Off-plan Property -The Good The Bad And The Ugly

New build property has its advantages,?there’s a lot of upside?when buying a property off-plan. However, it is not without risk. This article looks at the pros and cons.

Off-plan Explained

Off-plan property means purchasing a house or a flat while it’s still under construction.

Within this area there is a wide range of scenarios. It could mean buying the property while it?is still in its design and planning phase, or alternatively you could be looking at a near-completed project with the final touches to finish such as carpets and fittings. The risks and returns can vary depending on where the property is in its stage of its development. Typically the largest discounts are at the design and planning stage.

Discounted rate

A developer is often?willing to accept a lower offer in return for a guaranteed buyer at the end of the project – giving them confidence that they?can pay off any finance they’ve taken out on time. This prevents late payment charges from the bank or finance house.?The earlier you commit to buying off-plan, the bigger the discount you’re likely to obtain. With some developers this saving can be very attractive.

Securing a discount has its advantages as when the property completes you have a lot of equity in the property. This means you can re-mortgage at at a later stage and take out your equity and put it towards the deposit of an additional property. This has been a tried and tested strategy for a number of developers who have used this model to generate a self-financing portfolio.??

So if you’re an experienced?investor interested in buying off-plan, you’ll usually want to buy the property as early as possible when the discounts are?higher, as it is an investment and not an emotional purchase.

If you’re looking?to let your?property out, a lower price will result in a lower mortgage, which will increase your bottom line. You also have the ability to buy a number of units from the developer. This has additional advantages in that you could secure an even bigger discount as well as having your investments in one place, which adds to the convenience, especially if your involved in the day to day management side of this.

If your planning on flipping the property (selling on completion), then putting your deposit down a couple of years in advance will give you the benefits of growth in the market in addition to your off-plan discount. Manchester for example, has seen property prices go up by 15% in the last two years alone. While some areas within the city have done far better than the average. This strategy give investors the benefit of realising profit without the hassle of sourcing a tenant and dealing with any upkeep issues.

Risk: The property market is not guaranteed

On the other hand, you can never be entirely sure that the market will continue to rise. Should there be a fall in the property market you are still committed to buy.

Reward: You can choose your own fittings

Another benefit of buying off-plan is that you often get the opportunity to influence the look and feel inside the property, by choosing your own fixtures, fittings and finishes. As a landlord you would typically want more neutral designs to make your property attractive to a wider range of tenants. You are likely to select finishes which are easy to upkeep. This will save you money in the longer-term as there is less work to be done between a change of tenants. Perhaps more attractively, there is less work needed compared to buying existing property, saving you time in the process.

Risk: The development could be delayed or have issues

Another risk you need to consider is that the project could take longer than anticipated. This is very common due to the complexities of construction. With this in mind, it is prudent to wait until close to completion before searching for a tenant. There is also a risk that the development may fail due.?So it is important that when selecting a developer, you research the company and ensure that they have a successful track record. This will reduce the risk that the development could fail.

Reward: Protection?

Buying an off-plan property provides?you with some added protection compared to an older house.?At least you know the boiler will work, the roof is new and the property complies with all regulatory requirements. You’ll have a warranty which covers you for these sort of things, saving you money and giving you peace of mind.

Your warranty is split into two periods. During the first two years after completion, any issues with the property (such as leaky windows or ill-fitting doors), your builder is obliged to come and make repairs to their original work.

During the second, structural warranty period, the builder is only responsible for major problems with the property.?This?second warranty period lasts for an additional eight years, giving you ten years of protection in total.

If you’re selling the property on once it’s completed, this could be a great selling point – as your warranty is?transferred to the new buyer.

If you’re letting the property out this is also a benefit, as you are not responsible for repairing any serious problems which aren't caused by your tenants.

Risk: You might be denied a mortgage

There is?a risk for investors that you might not get a mortgage. Your circumstances may change between purchase and completion or the market could change meaning that lenders lend to a different set of criteria. Therefore, even a?decision in principle when you first approached your lender, this doesn’t guarantee you’ll receive the same offer when it comes to completion. This is an important point to consider as at exchange of contracts you are?legally obligated to go through with the purchase. Because of this, it is wise to make sure you borrow prudently to avoid these concerns. However, if your circumstances do change for the worse there are a number of specialist lenders who can help.

If you can't get a mortgage on time then?a bridging loan could be an option for you. This will help?you?to complete quickly within your required timeline. A bridging loan lasts for up to?12 months, and gives you time to arrange a mortgage, or sell the property before you need to pay the loan back.

Janis Aukstars - Esper Wealth