Off-Plan Property Investment Opportunities & Overview
Last updated 16th December 2020 • Lois Arcari • JaeVee
What is an off plan property?
Investing off plan is when you buy a house before the property developer has finished building it - or even before construction begins.
With the sharp rise in new builds, it’s quickly becoming more popular than ever before - but is it really worth using this property investment strategy to develop your portfolio?
- Choosing an off-plan property developer
- Off plan mortgage
- Buying off-plan stamp duty
- Flipping off plan property
- How to sell your off plan property
Off plan investment alongside experienced property developers
Pros of investing in off plan property
Investors can often be wary of investing in off plan property - worried about completion times or the finding trustworthy developers.
So what makes off plan property for sale attractive to so many investors despite the risks?
Off plan developments usually ask for smaller deposits than usual - about 10% on average - and buying off plan property often gives you the chance to help shape the design and build.
It’s an especially smart strategy if you’re buying in a saturated and pricey market.
Here’s the low-down of the benefits of this more hands off property investment strategy:
- As these properties are sold below market value, you can gain great capital appreciation once the property is completed and will then be priced at the current market value.
- If you need to buy cheaply, e.g are a first time investor, this could be the difference between taking action and waiting around until you gain the profits to go the traditional buy to let or buy to sell routes.
- You cut out the middleman and go direct to the developer when buying. - Developers have more incentive to sell their property than your average homeowner and you avoid expensive agent fees.
- The house will come with a new build warranty and you won’t be subject to buyer beware like you are when you purchase an existing property.
- If you find any structural faults once the build is over you can have a contractual right to sue the developer for the cost of fixing it - taking the risk away from you.
Like every strategy, investing in off plan property has its risks.
- The off plan mortgage market is more niche, and requires more research to get a good deal.
- There’s a long wait between buying the property and it actually coming onto the market. Depending on what stage you buy at, it could take more than a year
- with everything from extreme weather to company problems able to throw the build off schedule.
- If you decide to pull out of the purchase, then you’ll lose your reservation deposit, and the developer may even have grounds to sue you if you can’t complete the purchase.
- You’re stuck if the developers collapse or drag out the build. You need to check with your solicitor how your deposit is protected, and the upper limit of your deposit protection scheme, which is usually limited. To minimise this risk, only ever work with trusted developers who have proven themselves through years of experience.
- Check that your development doesn’t have any issues with so called ‘adopted roads’ which the council themselves don’t take responsibility for maintaining. This can result in costly charges for upkeep, which could substantially squeeze your profits.
Things to establish
Make sure you set your expectations straight
As with everything, if you want to make a success of buying off plan property, you’ll have to set out clear expectations of what you’ll want to do once you’ve secured your off plan property.
Will buying off plan actually help you achieve your property goals in the long term or are you just using it as an excuse to diversify your strategies without much thought?
And think about how can you make sure you’re using off plan to your advantage, rather than just snapping up the cheaper prices without much thought.
Do you want to buy an off plan property in a new estate on the outskirts of a proven town or city?
Or do you want to look at emergent commuter towns?
Know your options
While it might seem like the only options for off plan are residential, you might have more options than you think.
While there’s certainly a market for residential homes and apartments, you don’t just have to target professionals or families.
This strategy can also work well for student accommodation developments.
There are options for commercial property off plan too, although they might be harder to find.
Pick the right off plan property developers
Choosing the right developers is essential to the success of buying an off plan property, as you will depend on reliable traders in this strategy more than in any other.
Good traders will ensure your investment gets off the ground on time, and in a perfectly saleable condition, so that buying cheaper through off plan doesn’t become an expensive mistake.
You should look into your developer’s track record to see if they’ve had any previous problems with getting to completion or going over budget, and how they overcame these.
The scope of your rental yields depends on the quality of the builds, after all, and you can’t take a faulty building to market.
This is why you have to define the sufficient quality for putting your property on sale and what your buyers will expect from the property once you put the property on the market yourself.
While you might have found a better deal on less flashy properties, they’ll still need to be structurally sound, and have something to make them stand out on the market.
Our investment safeguard and risk mitigation process goes into this much deeper, and you may be interested in investing alongside professional partners in the top 1% of developers who we choose to back.
Mortgages and off plan property
How do you navigate off plan property finance?
Buying an off plan property usually doesn’t pose much of an issue for lenders, as it’s becoming more and more common.
The usual method of borrowing for an off plan property is to reserve your property once you’ve checked with a mortgage broker that its an affordable investment, then pay your reservation fee of usually about £1000.
Once the reservation fee is paid, the developer will typically want an exchange of contracts after only 28 days.
When it comes to dealing with off plan property, you shouldn’t try to manage the legal stuff all by yourself.
A solicitor or conveyancer is a complete necessity when navigating complex legal requirements and protecting your money.
You should be wary of your developer pushing their own recommended solicitor, which could cause a conflict of interests and compromise the impartiality of their advice.
Instead, it’s best to shop around from your own contact base and beyond, while always looking for someone who is experienced in dealing with new builds.
When exchanging, you’ll also have to pay a deposit of approx 10% of the purchase price.
You should work with your solicitor to check over the legal implications of your purchase, draw up your buyer requirements and present any escape clauses should work on your property be delayed.
For further peace of mind, you’ll want to conduct a snagging survey, which will find any problems that need fixing, before you complete your purchase.
This methodical approach will help you should any problems occur later.
Buying off plan does usually affect the validity of your mortgage offer, shortening it to only 6 months, with this offer extended usually only offered if completion of the house has been delayed, but even then this often entails restarting your mortgage application so that it can be reassessed.
However, because of the delays that can be common to new build properties, some lenders have specific new build mortgages, with three months longer validity than usual.
When buying off plan property, it’s always wise to check in with a mortgage broker who will have extensive knowledge of the range of products on offer, and that you can complete your purchase in the first case.
Buying off-plan stamp duty
You will have to pay stamp duty as soon as you complete your purchase, based on the price you agreed with the developer at the reservation stages.
There are some investors that recommend ‘flipping’ the new build property to another buyer before completion to avoid paying stamp duty.
This, however, is potentially a very risky strategy.
Even if you were to use this strategy, you can’t avoid tax altogether - you’ll have to pay capital gains tax on the sale, and if operating as a limited company, also corporations tax on your profit.
Flipping off plan property
First of all, some developers do not allow buyers to flip their new builds, so you need to check that your contract is ‘assignable’ or eligible to flip.
You can never be sure that you can sell the property at a higher profit and, indeed, if property prices fall from purchase as you get closer to completion, you could be waving your profits goodbye.
How to sell your off plan property
You’ll need to be super confident that you can find a buyer who’s willing to pay the right price for your property.
It’s also important to check out the competition.
If other investors have the same idea, then the amount of sales within your area might kick start a downturn in demand.
A good strategy is to invest in a development which has an estimated completion date further in the future, so it will less likely be affected by any market blips long term.
If you do find market conditions too unfavourable, however, you’ll need to be prepared to put your move to a buy to let strategy until sales pick up again.
If it looks likely that you’ll have to do this, you can always create a ‘just in case’ back budget of extra costs for rentals, including extra furnishings, landlord insurance, or letting agent fees.
If you want to give your property the best chance on the buyer’s market, you should buy into a high end scheme from a well known developer, and as always conduct thorough due diligence to make sure you’re selling in a desirable area where buyers are more likely to pay premiums - while still making sure you’re buying in an area where there aren’t too many investors with the same idea.
Let us know your top tips for investing in off plan.
Please note this blog post is not to be considered as investment advice. We recommend you seek independent financial advice and conduct your own due diligence before making any investment.