BUY OFF-PLAN. ATTRACTIVE BUT DANGEROUS AND WITH A SCARY STORY
What does the term ‘Off plan’ actually mean?
Well it means that the property you are about to buy is not yet ready to be occupied. One extreme is that it isn’t even built, and it is just a grassy field, and really any stage after that, right up to it being almost finished, is buying off plan.
The process is not really different to buying any house; you view it, agree a price, exchange contracts and sometime later, you complete, and the property is yours.
Sounds good, sounds easy, I mean, what could go wrong?
The answer is “lots”. So why do you want to do this in the first place? Well the main motivation has to be being able to buy the new house you want before someone else gets there. It’s a “supply and demand” issue and a very valid reason to do it.
This sounds simple. The developer and their agents produce glossy brochures of the beautiful finished article. There may even be a “show house” to look round.
- an artist’s impression is just that – an impression. Check the plans and specifications because they will be accurate, the artists impression doesn’t have to be. It will show things like mature shrubs and trees, which make all look nice but may not be planted, either if at all, or where you expect, and if they are, they may take years to mature
- Show houses may not have the specification that you are actually buying e.g. sinks and toilets, tiling etc. They are likely to be the top specification on offer.
- Show houses, in order to look spacious, are known to use slightly undersize furniture! A dirty trick.
No agent will say that the houses are selling slowly. You will have it explained that they are selling like hot cakes and need to get in now.
- A discount? Well, there is always a premium to be paid for something that is new over something that is used, and the same applies to houses. So, the developer can make up their price for new house. They can’t charge what they like and there has to be some reasonability and comparison to other local property values. But if you get a “discount” it is a discount off their made-up price
- A discount if you buy quickly? Cash flow is especially important to a developer and more than likely they have bank finance to build the project. Be in no doubt whatsoever that the Bank will be pressuring them to know how things are going. Are they on schedule on time and costs? The Bank will be comforted if they are told that sales are taking place, even if they aren’t completing.
A Reservation Fee
This a normally a relatively small amount when compared to the house price, usually around £1000 upwards and is almost always non-refundable. You will be forced to pay it, but what does it mean in law – not much. Sure they will take the property off the market for a period of time but if you cannot show them that you are going to exchange contracts when they want you to (see below), then it could be lost.
At the point that you reserve a property you are unlikely to have sorted out a mortgage, so if your application for a mortgage is declined, you will have lost that fee. You are advised therefore, at the very least, before you go house hunting, to have a written “Decision in Principle” or “Agreement in Principle” from a mortgage lender confirming your personal eligibility subject to you being able to prove what has been said on an application form and subject to a survey (see below)
Exchange of Contracts and Completion
The developer and his agent will press you to exchange contracts usually within 30 days.
Let’s just check two really important jargon terms before we investigate the implications: “Exchange” and “Completion”.
In the buying process, “exchange” comes first. Frequently misunderstood, the truth is that you are actually, legally, formally buying the property at the time you exchange. The price and other terms and conditions are confirmed at exchange. The vendor, usually a builder/developer, legally contracts to sell you the property and you legally contract to buy it. They can’t pull out and neither can you – it’s a contract. Only by mutual agreement can the terms of this contract be varied. At exchange the developer will expect you to put down a formal deposit, usually 10% of the purchase price. Having your money helps their cash flow and will help them build, usually reducing the amount they have to borrow from the bank – so they will be keen to have it!
“Completion” is a formality that happens after exchange. On occasions exchange and completion can occur on the same day but usually completion is a few weeks after exchange. For Buy-off-Plan it can be months (or years) later. At some point in the future, when the property is finished and ready, the developer will contact you asking you to complete the purchase. They will give you advanced warning and give you a “window” in which to complete. Note that you are legally bound to complete when they ask you to; you can’t delay it without the developer’s consent.
If you are buying using a mortgage, as most people do, then you need at some point to make a full mortgage application. Use an independent mortgage broker who has experience in financing off plan properties. You would be foolhardy to exchange without a formal mortgage offer of advance and moreover, the solicitor acting for you will specifically advise you not to. As explained above, when you exchange you are contracted to buy and if you don’t have the mortgage you expected, you are stuck!
If you took the important step of obtaining a “Decision in Principle” to check how much a mortgage lender will lend you, did you include information on the following:
- Does the lender lend on new build sites? On houses, usually “yes” but on apartments the answer can be “no”.
- No single lender wants to find that they are the only one lending on all the houses or apartments on any single development. So, lenders will have a maximum percentage of properties on any given development that they will lend against. Make sure you are not beyond that limit of the lender’s exposure.
And then in order to get to get a formal mortgage offer:
- The lenders surveyor will visit, even if there is just grass to view. The surveyor will check the plans, building materials and method of construction. If the surveyor doesn’t like what he sees, you have a problem
- The lender’s surveyor will also form an opinion of the likely value, even just on architect’s plans, and they are frequently in disagreement with the developer, the latter always being very optimistic and the former duly sceptical. So, your price, or a discount you think you have negotiated, aren’t real yet. This can work hugely in your favour. Nowadays, very few lenders employ their own surveyors and most surveys are done by larger national firms. So, if a surveyor turns up one day having been instructed by one lender and decides his view on the value, he may be back the following day working for a different one for a different buyer. If he didn’t agree the developer’s value on the first visit, then he is unlikely to have changed his mind on the second visit. This is something you may want to point out to the developer and negotiate a new price – lower, obviously.
- If you are buying an investment property like a buy-to-let or a holiday-let, there is another criterion that the lender’s surveyor will check and that is the achievable rent for the property. You will have supplied your projection of the rent, supported usually with the written opinion of a local agent, at the time of your application and doubtless you will have checked that it fits your chosen lenders calculation for the rent required for a given mortgage size. If the surveyor disagrees with your projection on the “down” side, you will be offered a smaller loan and thus will need to put in a larger amount from your funds. Can you afford this?
- Once the lender is happy with the survey and all your documentation, you will receive a mortgage offer from them. Normally such an offer is open for 6 months, infrequently 3 months, but you need to check. Once it has expired, that’s it you will have to start again. Sometimes a lender will extend the offer but that will never be confirmed at outset. They probably will not even say that they might extend.
If everything has gone smoothly – lovely. Complete your purchase and move in and live happily ever after.
if things aren’t smooth, this usually is where you find out the extent of your horror story. The best way to illustrate this is with a true case history. Just about everything that could go wrong, did go wrong. I have changed the figures slightly because it is easier to understand in round numbers.
The client bought off-plan an apartment that he intended to use as a buy to let (BTL). The purchase price was £500,000 and at the time BTL mortgages were available for 85% LTV, so he needed a mortgage of £425,000. The achievable rent was £2,250 per month and this fitted his request for £425,000. He had already got a decision in principle, arranged by another adviser, so he handed over his holding deposit. The survey was done promptly, and the price and rent were agreed by the surveyor. He got his mortgage offer, his solicitor allowed him to exchange and he handed over the 10% buy to let deposit of £50,000. There was an expected completion 18 months later; after all it was a tall and prestigious block with over 300 apartments.
Then we had the Crash of 2008, only 3 months after he had exchanged.
The build was delayed for 12 months. So, some two and a quarter years after he had exchanged, he got a notice from the developer that he had 8 weeks to complete. At that point he came to us for a BTL mortgage. We checked with the lender who had given him the offer about 2 years earlier. Of course, it had expired with no scope for extension.
What did we find when we tried to find him a lender?
- The lender he had been with had now pulled out of the market altogether
- All lenders still in the BTL market would only lend 75% LTV on houses and 60% on apartments
- Many of the lenders still in the market would no longer lend on new build apartments, so our choice was very limited.
So, going back to the client we explained that he now had to find a bigger deposit. The maximum loan we could get was 60% of £500,000, namely £300,000. Having put in £50,000 he needed to find an extra £150,000. He was distraught; he just didn’t have that sort of cash and it would be very difficult to raise it anywhere including on his own home We advised that he tried just in case something came up and that we proceed with a mortgage application. He passed the personal underwriting and the application went to survey.
This is where it got worse. The only good news was that the surveyor stated that the achievable rent was £2000 per month, which was good for a loan of £350,000; fine because he could only have 60%, being £300,000. But, the surveyor believed that the value had dropped from £500,000 to £400,000 because of the Crash. This meant that the lender would only lend 60% of £400,000, being £240,000. Thus, he now needed to find the difference between £500,000 and £240,000 less the £50,000 he had already put in i.e. £210,000.
What could he do? The legal position was as follows
- He had exchanged at a price of £500,000 and the developer could hold him to it.
- He had 8 weeks to find a solution.
This was brutal but it is what exchange of contracts really means.
Has he lost the £50,000 he put in? Not necessarily, but it could be better or worse than that. The developer can claim breach of contract, take the apartment back and sell it to someone else. They are obliged to get a fair market price for it and our client is obliged to make up the difference between whatever the developer gets and the £500,000, taking account of the £50,000 of his deposit. So, for example, if the developer got £475,000 our client would get back £25,000 less some costs. However, if the developer could only get £425,000, they could pursue our client for the missing £25000 plus some costs.
In this case the developer came to a commercial compromise. They lowered the purchase price to £450,000 but only because every single sale they had made in the block had the same problem and they would have had to start from scratch on all sales. Had it just been one or two buyers with this problem, it might have been very different.
By hook and by crook he found the money.
There is a happy ending though. As we recovered from the Crash, by 2016 the property was valued at £650,000 and we were able to replace that hard-fought for deposit cash by remortgaging.
So, you have now bought successfully, struggled to do so or not, and have moved in. But the developer hasn’t finished the whole project. So what happens if there are delays or if the developer goes bust. Well:
- You may have to put up with living with a building site around you
- You may not get the pretty roadways, pavements and trees you were expecting on time or at all
- If there are building faults with your property and the builder has gone bust, you will have to deal with insurance company that gave him his building warranty.
I said at the beginning that I did not want to sound cynical and I hope having read this article that you are not put-off. There are 100,000 to 150,000 new homes built each year in the UK and nearly all are sold off-plan, so it does “go right” for the majority of homebuyers. So, I really do wish you “Happy house hunting”
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