Buying Off Plan
Buying Off Plan. The Process.
So you’re looking for a property investment to start your portfolio or to diversify. What are the pros and cons of buying an off plan investment?
Does everyone make money and what should you look out for? Buying off plan, if done correctly, can be extremely profitable. In this article we’ll explore what to consider to make an informed choice to increase your chances of success.
To start with, let’s discuss the concept of buying off plan. This is the process of purchasing a property before it has been built. Depending on your initial engagement this could be literally “off plan” where no work has started and with a forward completion date of 1 -2 years (typically) or nearing the end of the development when the site is almost finished.
The benefits of buying off plan.
Is it cheaper to buy off plan? Typically, yes it is. Developers usually offer a Below Market Value price. This is to entice early stage investors, add sales to their bottom line figures and to market their development as an attractive purchase. They are effectively compensating these early stage investors for the inconvenience of having to wait until the property is built and for not being able to rent their investment straight away. It can often be harder to visualise how the completed project will look from the plans rather than being able to walk through a finished development. This may deter some investors, hence, a lower starting price. The benefit to you is potential uplift in capital growth when you make your final payment, to the developer it removes their risk and exposure to the project.
Depending on the stage that you invest and the potential capital uplift (taking into account current market trends) there will be two ways to profit from your investment.
This is the practice of selling an off plan property before practical completion. When buying off plan you will need to put down an initial deposit (normally a percentage of the purchase price). There may be further stage payments or the balance on completion. You then sell the property to another purchaser before completion. If today’s price is more than when you signed the initial agreement then you will have made a profit on the transaction. As a primary strategy, you will need to watch out for clauses in the contract banning this practice. Also be aware that if the market flattens or falls then you will still be committed to purchasing the property or risk forfeiting your deposit.
2. “The Hold”.
A long term approach from a rental yield standpoint. You still purchase off plan but bank the discount against market price rises in the future. You still lock in today’s price for tomorrow’s payment. Look for developers offering assured rental yields and you will be able to accurately work out projected income for your rental return.
You’ll need to pay a reservation fee to reserve your unit. Instruct a solicitor who will go through the same legal process as if you were buying a second hand property including all of the local searches and checking the contract. Once the due diligence has been completed you will be required to pay the deposit and exchange contracts. It then becomes legally binding and you will forfeit your deposit if you decide against the purchase. The developers or their appointed agents will keep you abreast of the building progress and advise of when to start arranging the mortgage if one is required. When the project is finished the developer will serve notice to complete which will give you time to release funds and finalise the process. Once the developer has received payment the property is yours!
Remember to do your research!
Choosing the right developer is paramount. How have they performed in the past? Are you confident in their projected timescales? How does this development compare to their previously completed projects?
Have you considered the location? This is vital when looking at projected capital growth over the mid to long term. How does the regional price index compare with the UK national average? Are there any specific regional growth plans or transformational changes in the pipeline? Regeneration can stimulate the macro economy contributing to rising tenant demand.
Transport links are hugely important for tenants and investors alike. A well connected transport infrastructure will attract working professionals looking for an easier commute.
And finally, what is the rental yield? Research tenant demand before you make your investment. Good value is not always the cheapest. A premium product attracting a premium tenant will deliver a superior rental yield with fewer voids.
Consider all of this and you are on your way to making the correct investment to protect your future.