Landlords buying BTL property off plan
BUYING OFF PLAN
What is buying off plan?
The term buying off plan simply refers to the fact that a potential investor or property owner buys a residential property that is not already habitable and is in most cases not even built. The investor has in this situation to study very carefully the plans that the developer has for the building and select an investment based on what it will ultimately look like. There are significant risks associated with buying off plan. These are as follows:
- The housing market may have moved during the construction process. This will be good news if property prices have gone up, but very bad if prices have fallen because the investor is contracted to purchase the property. The investor will loose their deposit which is at least 5% of the purchase price. Some contracts allow the process of ‘flipping’. This term refers to the process where an investor sells on to another party the right to buy the property at an agreed price before completion and the balance of the monies are due.
- There is a risk that the development may change from the original specification that the developer gave. The chances are that any changes will be minor; a slightly different tile or carpet than that originally shown. But they could be more significant. For example; on a suburban housing estate developers frequently alter the housing mix to meet market demand.
- If the developer goes bust the administrator or liquidator will still have to honour the original agreement between investor and developer. However, the bankruptcy process is likely to slow down the development process meaning the development could be months if not years late.
- Investors buying off plan will have to pay a deposit within so many months of putting down a holding deposit in order to reserve their investment. This means that the investor may have to tie up significant amounts of capital including the loss of interest on this sum whilst they wait for the development to complete. It is possible to avoid paying a deposit through the use of a financial guarantee scheme called an exchange traded bond. This allows a property investor to replace the cash deposit with the bond.
The attractions of buying off plan.
The attraction for many investors of buying off plan is two fold.
Firstly, for speculators who are looking at ‘flipping’ their investments this is a way for them to make a very high return on their capital in a very short period of time. Secondly, many residential property investors have utilised the fact that a developer offers a gifted deposit to enable a landlord to purchase an investment property without effectively putting down any of their own capital. A gifted deposit which does not only apply to off plan investments is where the developer incentivises
the purchaser by way of a “cash back” sum payable to the investor as a reward for committing to purchase the property. This deposit can then be used by the investor as their deposit. The advantage to the property investor is that the mortgage company will issue a mortgage based on the gross value of the residential property. This effectively means that the investor secures the property without using any of their own funds. Mortgage companies have become more cautious about these types of deals and many will only lend a reduced multiple on new build properties.