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Off Plan property purchases are when you buy a property before it’s built. Some investors specialise in off-plan purchases and swear by this strategy. This is because you can buy off-plan properties at a discount – more on that later.
In this article I’ll explain what to expect when you buy a property off-plan and how to negotiate discounts. I’ll also cover the risks of this strategy and how to mitigate them. It’s definitely a strange strategy! After all, you wouldn’t buy a car or a computer before it’s built.
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Off-plan is where you buy a property before it’s built. You might buy the property during construction or before building work has even started. Unlike ordinary property purchases, you won’t need an estate agent. You buy the property directly from the developer.
So what happens in practise? You’ll visit a marketing suite on site and be greeted by some smart looking sales executives. The suite normally contains a model of the development, a video presentation and a show apartment for you to walk inside. You can also ask for a tour of the building site.
You can expect to receive a pack with the following information
- List of the properties available
- Layout and square footage of each property
- Price of each property
- Expected service charge
- Expected rental income
If you decide to purchase a property, then you’ll need to pay a deposit to secure the unit. You’re then provided a payment schedule that you need to meet. The developer will have a lot of units to sell in order to make their project viable. So make sure to request a discount on asking price!
- You can get discounts on asking price
- Newly built property should be high quality with fewer maintenance issues
- Many investors buy off plan properties for cheap, and then sell once the unit is built
- The developer could go bankrupt before the property is built
- You can’t see the property before you buy
- More difficult to get a mortgage for an unbuilt property
I alluded to the investor strategy above. A very popular strategy is to buy a property off plan at a discount. Then once the property is built, immediately sell it. The idea is that the newly built property will be more expensive than the partially built one. You need to be careful with stamp duty and other costs, as that will eat into your profits.
An investor might own the property for 1 year. Once they sell the property, they can release their capital and repeat the trick. Best of all, you don’t have to deal with building work, refurbishments, licenses or tenants. This strategy is one of the simplest property strategies to apply.
This strategy was exceptionally popular before the financial crisis in 2007. Prices were rising fast, and people would make large profits by the time it came to sell. The off plan gravy train isn’t what it used to be! During the financial crisis, a lot of developers went bankrupt and investors lost all of their money. There are still people that do the off-plan strategy, but the profits aren’t as high as the golden days!
I mentioned above that investors can obtain discounts for off-plan properties, but how do you do this in practise?
To understand why these properties sell at a discount, you need to understand the business model for developers. When a developer starts a project, they probably won’t have enough cash flow to complete the project. They need to make property sales to bring in cash and complete the building work. So it may not be possible for developers to wait until they get high offers - they must sell units, or they’ll fail.
This dynamic brings opportunities for investors. It can be useful to make a low offer before the end of the quarter. Typically, the developers will have sales targets for each quarter. If they haven’t hit their targets then a low offer is more likely to get accepted.
The biggest risk of buying a property off plan is that it never gets built. The most likely reason is that the developer goes bankrupt. If that happens, then don’t expect to get your deposit back.
There are ways to mitigate this risk. One way is to buy from a reputable builder. Companies like Galliard and Barratt have been operating for many years and are unlikely to go bankrupt at a whim.
You can also get insurance. NHBC protection ensures that a deposit (up to 10%) is insured, if the developer goes bust. Another solution is to get a developer to put your deposit in an escrow account.
Off plan properties are one of the simplest strategies that investors use. Despite the simplicity, if you apply the strategy well, it can be very lucrative. The strategy is also attractive as you can earn good profits without doing too much work. Sounds pretty good right?! In this article I’ve explained what off-plan properties are. I’ve also covered the risks involved, and how you can mitigate these risks.
If you’re interested in more advanced property strategies, then check out the articles below: