It seems that buying off plan is back in fashion again, with two in five of new build properties currently being bought in this way. The Independent (7 September 2013) has published an insightful piece on the subject.
These buyers are either young first time buyers or those entering the buy-to-let market, and few of them will remember the 'off plan' frenzy during the 80s which, after the property crash, left many homeless and penniless after having bought property this way.
It seems to be an attractive option, allowing the buyer 'first pickings' when it comes to choosing flats, size, view, layout, gardens etc, before the property is built.
Very often the prices for the first stage of the development will be markedly cheaper than those built at the later stages of the development, and most people agree a purchase price, betting that by completion the value of the property will have increased.
At the moment, certainly in London at least, flat developments are being built on every scrap of available land and the construction sector is expanding at its fastest level in six years. Interest in buying off plan is at its highest since 2007. In a strong market a purchaser can see capital appreciation of 10-20%, which is certainly appealing to the overseas purchasers who, in 2013, are buying over 50% of Central London property this way.
So, you still haven't been put off by the above and want to go ahead and purchase a property in this way... what should you do?
Prepare
- Use your head and not your heart, and whatever you do, don't panic!
- Think carefully, do you want to live in this property or are you thinking of buying to let? Perhaps you are buying to 'flip' the property and are only looking for a short term profit? Different considerations apply, so do your homework.
- Look at the location of the development. Are there good transport links? Signs of gentrification or regeneration? What about schools, shops, parks cafés etc? Take a good, cold, calculating look at the area. Visit it during the evening, the week and at weekends.
- Investigate the property market thoroughly; check the valuations of local and similar properties. Remember that there is a 30% premium for new build properties.
- Check out both the developer and the property. You will need to consider their creditworthiness (what happens to your 10% deposit if either one of these companies goes bust mid-development?). Look at their previous developments and ask estate agents and surveyors who are local to the area about the reputation of the developer/builder.
- Visit the marketing suite but beware these marketing techniques can be very seductive. Bring the brochure to a specialised solicitor BEFORE you even think about reserving one of the properties off plan. The solicitor will check through the microscopic print loopholes on the marketing material and potential contracts.
- Check that there is a NHBC warranty. Only 80% on new homes have this warranty. Remember also that this NHBC warranty only applies to structural issues, the industry does have a voluntary code of conduct concerning pre- and post-contractual issues, but it is only a voluntary contract, and again a specialist solicitor will help you with those issues, e.g. snagging issues which can be a difficult and long running problem.
You Have Decided To Go Ahead and Reserve the Property
You want to go ahead, you do not want to be in a property chain, you do not want to deal with estate agents and you want to choose the interiors and fixtures and fittings yourself – new regulations mean that the property will be very energy efficient (even if the average size of the property is a tad small these days)... so you are in Property Heaven! Get your feet back on the ground. There is a lot to do.
- Get your finance in place ASAP. Typically deposits for such off plan purchases are between 5% and 10%. Remember most mortgage providers leave their mortgage offer open for six months only and they want you to complete the purchase within six months as well. If the build is taking longer than six months, the finance providers can become very nervous and withdraw the offer. They will do the same thing if the market drops and, Heaven forbid, if your financial circumstances change.
Remember after the deposit is paid, you only have twenty-eight days to exchange contracts, so make sure that you have instructed a fully qualified, specialist solicitor who is experienced in these types of property purchases and who can process the contracts efficiently. There can be expensive repercussions if you are not ready to exchange within the twenty-eight day deadline. You will then become contractually bound to the vendor and if you are unable to complete you will lose your deposit. You could also be sued for the full contract price of the property.
- Get a surveyor's valuation of the property and a snagging survey. New builds have an average of eighty defects which will need to be addressed.
- Visit the development site fortnightly to monitor progress.
- Ask what happens if the builder goes bust (e.g. is your deposit placed in an escrow account for safety) and what happens if the value of the property falls after you have exchanged contracts.
- Completion. Be aware that in these types of contract there will be two important dates to monitor:
- Short stop – the date by which the builder is expected to have been finished; and
- Long stop – the date by which the builder MUST be finished.
Also remember that these properties are best viewed as medium- to long-term investments and do not buy if you are risking other financial interests e.g. your home or pension.
If we can assist you with any of these issues, please contact our specialist solicitors by completing our online enquiry form or by telephoning us on 020 7387 2032.
