Buying off plan property refers to buying property that is yet to be built. It is a risky venture because you are actually spending money on property that is not in existence and only hope that it will exist in future. However, buying such a property can be considered a good idea and comes with a number of rewards if you deal with the right people. This post looks at the pros and the cons of buying property off plan.
To succeed in buying off plan property, it is important that you evaluate the project you want to invest in. You must be prepared to take calculated risks. Also, you must be aware of certain legal aspects because this is a unique scenario where you are paying your money for property that does not exist. You will also not have the opportunity to view the asset before you actually hand over your hard earned cash.
So what are some of the benefits of buying property off plan?
As a buyer, you are likely to end up with a very good deal, if you buy at the right time. This is one of the opportunities that can help you secure a top notch property at a greatly discounted price. When buying off-plan, you will be required to pay the current market value of the property, not the price when its completed being built.
The value of the property you are buying now at the current market rate may increase in value before you are expected to complete. If this happens, you will possess a property that is worth more than what you actually invested in. In a nutshell. Off-plan property buyers are able to secure an asset of a higher value at the current low capital outlay. Take a look at the 18 year property cycle to understand more about the right time to buy off plan.
Note that in such a transaction, you will be required to outlay a deposit, that could be anywhere from 10 -25%. This is the initial amount you will be required to pay to help you secure the property you want. In some cases, you may not be required to pay the balance until when the property you are buying is actually built. This is good for the buyer because it gives you time to organise your finances to secure the property. It also gives you an opportunity to sell off any existing property without necessarily having to resort to bridging finances.
If the property goes up in value and you are getting a mortgage to cover the balance you can’t use the capital growth as an additional deposit. Here’s an example:-
Purchase price *300K
Deposit required by the builder *20% = 60K
Property value increase between signing initial contracts and completing *20%. New value 360K, equity of 60K
Deposit required by the bank *30% = 90K minus 60K already paid, therefore outstanding to be paid by cash 30K (not by the equity in the property)
In the event that the market experiences growth, any property purchased off plan may have its value increased by the time the building is completed in two or three years. Generally, if things go as planned, the value of the property that you finally end up with will increase by at least 5% per year.
Cons of buying property off plan!
As mentioned, buying property off the plan has risks you must be prepared to take. First, you will be buying a property that is just on paper. Meaning that you don’t have an opportunity to view the property before you actually commit your money. This is a significant risk since you may not actually know how the finished product will look like or the quality of the final product. The finished product may not actually live and measure to your expectations.
In most of the cases, NHBC will only guarantee 10% of the deposits. This means that if things don’t work as planned you may only recover 10% of his investment. What happens to the other 90%?
Lastly, if the property declines in value you could have negative equity on your hands. If you intend to cover the cost of the purchase with a mortgage you may need to find more deposit funds as the bank will expect any shortfall between valuation and purchase price to be pick up by you not them!