There are many different ways to invest in property: buying buy-to-let residential or commercial properties, purchasing shares in property companies, or choosing funds that focus on property, to name but a few.
For those investing in bricks-and-mortar property, there are various decisions to make – such as whether to buy off-plan. With the lure of greater potential returns, it’s a favoured option for some. But what does buying off-plan mean, and what are the risks?
What does investing in off-plan property mean?
Buying an off-plan property is simply the act of purchasing a property before the building work has been completed. This may mean that you purchase before building has even begun, or – more likely – that you purchase the property while building work is in progress.
In off-plan investments, buyers will purchase a property based on its plans – or, in some cases, may also be able to see a computer-modelled walkthrough of what the property will look like when completed. Property development firms welcome off-plan purchases, as it gives them some security before completion – while investors may find that buying off-plan can give them a better return on their investment. But while the rewards can sometimes be significant, buying property off-plan can also be subject to sizeable risk.
What are the risks of investing in off-plan developments?
While buying a property off-plan is likely to save you money in the short term (it is claimed that those who buy off-plan could often save 10-20% on the RICS valuation of the property by buying it before it is completed), the risks should not be underestimated.
Buying well in advance of the build being completed means that prices could still fluctuate – meaning that it’s important to do your research when it comes to the area, its economy, its transport links and more. Bear in mind too that your mortgage offer will most likely only be valid for six months – meaning that if there is any delay to the build, you may need to reapply. In addition, you may find that some lenders will refuse to make a mortgage offer for an off-plan purchase.
If you pull out before completing the purchase, it’s likely that you will lose your deposit – and while those buying new build properties are expecting a certain level of quality, 34% of buyers of new build properties stated in a 2017/18 survey that their new property had more problems than they were expecting.
Founder of Thirlmere Deacon, Stuart Williams, believes that significant increases in value between purchase and build completion are possible. He says, “It is not uncommon for some investors to have made up to 100% growth on the value of their unit between exchange of contracts and completion”. However, he is also clear to state that there are no guarantees, adding “it is important to be investing in areas with strong demand, consistent growth potential and also invest with developers who have financing in place and are not using the investor’s funds to complete the build”.
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