What are the disadvantages of purchasing property “Off Plan”?
There certainly are many advantages to buying property Off Plan, but the disadvantages can not be ignored.
One of the major factors which prevent increasing numbers of investors and homebuyers from buying Off Plan is that you are committing yourself to purchase a property which you can not physically see or inspect. The decision to buy Off Plan property is based solely on a selection of plans and elevations and a brief specification from the developer/agent. The major concern is not that these details will change dramatically from the Off Plan stage to the completed product, but that what the individual may envisage the end product to be will be different. A purchaser could find themselves in a situation to be legally bound to complete on a property which they no longer desire.
Another risk of buying Off Plan is that you are committing yourself to buy a property which will not be completed for a period of time which could be up to or exceed 12 months. If a buyer found that their circumstances change from the Off Plan stage and needed to re-sell quickly, their options would be limited until they had at least completed on the property. Assignable contracts can allow buyers to re-sell their contract to a third party after exchanging contracts with the developer. Astute Off Plan buyers should certainly give consideration to negotiating the inclusion of an assignable contract, to allow for unforeseen circumstances and increased flexibility. In some cases astute investors have used assignable contracts to re-sell before completion of the property and realise a profit from the increase in property value between the time of Off Plan reservation and re-assignment. But this article is not about the advantages of buying Off Plan, so let’s plough on with the potential disadvantages…
In a market where property values are falling, you can imagine how frustrating and worrying it would be for an Off Plan buyer who is tied into a property purchase. Seeing their new build property decrease in value, potentially every month and in many cases by more than their earning income!
Let’s say a buyer reserves their chosen plot in a development Off Plan and promptly exchanges contracts with the developer (committing themselves to the purchase). There is 12 months until completion and the agreed purchase price is £200,000. If the property market makes a downturn (or was already falling) and property values are decreasing by 10% per annum, this buyer could see themselves with a property worth only £160,000 on completion. A loss of £40,000 in a year! This then leads to potential mortgage problems, as the developer requires the balance of the original purchase price of £200,000 upon completion, based on a property which is worth only £160,000. This situation also causes problems for the developer, as many buyers will not be in the financial situation where it is possible to complete and would prefer to suffer the consequences of not completing on their contract. I would love to say that buyers would never commit themselves to buying Off Plan in a falling property market, but unfortunately this situation has happened far too often in the past and is sure to happen again in the future if or when property values go south.
However, I do not want for this article to be all doom and gloom. It is not to suggest that buying Off Plan property does not have benefits or it will certainly end in a substantial loss for buyers.
Buying Off Plan requires an element of research to be undertaken. By “an element of research” I mean as much research as is necessary for the buyer to satisfy themselves that this is the right option for them. In this case, there is no such thing as too much research. The more the better!
Research the local property market, speak to estate agents and ask their opinion on the future of the property market. Although nobody can say for certain what will happen in the near future, a selection of advice from local property specialists will allow you to make an educated decision. Not sure if the Off Plan property prices are in line with current market values? Again, speak to local estate agents or even instruct a RICS Surveyor to undertake a property valuation on your behalf.
If the feedback you receive is not a resounding “go for it!” then it may be in your best interest to decline buying Off Plan at that time. It may be that the timing in the current property market is not right or that the actual development itself is set for success.
But when you find the ideal Off Plan opportunity, you could be a fool to miss it.
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