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Builders are racing to build new homes across the country as the government encourages more development of affordable homes. As these new estates take shape, the number of properties offered off-plan rises, and property investors can get great deals.
But what does buying an off-plan home entail, and are the deals as good as they seem for buy-to-let landlords?
Buying off-plan is buying a new home before building work finishes rather than a completed property. The term ‘off-plan’ means buying from viewing a set of architect plans instead of bricks-and-mortar. The main advantage of buying off-plan is that property prices are rising quickly. Agreeing on a price six months or more before moving in can save thousands of pounds.
According to the Office for National Statistics, the average UK home rose from £266,321 in June to £274,712 in December. The price difference saves £8,391 in cash plus the corresponding stamp duty reduction for an off-plan buyer.
Buying off-plan can offer more than the opportunity to negotiate a great deal with the developer. Besides your buy to let gaining in value by the time you get the keys, you could:
Money’s not everything sometimes. Although buying off-plan comes with some excellent potential rewards, sealing the deal can also have disadvantages. A mortgage-funded purchase can provide some challenges.
Construction delays and deadlines can stretch due to poor site management or unavoidable and unforeseen circumstances, like the disruption caused by the coronavirus pandemic. Most mortgage offers expire after six months, but the delays can add months to the anticipated completion date, which means reapplying for a loan.
This is inconvenient, but the lender will want updated financial information. If your finances have changed adversely between applications, the lender could offer reduced terms or even decline the mortgage. Pulling out of the deal if mortgage terms are reduced or the offer withdrawn is an expensive option.
Any reservation fee will be lost. Sometimes, the developer may sue if the purchase does not complete.
The most significant off-plan risks are falling house prices and the developer going to the wall. It’s never a good idea to commit to an off-plan purchase when house prices are falling, as you could spend more than the property is worth.
Confidence in the developer is essential. Don’t go by brochure or website testimonials; check them out online in forums and social media to see if buyers are happy with their new homes. Ask the developer if they are insured if they go bust or fail to finish building.
Forget the marketing blitz by so-called off-plan experts - before dealing with salespeople like this, ask some questions:
Once you have haggled with the developer and agreed to your deal, the developer will ask for a non-refundable reservation fee, which can be as high as £1,500. At this stage, instruct a conveyancer and apply for a mortgage. The lender will value the home based on the plans and the developer’s specifications.
Suppose all runs smoothly, exchange contracts and pay a 10 per cent deposit. In the run-up to completion and picking up the keys, arrange a snagging survey to check for defects.
No. Off-plan and buying below market value (BMV) are different purchasing methods. Off-plan homes are new builds; BMV homes are lived-in properties sold for less than their market value.
The reasons could be that the owner has financial problems, received the property as an inheritance, or needs to resolve a divorce or separation.
Developers are open to haggling, but the discount is not always off the purchase price. The most significant discounts go to brokers or investors buying multiple properties on a development. Landlords investing in a single buy-to-let can negotiate over stamp duty bills, fixtures, and fittings.
Flipping is buying and selling a property for a profit before the building completes. Flipping properties is risky in the current market as interest rates rise and wages fall due to inflation. However, flipping is not against the law, and investors can sell whenever they want.
Some buy to let lenders have rules about how many properties they are willing to lend against in a development. However, these rules should not affect off-plan buyers too much as they will be among the first to purchase on a development and are often cash-buyers.