It is extraordinary that the practice of viewing a muddy hole in the ground (or just viewing computer generated schematics), entering into a binding contract with payment of a 10% deposit to purchase a flat which may, or may not, be built upon it at some point in the future, has grown to epidemic proportions in recent years. This is buying “off plan”. The reasons for this epidemic are obvious but, in particular, the availability of new properties is not keeping up with the apparent demand. There were many burnt fingers during the recent recession when purchasers who had, prior to the recession, exchanged contracts to buy off plan found that the value of their prospective flat fell dramatically during the recession and often with the subsequent inability to obtain the necessary mortgage finance to complete. Despite that, buying off plan, whether a flat or house, is now being pursued by UK and overseas buyers with great abandon. Therefore, some downsides and upsides to note below:
Some depressing downsides:
- Mortgage offers usually have a life of 3-6 months, depending on the lender, so if completion of the build is anticipated beyond that lifetime, there is no guarantee that the proposed mortgagee will extend the lifetime, on the same terms or grant finance at all. The mortgagee will re-value once the flat is complete and if the market has fallen during the construction period, the mortgagee may not grant a mortgage or may be happy to grant a mortgage but of an insufficient amount to complete the funding for the purchase price set out in the contract.
- The seller could go into liquidation during the construction period so the 10% deposit paid by the purchaser upon exchange of contracts may be lost. In addition, the construction may be incomplete as a result and possibly with no certainty as to when, if at all, the construction may be completed.
- If the property market falls and the purchaser fails to complete because of inadequate mortgage funds or, for example, there is a change in personal circumstances, such as unemployment, the seller will forfeit the 10% deposit paid by the purchaser upon exchange. The seller may also sue the purchaser for any loss suffered by the seller as a result of a re-sale of the flat by it at a price which is less than that stated in the contract.
- Completion of the construction is frequently delayed beyond the anticipated date in the contract and contracts often allow the seller to put back the completion date. Accordingly, it may be difficult to work to a definite date for the purchaser to take possession of the flat.
- On more aesthetic grounds, it can be very difficult to imagine the end result of the construction arising from the muddy hole, its surroundings, whether or not there will be any continuing annoying construction going on around the flat, the likely neighbours, etc.
Some uplifting upsides:
- Buying off plan should take place during a period when the property market is rising, so crystal ball time. If the market rises during the construction period, the price to the purchaser in the contract stays the same, so there may be a healthy increase in the value of the now completed flat.
- Certain sellers may require stage payments of the purchase price during the construction period and which some purchasers may find easier to manage.
- The mortgagee may be persuaded to lend a little more to the purchaser if the value of the flat has increased, which could be the next deposit on another flat to add to a fledgling property portfolio.
- If the contract permits it, the purchaser may be able to assign the benefit of his contract to a third party at a price which repays to the buyer his deposit paid upon exchange of contracts and a profit on top, commonly known as flipping the contract.
- The purchaser could end up with a beautiful flat, sometimes furnished to a high spec, with no on-going development around and about, beautiful landscaping and fun neighbours!
Essentially, buying off plan is a game of poker in predicting the rise and fall of the property market. As the purchaser steps through the front door, will there be a scowl on the purchaser’s face at the drop in value of the flat or a big smile and a pat on the back for reading the market correctly and enjoying the increased value of the flat? So, shuffle the pack of cards and polish that crystal ball, but make sure your lawyer is looking over your shoulder at the paperwork before you place that bet!!