and I would always be wary of high discounts and large incentives as they usually indicate a problem with sales.  Receiving a free furniture pack, free legal fees or a small cash-back is fine but reducing the price of the property may have a knock-on effect when it comes to valuations.  You should ask your agent what they consider is achievable and what is developers sales strategy has been throughout the selling process.

TOP TIP – Don’t get carried away by incentives.  These should be a ‘nice to have’ and not a deal-breaker.  Your decision to buy should be based on the actual numbers.  To help you focus, produce a check-list of what is important for you in an investment property.  Once you have ticked the boxes, then make a decision and don’t get greedy.  In this industry, more often than not, greed will lead to disappointment.

  • Best Prices – in an ideal world, a developer will set off-plan pricing that will cover their build costs and give them a tidy profit.  They will then increase prices by small amounts in line with growth giving the developer additional profit and rewarding the initial investors for their early commitment.  Both large price increases and the offer of discounts are common signs of a problem, so understanding the current state of the development in terms of building progress and sales is critical.

TOP TIP – When speaking to your agent about a development.  If you want to get a clear picture of the state of the development, also enquire about other developments an agent has on their books and ask them to make a recommendation on what they would personally invest in….. in most cases, an agent will direct you to the development they have the most confidence in as this is the one that will give them the fewest headaches moving forward!  Also, there is always a reason behind a discount and discounting stock is usually the final step taken by a developer before they are liquidated!

Clearly there are some real advantages to buying off-plan but there are also some disadvantages.  Here are some things to consider and some tips on how the risks can be minimised and managed:

  • Risk of losing my deposit – this is everyones biggest worry.  Fortunately it is very rare, and although you are not investing the full amount, it is still likely to be a significant amount of money and you will have nothing to show for it apart from a piece of paper until construction is complete.  The track record of the developer and the source of their funds are your most important considerations.  If there is a financer in place then if there is a problem with the builder, a new builder can be quickly brought in to finish the job.  If there is a problem with the financer, but the venture is still a profitable one then a new funder can usually be sourced quite quickly.

TOP TIP – In my experience, problems only usually occur when developers offer such high discounts and sales incentives that in the event of there being a problem, no alternative funder or developer can be found to make the venture profitable.  The two key elements that reduce this possibility are the number of sales made and the proximity to completion of the building.  When developments are 80% sold, the developer will usually have hit their “critical mass”, meaning that they have enough money to finish the build without addition sales.  Ask your agent about sales already made and the popularity of the investment. Also ask for details of previous developments completed by the same developer and how the project is being funded.

  • Risk of late completion – history tells us that most developments are late, but being 2 to 3 weeks late is different from being 2 to 3 years late!  Many developers will initially publish a completion date which is attractive to investors and are able to extend this date at a later stage without penalty.  Some developers offer an interest on deposited funds which means that they are financially penalised for late completion.  Some may also include a long-stop date in the contract which is usually 6 to 12 months after the scheduled completion date.  After this time, an investor can immediately claim all of their money back.

TOP TIP – Ask your agent for a detailed building schedule and for any reason that might affect the scheduled completion date.  Late completion is usually the result of a late start.  Once the builder is on-site, any developer should be able to produce a detailed build schedule.  Depending on the type of development and the financers conditions, if your agent is working closely with the developer then they will be able to talk through any potential issues.  Again, the number of sales and proximity to completion will have a large impact on this.  If you are one of the first to invest then the track record of the developer should be your focus.

  • Risk of lower quality – while this has been raised as a question a few times when selling off-plan, I can never actually remember receiving a complaint from a buyer about quality and while we may perceive developers as greedy individuals, they are also extremely competitive.  Every developer will tell you that his will be higher quality than the development down the road!  But as we work closely with developers who have a long-term strategy whose success relies heavily on their previous developments, we always insist on a detailed internal specification and take pride in showing future potential investors.

TOP TIP – Always ask for a detailed internal specification and ensure that this is included and referenced in your contract.  Developers who allow you access to their previous developments and who have previous developments that are performing well will rarely use cheaper materials / appliances.  We also usually find that smaller and newer developers, particularly in smaller schemes, will go the extra mile to please their investors.

  • When can I apply for a Mortgage? – Securing finance for an off-plan purchase is difficult if you are buying over 6 months before completion.  This is one of the main reasons that incentives are offered to investors and prices are lower.  In most cases, prices increase 3 to 6 months prior to completion as the market opens up to owner occupiers who are able to secure residential mortgages prior to making a commitment to buy.  I have never experienced a buy-to-let investor being unable to secure finance with the exception of a few whose own personal circumstances have changed dramatically (lost job, taken out a pay-day loan, filed bankruptcy etc).  In some cases, we have seen lenders requiring a slightly higher deposit, or seen interest rates increase slightly.  This may well change the appeal of the investment, so it is important that buyers consider the impact that these may have on the investment.

TOP TIP – Get a Decision in Principle from your broker / lender and ask how many other lenders are likely to be offering similar mortgages.  This is a much bigger topic than I can cover here, so you should speak to an FCA regulated broker who can go into more detail for you, but from a commercial perspective, always ask your agent about other options available if suitable finance cannot be sourced on completion.  In most of our more popular developments we have been able to quickly re-sell apartments for those who have run into financial difficulty and in some cases, been able to give them a healthy profit on top of their deposit.

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