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Danger - Buying one of too many off plan properties can kill your profits stone dead.
Property Millionaires' Club October 2003 - Lady Lea
Bulk buying off plan has been a fast growing trend since early 2002. In this time I have had a chance to experience first hand, and with fellow investors what can go wrong with this type of investing. Here's what we have learned and what you need to be aware of.
1 - Spot the biggest profit killer. Many people getting involved with this type of investment rely on information supplied by "finder" companies and often pay fees of around 2% to get "no money down" deals and gifted deposits as well as large discounts of around 15 - 20% below the market value. What most of the investors are hoping to do it sell back to back and make a quick buck or hold onto their property and rent it out. The information you recieve can make these deals sound very exciting, but often fails to inform you that you are running a high risk of completing with fellow investors who have investedd in the very same development. Often these deals can be for 60 appartments ore more - therefor you could be competing with 59 other investors in the same building, assuming each property is sold to a seperate investor. You are enticed by paying a small deposit for a very high return in say, one or two years' time.
2 - Get the lowdown on pre-valuations. Valuers are human beings and some can be encouraged to write a "suitable" valuation for the person paying for it (see confessions a true property valuation). If you are presented with a pre-valuation, ignore it and do your own research. Take an example of one purchase I looked at. The plot was available for a discounted price of £220k, its list price was £390k, and its true current day market value was £250k (from my own research)
My valuation was paid for on the basis that I wanted to have "loan to value" financing and achieved, from a friendly valuer, a valuation of £390k. This would have meant I could get £332k cash out of this deal, giving £220k to the vendor / developer, retaining £112k for myself. It would also have meant I could not dispose of the property unless I could come up with the shortfall. This valuer would have been in a lot of trouble with the lender if the property had been reposessed.
3 - Understand the key facts about specifications. When reserving your "fantastic deal" with the helpful finder, you are mostly given very minimal specification sheets, which are open to interpretation. Be wary of the term "High Spec". This is totally non-commital and what you might think of as high spec might not be the builder's definition of the same term. Make sure you get named brands or at least name brand equivalents so that you have some firm information to pass on to your selling or letting agent. This can influence the price quite considerably. It is important that you fully agree the specifications of any property before the exchange of contracts. With one flat I almost purchased it made £100k differenc to the resale price. The builder would not commit to firm specification so I rejected the deal.
4 - Get the know-how on funding. Most finders will promise you no money down or cash back deals, and according to their figures, they may well be. But thiss doeas not necessarily mean that you will get that funding. Pre-Planning is very important. You may not meet the criteria. You should also know that lenders update their products all the time. Gifted deposits may have been on offer last month but not now. Never rely on what your finder tells you about funding. I have many investor friends who have been promised something quite impossible. They just did not meet the criteria. You could end up having to find extra funding - and you could end up loosing it all if the property will not sell or rent for what you would have expected. It is very risky taking out loans that you expect to repay from the resale of your property. There is stif competition on some new-build developments.
5 - Understand the reality of back-to-back sales. Selling back to back is one of the hardest things to achieve. It is my experience that most selling agents have no idea how to sell a property that is not built yet. They will complain that they have nothing they can take people around. Lining up a buyer to complete at the same time as you is the next hurdle. You are aware of the urgency of completion and could have everything in place - but you are relying on the person buying the plot from you to get themselves together in time. At the last moment, they might not get their mortgage and you loose the contract. This happens - developers are molre than happy to keep your deposit and sell to another buyer as, quite often the prices have gone up since they sold it and they can make more money. This leaves you with solicitor fees, a lost deposit and a finder's fee to pay.
