“Off-plan” property investment is where an investor buys a property during the planning or construction stage of the property being built. In other words, the property being purchased is unfinished or has barely been started.
This type of property investment has grown in popularity over the last few years, along with a similar “build-to-rent” investment. The main reason why investors are attracted to “off-plan” property is that it can invariably be purchased at a discount compared to fully-constructed buy-to-let properties. This discount is to off-set the extra risks attached to buying a property that is not yet fully constructed.
Here is a quick guide to how “off-plan” property investing works to help you ascertain whether it is the right type of investment for you.
How does the process of buying “off plan” work?
Buying a property that is still under construction is slightly more complex than buying a fully built property as contingencies need to be put in place in case the building works do not get completed as planned.
A buyer will first have to put down a “reservation fee” in order to stop other buyers from putting bids in on the constructed property. This is usually in the range of £1,000 to £5,000 and is eventually deducted from the deposit.
Once due diligence is completed by the buyer and seller’s legal team it is time to pay your deposit. This deposit is generally between 10-30% of the property’s total fee. Contracts are exchanged between the buyer and the seller when the deposit is put down.
Once a contract is exchanged, the buyer is committed to purchasing the property regardless of whether it’s construction is completed or not. This possibility of non-completion is an additional risk that the buyer takes on as they will lose their deposit or have to fund some of the building work themselves if the developer folds.
Unlike buying a completed property, when you buy “off-plan” a buyer has to wait for the building works to be completed before they apply for a mortgage. Only once the building is complete and the mortgage is finalised will the developer serve a “notice to complete”. At this point the buyer has a set period of time to pay for the rest of the property.
What are the additional risks and benefits of investing “off-plan”?
The main advantage of buying a property before it’s construction is complete is that you can almost always buy it at a discount. This discount usually falls between 5-20% depending on how far along the construction has gone (the less work that has been completed, the greater the discount in general).
Buying “off-plan” therefore gives buyers access to locations that they otherwise may have not been able to afford. As homes in more expensive locations tend to rise in value with more certainty, this can often lead to a better investment in the long run.
With a discount comes the additional risk that a buyer takes on of a property’s construction not going to plan or being left incomplete. This can happen for a number of reasons including the developer and construction company going bust.
An additional risk is that a buyer may not be able to get a mortgage for the property once it is complete. This will happen if there are changes in the mortgage market or your personal circumstances in the time that lapses between putting down your initial deposit and when the construction is complete.
If you are buying a property in the earlier stages of development, or the project is delayed, then the chances of you failing to get a mortgage is increased as this will cause a bigger lapse between your deposit and the completion of the project.
How to mitigate the risks involved in “off-plan” investments?
As with all property investments you need to be as confident as possible that the property you are buying will rise in value. Therefore you need to look at the history of the housing market in the particular location that you are investing in, as well as the demand for the type of property that you are buying.
The majority of additional risk in the “off-plan” investment model revolves around the developer failing to complete the project.
As a buyer you therefore need to:
- Vet the developer and look at their history of projects, as well as their company’s financial history.
- Make sure that the developer is using reputable construction companies and contractors.
- Go through the project plan carefully to make sure that the final build will be of a sufficient quality to justify the price.
Questions to ask yourself before buying “off-plan”
The ultimate way to determine whether you should consider investing in “off-plan” property is whether its benefits outweigh the risks for your particular circumstances. The answer to this will vary from buyer to buyer.
Here are some questions to ask yourself to determine whether this type of investment is right for your:
- Is the discount that I get from buying “off-plan” necessary for me to get on the property ladder?
- Does the discount I get from this model enable me to buy in a location that I otherwise could not afford?
- Have I looked at the developer’s track record or projects? Am I confident that they will complete the project?
- Is the developer using reputable contractors?
- Is the property being built a popular type of property in this location (for both tenants and buyers)?
- Will I be able to sell the property on when I need to without any foreseeable problems?
Given the risks involved with this type of investment, you should not go ahead with it unless you can answer all these questions with a certain “yes”.
Disclaimer: The above article does not constitute professional financial advice and the author is not a professional financial advisor. Please speak to a professional financial advisor before you embark on any property investment venture.