Property Investment - Buying Off Plan Property

Careful consideration and due diligence need to be undertaken if you really want to buy property Off-Plan. You should be aware that while there are financial gains to be made, as most developers offer attractive discounts, there are also inherent risks, including, but not restricted to the developers going bust.

However in recent years buying off-plan has become very popular with investor seeking to buy at attractive discounts thereby increasing their net asset worth.Nearly all Off-Plan developments are simply sets of drawings and artists Computer Graphic Images (CGI) of the proposed finished development. Many Off-Plan Development will have fencing around a site with CGI and telephone numbers in which to make contact. Buying Off-Plan is not for everyone however this type of investment is growing and in recent years has really taken off as a way to make money.  So exactly how does Off-Plan Buying work and what are the rewards vs. risks? 

Remember: Buying Off-Plan is generally a medium-term financial commitment, about 2 years in fact, and that is on the provision that you; A) Want to sell on completion and; B) Can actually sell your property.

Did You Know? You get answers to your Legal Questions ASAP

 

Buying Off-Plan : The Pros and Cons

The Pros1.

1. You generally get to buy at a discount, and when the building is completed in a year or two hopefully capital appreciation has made it worth much more – when marketing conditions are right you can make up to 20 per cent profit off your initial ten per cent deposit.

2. Because the building is new there should be little or no maintenance. Make sure you get a warranty no matter which country you buy in.  If it does not come with a warranty DO NOT buy, move on and invest elsewhere.

The Cons

1. Like any other market prices can go up as well as down and you have to try and put this equation into the two year investment you will be making.  Two years is a long time in any market.

2. Consider the rise in rates and or falling rents as this will have an impact on your investment.

3. If you are looking to sell once the development is complete there is not guarantee it will be easy. Consider how many other investors there are in the development … will they all be trying to sell at the same time.

4. Markets and people requirements change over time … will they still want your property on completion. What is trendy today might not be tomorrow.
Again, whatever type of investing you do must be undertaken with due diligence if you are serious about minimizing the risks and maximizing profits.

 

2. The Development Investment

The official off-plan marketing starts once the developer releases details to the property agents.  Depending on the size of the project this can be a quiet affair or some elaborate launch party.

In most cases there will be pre-launch sales and developers use these to determine investor reaction. This can be a good opportunity to get a healthy discount or purchase a deposit with lower investment capital. This however is not always available to small investors buying one unit; the pre-launch sales are generally offered to bigger investor that will purchase multiple units.  The bad news is that most pre-launch business is offered to large investors buying multiple units - pension funds, large investment syndicates, and the like.  When agents do receive pre-launch property they will normally contact and sell to their established investor list, therefore if you are serious about investing off-plan talk to a number of agents and get yourself on their investor list.

It is possible to go through investment houses, but you will have to pay their fees. In general the advantages of buying pre-launch off-plan are clear, getting prime plot at greater discounts can all increase your investment potential, but getting pre-launch will require work and a healthy amount of due diligence. If the launch goes well, later releases will probably be more expensive.

Remember: If you buy and the launch performs poorly the developers may well reduce prices further which will have an adverse impact on your investment. It is irrelevant whether you buy at pre-launch or launch, you should always negotiate on the price, deposit and other features, including parking spaces.  Parking spaces can be a real premium especially in major cities.

 

3. Do the math

Carefully look at the numbers, this should be part of your due diligence.  Consider if the price is right and if you plan on holding the property for rental income, what is or will be, the potential return.  It is interesting to note that in Resort properties around the world, that many developers offer a ‘Guaranteed Rental Return’ for a set number of years. You should be aware that buying Resort properties off-plan may not offer the discount attraction compared to other properties, as the developers will have to factor in any guaranteed rental return offered.

 

First Step Due Diligence …

Check the local market - what is and is not selling

Consider the discounts and deposit required

Check out the developer to determine solvency

Check out market prices - both sales and rental

Talk to your financial advisor

Talk to your legal advisor

There more steps you will need to take and your legal advisor and financial advisor will go through this with you. It is worth having a surveyor assess the value and the rental potential – developers generally have an overly optimistic view of future gains and rental potentials and this area is important before you contracts are sign.

Remember: Time will not be your friend but the old saying “Fools rush in where angels fear to tread.” And “A fool and his money are soon parted.” Are never more true when buying off-plan. You MUST undertake all the necessary due diligence to protect your investment.

 

4. To buy or not to buy...

In the words of the bard … that is the question!  Consider the following:

Price: Look at the current market and even ask local agents. If the property is over-priced reconsider.

Yield: What sort of rental potential does it have … this is a little crystal ball as the market and location trend may change over the period of development.  You can look at past records to see any trends.

Area: The location is vital and trends change. Look at certain areas of London 20 years ago. Some were extremely undesirable but today the situation has turned 180 degrees.

Supply and Demand: How many new developments are underway and how many will there be by the time the development is finished.  Over-supply in any market will have a direct adverse impact on your investment.  Does the development have the necessary infrastructures surrounding it to increase demand?  For instance, if the development is close to trains and other forms of transport, with easy access to the cities, then demand may be greater.

Investors: Too many cooks will spoil the broth!  If the development consists mainly of investors then you will have to compete with these in order to sell or rent.  Competition will have an adverse impact on your potential gains so carefully look at the ratio or investors to buyers.

The Developer: Check out the developers.  How long have they been in business?  Look at other developments they have been involved with and get feedback. Are they registered with Builder Organisations such as the Federation of Master Builders or NHBC or equivalent registered? Make sure they are insured.

 

5. The Property

You will need a fair amount of imagination when it comes to buying off-plan, you will need to imagine what it will all look like, how it is laid out and what the interiors will be.  On the other side of the coin you will have to look at this skeptically as the developers job is to hype the development as much as possible with mock-ups, CGI images, glossy brochures, and flashy launch parties. Go to the party and enjoy yourself with free food and like-minded interesting people but do not let all the hype get to you.

Look at all the information being offered and consider:

Layout: Lay and location are vital for healthy returns so check this out and visit the site.

 Aspect: Consider the units carefully, would you want to be looking out over a sewage plant, train station or would you rather see green fields, a park or something else more pleasant. 

Services charges: Depending on the type and location of the development these can vary enormously.  You need to establish exactly how much and what you get for your money.  Remember service charges will eat into your return, especially if renting.

Specifications: Look at the specifications to ensure that good quality materials are being used and that the overall finish will be up to a high enough standard that will make the property appealing to both buyers and tenants.

Extras: No bars hold here … go for everything you can.  Reduced service charges, lower purchase deposit, parking space, larger unit.  Get a pen and paper and write down what you want and then negotiate.

Rental Guarantees: There's no such thing as a free lunch - the cost of rental guarantees is often included in the asking price.

Highly Recommend Books for the serious property investor:

How to become a Property Millionaire

How to Spend the Kids’ Inheritance

 

6. Putting the Investment together

Find a Property: You find a suitable development and think it looks interesting.

Talk To A Lender: Get a decision in principle from a mortgage lender.

Reserve a Plot: View the plans and pay a non-refundable £1,000 reservation fee.

Surveyor Instructed: Buy-to-let mortgages are based on the surveyors' valuations, so instruct a surveyor recommended by your lender. The surveyor will also consider rental values.

Mortgage: Have a mortgage offer in place before you exchange contracts. Don't complete without it or you could discover the loan your lender will offer won't cover the cost of the property.

Exchange & Deposit: You exchange legal contracts within 3-4 weeks; on exchange you must pay a 5-10 per cent (minus reservation fee). If you fail to complete, you lose the deposit.

Completion Dates: There are usually two, a short stop and long stop date. The development can't be completed before the first or after the last (usually a generous time frame). Remember - there is no definite completion date.

Snagging: You get a couple of weeks' warning before the final completion date. This gives you time to check the property - you can employ a professional snagging company or do it yourself.

Completion: Your solicitor transfers funds from lender - stamp duty is also due at this point.