Buying property off plan: the pros and cons
Buying off plan means you purchase a property before it has been completed, often before construction has started on the site. It’s common for such properties to form part of a large scale development.
For many, the appeal of off plan is the property is brand new and buyers can secure a unit on the day of launch simply by putting down a relatively small deposit. If upon completion the property increases in value, then the buyer really benefits.
However, last month the All Party Parliamentary Group of MPs raised concerns about the quality of off-plan properties following an inquiry into the industry. Some commentators even suggested prices were being inflated, making it more difficult for first time buyers to get on the housing ladder.
Off plan purchasers were hit particularly hard during the 2008 financial crisis after they put down deposits only for developers to run out of money and abandon projects.
With this in mind, we look at the pros and cons of buying off plan, and list some top tips on what to ask a developer if you’re considering this route.
Pros of buying off plan
One of the main advantages of buying off plan is the fact that the property is brand new and unused and you can have an input into the interior decor, fixtures and fittings.
When you step into a show home, you’re often sold a particular lifestyle and many buyers are impressed by the latest designs and clever ideas which fit around today’s modern living, such as bike sheds or nifty space-saving layouts.
Buyers can also have a say in colour schemes and are often given an option of packages for the quality of the finish based on their budget.
The buying process is usually simpler. The developer can provide a solicitor, all the usual legal searches have already been completed and when you view the property/site, you can exchange there and then.
Another big advantage of buying off plan is the selection you get. Unlike purchasing an existing property which only becomes available when the owner’s ready to sell up, with off plan, you can pick from a range of different houses, apartments or studios, and even the exact location of the property within a development block.
And as everything’s new, a new build warranty will be available on a purchase, which could be a 10-year insurance policy against any construction defects.
“Contrast this with an older building, there is unlikely to be any maintenance in year one and then very low maintenance for the first few years,” says Dominic Field, director of Temple Fields, a property investment search agency.
As well as pros for first time buyers and remortgagors, there are also positives for buy-to-let investors.
Field says historically, new build has been used as a means of speculating on the residential property market.
“In a rising market purchasers would put down a 5% or 10% deposit and maybe have to make an additional payment 12 months later and then exchange and complete. Where the market is rising and they are permitted to sell on before construction is complete such speculators can sell and make a great return on the limited money they have invested,” he says.
Cons of buying off plan
Buying a property is one of the largest financial transactions you’re likely to make and Fields says one of the disadvantages of buying off plan is the price: “The properties tend to be more expensive than non-new build dwellings, priced 10% to 20% above the local market prices for second hand stock, because they’re shiny and new and sell a particular lifestyle.”
He compares it with buying a brand new car, which loses around 10% of its value simply after it’s driven off the showroom forecourt.
As well as being more expensive than similar properties in the area, Field says off-plan homes often come with limited space, meaning the total living space is much smaller relative to older properties and many apartments within development blocks have no ability for the owners to extend to add value.
And despite the ease of having the paperwork done for the buyer, Fields says mortgages can be harder to obtain.
“It’s difficult to establish the value for a new build compared with older properties where there are immediate comparables,” he says.
If the prices are inflated, the lender may not be prepared to give you a mortgage as in the case of repossession, it may not get back the original amount loaned to the buyer.
As off plan tend to be more expensive, the yield for a buy-to-let will be much lower and there may be stricter criteria for obtaining the mortgage, such as achieving a higher rental income.
Gary Patrick, regional sales director of Barratt London, also cautions : “If an apartment’s completion date extends beyond six months, buyers need to be confident that they will be able to extend or replace their mortgage offer as their agreement to purchase is still valid and they will be held to their contractual obligation to purchase even if the mortgage offer expires.”
As with other leasehold properties, there will be service charges to pay but Field says due to the facilities available, such as concierge, pool, gym and lifts, the service charges are frequently high.
And just because your property may be ready to move into, it doesn’t mean the developer has finished building. These apartment developments are usually built in phases so you may need to get used to ongoing building noise and dust as the other buildings in the community are completed.
Turning to buy-to-let investors, while they can be rewarded with large returns when the market is rising, conversely, in a falling market, they can find themselves liable to complete a purchase which is worth less than they paid.
Of course, one of the big risks for buyers is losing their deposit should the developer go bust.
The Home Builders Federation (HBF) says there is a deposit protection code which requires builders to tell buyers how their deposit will be protected.
In the majority of cases, this is through the National House Building Council, although it is subject to policy limits which are typically 10% of the sale or a maximum of £100k.
The HBF adds that where larger deposits are taken, protection will usually be through some kind of trust or client account with solicitors.
Top tips when buying off plan
Angela Kerr, director of the HomeOwners Alliance, said potential buyers should have seen all the plans and specification of the property by the time they come to instruct solicitors.
“Don’t rely solely on promotional glossy brochures. If you don’t have the original specification then the developer can essentially change the build and you’ll get something you weren’t expecting,” she says.
Patrick agrees. He says buyers should look at the whole picture, such as computer generated images of both the communal facilities as well as the property.
He adds buyers should look at the developer to see if it has a good track record.
Kerr says that when it comes to getting a mortgage for an off plan property, buyers should be aware that any mortgage offer is likely to be valid for only six months.
“The completion date for purchasing off plan can extend beyond this time, so some lenders offer longer validity periods for new build purchases,” she says.
She recommends buyers check their contracts thoroughly to ensure it allows time for a ‘snagging list’ to be drawn up ahead of completion – that is a list of items that the builder hasn’t completed effectively or defective work to be repaired.
She says: “It’s surprising the number of outstanding issues your new home has when you move in. By going round the property, this will mean the developer still has the financial incentive to fix your snagging list quickly – and before you move in.”
Patrick of Barratt London also suggests buyers find out exactly how long the development will continue to be built and how it will be managed by the developer.
“A responsible developer will be able to reassure you on all of these points so make sure you are satisfied with the answers before you agree to buy off plan,” he says.