Buying property before it is completed, known as “off-plan” in the UK, can be a very lucrative way to growth your wealth. We have put together some essential reading to help you minimize your risk and maximise your return from off-plan property:
1. Understand Your Deposit Security
When you purchase an off-plan property you are required to pay a “deposit”. This is a percentage of the property price which you pay upfront to commit you to the purchase, lock in your purchase price and benefit from the property price growth during construction.
The percentage is generally between 10% and 25% of the property price although it can be higher.
Your deposit can be protected in two principal ways:
1. The new build warranty provider will often insure 10% of the purchase price
2. A portion of your deposit can be held as “stakeholder” which means it sits in a solicitors account and cannot be touched until the building is complete.
Anything that is released to the developer, usually referred to a being held as “agent”, is at risk and the majority, if not all, would likely be lost if the developer went bust or could not finish the project.
Usually you have to take a degree of risk with your funds so make sure you find out the security around your deposit on each opportunity from the beginning so you can understand your risk vs return ratio.
2. Owner-occupiers Are Important
High quality properties in good cities are very popular with investors.
This popularity has risen to the extent that developers can successfully sell-out their buildings to investors without ever approaching the local or owner-occupier market (buyers who intend to live in the property). This is great for developers, but it is not necessarily a good thing for the investors.
Buying in a building which has sold a percentage of the apartments to local buyers and owner-occupiers has many benefits:
1. Firstly, owners who are truly making the property their home tend to take much better care of the building and communal areas and they build a sense of community in the building which creates a very positive atmosphere.
2. Secondly, they offer you some protection in a down market – if the market drops, investors are more likely to sell and if there are only investors in the building this can create competition and drive sales prices down.
3. Thirdly, they prove your exit to the local market because you can see they are desirable from the beginning.
4. Last and certainly not least, for these same reasons, banks love to see sales to owner-occupiers. Banks are much more willing to grant mortgages on apartments in buildings which have also been sold to owner-occupiers as they view their risk to be lower.
There are a few ways to work out if a building is being sold to owner-occupiers. 1. Check if any local estate agents are selling it as they sell predominately to local owner-occupiers 2. Check and see if the project is registered for the Government Help-to-buy scheme which uniquely supports first time home owners. 3. Ask your agent if the developer is allocating any apartments to owner-occupiers and how many have been sold so far.
3. Check The Developer Track Record
Developers range from local family-run businesses to major Billion-pound national house builders. One is not necessarily better than the other and both have their advantages, but it is important to understand who you are about to enter an agreement with.
Many developers market themselves with headlines such as “50 years experience” or “sales of over £500 million” which sound great, but they are very open to interpretation. Instead of relying on these headlines, try to do a little research on previous projects they have successfully built – any major delays or difficulties? How are the reviews from tenants in the buildings? Has this developer ever built a project like the one you’re looking at or have they only built small commercial projects and are now trying their hand at a 30-storey residential tower for example?
Now, all developers start somewhere, and no one has a perfect past, so don’t let the answers put you off altogether. However, knowing this information will help you to further analyse the risk vs return profile.
4. Buy Early
Ever look at a building and wonder who owns the penthouses or the corner apartments with balconies overlooking the water? Answer: investors who bought early off-plan. Not only did they buy the best apartments, but they also bought them at a lower price than most other buyers paid later on.
Developers are keen to secure sales at the launch of a new project to get off to a flying start, so this is when buyers are offered the best prices. Prices are then increased as construction progresses and again at completion. So, at the launch of a project not only do you have first choice of the best apartments, you also pay the best price and benefit from maximum growth. Of course, you will also have the longest to wait until completion, but as property should be considered a medium-to-long term investment your total return will outperform any later buyers.
Buying at the launch is one of the best ways to maximise your total return and acquire the most premium holdings for long-term wealth protection.
5. Negotiate Incentives
Developers are motivated to sell properties before completion because it helps with their financing, data reporting and clean exit at completion. As a result, they are usually willing to “sweeten the deal” and throw in an extra incentive or two.
Examples include providing a free furniture pack, paying your solicitors fees, contributing to your stamp duty or giving cash-back. These will all reduce the capital you need to invest, resulting in a higher return on the total capital you invest. This is a major advantage of buying off-plan as you can’t get these kinds of incentives when buying an existing property on the open market, so be sure to get something extra from the developer!
SUMMARY
Buying off-plan is one of the most efficient ways to secure and growth wealth through property and anyone can do it. Follow these pointers and you’ll set yourself up for the best possible results. Happy investing!
