In this blog, Stuart highlights the key questions to ask when buying off plan property.
How to spot opportunities in the UK
Understanding the changes in the marketplace is an essential component to making a good decision when investing in property in England. In many areas of the UK, it is now considered a ‘seller’s market’, which to put it simply means the amount of buyer’s exceeds the amount of the supply in available properties, therefore seller’s are able to command higher prices.
New Construction (Off Plan) Basics
Whilst demand fluctuates throughout the UK, the areas that tend to have the highest undersupply are rife with opportunities for developers and investors to benefit. Investors and home buyers are able to purchase ‘Off Plan’ properties from the developers whilst they are under construction or even prior to construction commencing. This ensures the buyer is able to access one of the newest properties in the area, whilst securing the property at the best price.
Being an “Off-Plan” home or property buyer simply means that the person who is the buyer is purchasing a home or residence before it is constructed. Instead of buying an existing home, these new construction buyers enter into a contract of guarantee to purchase a home or unit based off an architectural drawing or the developer’s plans for construction. This is quite common in newly built homes and neighbourhoods where a developer has been approved to create a new housing development from vacant land. This is also common for property investment buyers and individual buyers of units in a building conversion or new apartment block.
For a traditional home buyer who is learning about investing in “Off Plan” properties, the concept may seem a bit unorthodox, unnerving, and controversial. However, “Off Plan” home and unit purchases are now the norm in England, the U.K., the U.S., and other established regions around the globe. The most important detail for buyers of these types of property investments is learning how to be secured in the transaction process. That means the buyer needs to find ways to ensure that the unit or home being sold is completed within a timely manner and in the proper promised condition.
The Big Benefits to Early Unit or Home Property Investments in “Off Plan” Projects
Of all the advantages of this type of property investment, one of the biggest is the pre-construction or early construction sales price. Buyers who choose to make an early commitment to purchase a unit or home in an “Off Plan” project, usually have the benefit of getting their new home or unit at a discounted rate. These discounted sales prices are often given to individual buyers and property investment buyers that are buying a unit in a conversion project or multi-unit project at the beginning of the construction phase.
Because a builder or developer in a larger project often needs to have some commitments from buyers of their properties before the banks will extend some of the financings, they may sell the first several units at a discounted rate. This allows them to have enough buyers to substantiate more construction funding to be released by the bank. For people who choose to buy a new construction unit in the early stages, it can create a big boost in profitability.
Depending on the cost of the unit or home, some buyers of an “Off Plan” home or unit can experience a net gain in value that equals thousands of pounds compared to the selling price of units or homes being sold towards the end of a project. In most cases, the amenities and size of the units that are sold at the beginning of the project versus one’s sold at the end of a project are equivalent, so the increased benefits are quite noticeable.
Whilst profitability is one of the greatest incentives for people to be an early property investment buyer in these types of projects, it is not the only benefit. Buyers who invest in the early phases of an “Off Plan” project also get the benefit of being able to choose the most pristine locations for their home or unit out of the planned development. Since the project is new, and there are few units sold, they often get the opportunity to choose the best prime location within the complex or neighbourhood for their property investment.
Understanding the Best Way to Protect Yourself with “Off Plan” Purchases
New buyers of under construction homes or housing units and those making a property investment in an “Off Plan” property should learn as much as possible about the process they are getting involved in before they make a commitment to buy. Whilst most “Off Plan” purchases of property work out quite well, there are a few occasions where problems have occurred. Knowing how to safely protect your interests as a buyer and ensure that all goes well with the pre-built home or pre-built unit purchase is critical. A well-designed contract should ensure that the home or unit will be delivered to the buyer, as stated in the guidelines of the purchase agreement.
Buyers are always encouraged to do their research in the “Off Plan” project and check the property builder’s track record. In most cases, when a new home is being built from construction plans, a bank or financial institution is funding the construction money in increments. The financial allotments from banks on new construction projects are always remitted after the completion of a previous construction phase. The same applies to larger property projects as well. However, in smaller single unit or private home “Off Plan” property projects, it is easier to monitor the development and construction phases.
With larger new construction projects, doing preliminary research on the builder and developer as well as getting a well-defined contract will offer the right protections and security the buyer needs.
As with any real estate property investment, it is always important for a buyer to make sure that the contract to purchase is a thorough, comprehensive contract that protects both the buyer and the seller’s legal interests. A properly created contract to purchase an “Off Plan” property should require that the final purchase and closing of the property will occur subject to the completion of the home or unit as promised and defined in the contract and architectural drawings.
When researching an “Off Plan” property project, buyers should ask these primary questions of the developer:
- How close to the original plans does the home or unit follow? This is one of the essential questions that many buyers want to know. In general, the architectural plans for a home or unit are followed as per building compliance guidelines, but developers are allowed a small % for possible size change in the unit (making it larger or smaller) if an unforeseen issue arose, meaning the designs had to be altered slightly. Government building officials will also check new developments during the construction period. Buyers will also be able to inspect their property during the build or refurbishment period.
- Will this property have less value than traditional property? Traditional homes or units that are built brand new hold their value well due to less maintenance required for a good amount of time. But verifying the data for value projections, the bank value of other units sold and supply and demand at a specified location is important.
- What are the biggest benefits of this property investment? As with all property investments, understanding the benefits of the location, amenities, and cost savings of a newly constructed home or unit is important. What is the level of supply and demand in the area, what are the projected rental yields, and potential growth during the build period?
- How much deposit money do I need to pay? The amount of a deposit can vary depending on the development, the asset class (residential/student/hotel investment etc). In most cases, a 20-30 per cent deposit is required on exchange of contracts. In addition, there will be a fee to reserve the property – this can be anywhere from £1,000 to a 5-10% of the purchase price.
- How much experience does the developer have in new construction projects? This is an important question. In some cases, the builder is new to project development and should have the backing of experienced developers. Without proper experience, there can be cause for concern. Obviously, everyone needs to start somewhere but if the developer is relatively inexperienced, you need to check how your deposit funds are secured (insurance or escrow etc).
- How can I ensure the property will be completed as portrayed and with high-quality construction? Most builders or contractors will have an established reputation that can be verified. In addition, buyers should be able to check on their home or unit several times while it is under construction.
- How does the buying process work? While there are always basic guidelines, laws, and protocols for purchasing any real estate, it is important to verify this with the purchase of their new home or unit. Buyers should be sure they understand the process before making a commitment of any sort.
- How do I know the property will be delivered as planned? Buyers of new construction should always put proper wording into their contracts to protect them. Proper legal counsel can ensure this is done right. Additionally, all properties are inspected by local council inspectors to ensure safety and compliance are adhered to, based on architects drawings.
- What are the incentives of buying before construction? In most cases, developers will offer price discounts and other perks to early buyers. In some cases, there are specific upgrades offered free of charge to early buyers. Buyers should ask about the variety of incentives that are offered for early buyers. It is not uncommon that developers work with buyers an negotiate a price or amenity incentive or both.
- How is my investment safeguarded? As with any type of investment, there is an element of risk. For example, the market conditions can change which could then affect your returns or value of your property. However, you can mitigate this risk by purchasing in a key location where demand will be there for the foreseeable future.
- How long will the whole project take? This varies from project to project and at which point during the build process you purchase. It could be anywhere from 3 months to 3 years. Anything taking longer than 3 years is likely to be a substantially large scheme and could end up being delayed as these types of schemes are usually quite complex.
- What happens if occupancy is delayed? All developments should have what’s known as a long-stop date in the contract. This is the point at which the development should absolutely be finished. The long-stop date usually factors in some delays in case they appear. Anywhere from 6 – 12 months from the original completion date. If the development isn’t completed by the long-stop date then the developer is in breach of contract and investors can choose either to remain in the development, with interest being paid on their deposited funds (deducted from their end price), or they can withdraw from the investment and will be entitled to a full refund.
- What items can I personalise in the unit or home? With new home or unit construction, there are usually a wide variety of personalized choices that can be made by a buyer. Choices in appliances, lighting, flooring, and fixtures are not uncommon. With individual homes, options in landscaping are common as well. If it is an investment property or within an apartment building, customizing your unit is likely to be limited or at the discretion of the developer, but will be chargeable to the investor.
- What type of final inspection is there? Any new development will require sign-off by a local planning officer. This is a legal requirement, which then enables the new build insurance policy (10 year new property insurance) to commence. Without this sign off the building won’t receive this insurance and it won’t legally be allowed to be occupied.
In addition, investors buying with finance would usually have a surveyor go in and value the property to ensure it is in line with the agreed price.
Buyers might also wish to go in, or send in their letting agent to do what’s known as ‘snagging’. This is checking over the property from top to bottom to ensure everything is working and where it should be. Any issues would be reported back to the developer at this point who will rectify the issues.
Contracts for an “Off Plan” Property
While most developers have a standard contract for the purchase of their Property Investment units or homes, it is always advisable to use a lawyer or solicitor to act on your behalf to review the contracts and provide you with their feedback and answer any questions you have. Most developments have 1 or 2 ‘panel solicitors’ who have already carried out their contract review and search on title to ensure the developer is legally entitled to sell the properties.
The contracts pack will consist of a sale and purchase agreement which details out the terms of the purchase along with the lease agreement.
Many buyers want to cut corners and save a few hundred pounds but it is always recommended to use a specialist lawyer, and preferably one who has already reviewed the contracts. Ask your sales agent who this is and it will save you time and money in the long run.
Get in Touch
Interested in off-plan property investment? talk with us directly, you can call us on +44 (0) 2039507939 or send us an email at firstname.lastname@example.org. If this is your first time landing on Thirlmere Deacon Property Investments, I encourage you to visit our Buy-to-let page to find out more about our current and to see what we have on offer.