We are advocates of investing in off plan property because of the benefits it can deliver to investors and communities. But before you jump in and buy your property, you also need to be aware of the risks of buying off plan and importantly, you need to know how to reduce these risks to protect yourself.
So what are the risks? Here are the questions you should be asking, so that you know how to reduce the risks and what to do if the worst does happen.
What if the building is delayed?
Construction is difficult and complex and despite the best processes, teams and planning, delays can still occur. Why? Because it’s impossible to predict adverse weather conditions, delays in materials or global pandemics and lockdowns.
It’s impossible to pinpoint an exact completion date 2 or 3 years in advance. Therefore your contract should include a short stop date – this is the earliest date you will be expected to complete on the property and a long stop date – which is the very latest that the property will complete.
Makes sure your contract includes a short stop and a long stop date (your solicitor will be able to advise you) and make sure you are comfortable with accepting these dates.
What if the long stop date is reached and the property isn’t completed?
Most long stop dates are 12-18 months after the short stop date. If the long stop date arrives and the property hasn’t been completed, it can be problematic for two reasons.
- Once the long stop date is reached, both parties (you and the developer) can terminate the contract. So even if you don’t want to terminate the contract, the developer might terminate the contract with you, meaning you have waited 3 years for a property that you can’t buy.
- The opportunity cost – whilst you will get your deposit back if the development doesn’t complete by the long stop date, you have no recourse for missing out on the potential capital appreciation in the event that property prices rose between the time you reserved the property and the long stop date.
Be wary of unscrupulous developers – dishonest developers have been known to purposefully push construction beyond the long stop date to take advantage of rapid price growth. This enabled them to cancel the contracts with original buyers and to then resell for significantly more.
This was a particular problem in Australia that has to led to some states requiring that the sunset clause (which allows developers to terminate the contract if construction goes beyond the long stop date) to require the consent of the purchaser or the courts, for it to be exercised.
What if the developer goes bankrupt?
If a developer finds themselves in a situation where they have paid too much for the land, or construction costs are more than they anticipated, they may simply not be able to build the building. Many sale and purchase contracts have protection in place to ensure your deposit is protected. You must check with your solicitor before you sign the contract to ensure this is the case.
What if my circumstances change and I need to sell before completion?
Successful investors always plan to hold their property for the medium to long term. But should you have to sell your investment before you complete, what are your options? Your contract will most likely contain one of three possible options:
- No right to sub sell or assign – you cannot sell your property before it completes (most likely because the developer has a lot of apartments to sell, and they don’t want more property competing than absolutely necessary). In this scenario, should speak directly to the developer, good developers will have a strategy to deal with these scenarios.
- Right to Assign your contract – you can assign the benefit of your agreement to another party. You’ll need the developer’s permission to do this and be mindful that if the new purchaser defaults and doesn’t complete – you will still be liable to complete as the original purchaser.
- Right to sub sell – this is your ‘cleanest’ what to sell an off-plan property. You will be able to sell the property to a third party and the developer has limited recourse if the new buyer fails to complete.
Remember – if you are selling your property prior to completion, you’ll need the permission of the developer to use any of their images, brochures or floorplans.
What if I can’t afford to complete?
It’s a sad fact of life that circumstances change, you may have lost your job or fallen on hard times. The reality is no one has a crystal ball and when you commit to buying an overseas property 2 or 3 years in advance of it being complete, you simply have no way of knowing if your circumstances will have changed during that time.
Unfortunately, for an investor if are no longer able to complete the purchase, there is no automatic right to pull out and you are contractually obliged to complete. Your contract may allow you to sell your interest (see above). If you fail to complete, you will forfeit any deposit and stage payments you have paid. The developer will also have the right to sue you for any loss incurred by not completing the contract. However, in reality it is unlikely sue you, but they will retain your deposit and stage payments.
What if the property is not what I was told it would be?
Prior to completion, most reputable developers will ask you to ‘snag’ an off-plan property. This allows you to check the developer has met all their obligations under the terms of the contract. This may include things such as checking the dimensions of rooms, to checking the paint finishes. If defects are recorded, the developer should then arrange for these to be remedied.
If you’re an overseas purchaser your letting and managing agent can carry this out on your behalf. Make sure you carry out this process thoroughly – the developer will be waiting for your money so it’s in their interests to resolve any issues.
Are there any cost escalation clauses?
You MUST check for cost escalation clauses in your contract (sale and purchase agreement) and lease agreement for any cost escalation clauses. Common issues include:
- Construction Cost Escalations – some developers may include cost escalation clauses, which increases the cost of your property if construction costs increase. You should not agree to a clause like this, as you would be both bearing the risk of the construction, future value and cost increases. This is more common in Australian developments than in the UK.
- Ground Rents – in the UK specifically, many developers have written leases for leasehold property which have highly onerous rental review provisions for ground rents. Within some of these agreements ground rents doubled every 10 to 25 years, whereas these review provisions should be linked to the Consumer Price Index. Read our article ‘What does leasehold mean’ for more information
- Service Charges and Strata Costs – it is worthwhile reviewing the lease agreement to ensure that the provisions with respect to the service charges are fair and reasonable.
But don’t let these potential issues deter you from off plan property investment. We have simply highlighted these potential risks so you know what to look out for and how to protect yourself and reduce these these risks. The more knowledgeable you are, the more successful you are likely to be.
We hope you have found this article useful, feel free to comment or ask any questions. For more information on about property investment check out our other articles and request your copy of our Buyers Guides from [email protected]
We’ve also produced articles specific to overseas investment property in the UK, Australia and New Zealand, so make sure you take the time to consider all your options and make sure your investment is right for you.
Important notice: Proptech Pioneer and its associated companies seeks to provide investors with guides, information and tools, but we cannot guarantee this information to be accurate or perfect. You use the information at your own risk and accept no liability if you rely on this information. Proptech Pioneer is not a tax advisor, conveyance, lawyer, financial advisor or mortgage advisor. You should seek independent advice from independent professionals before making any investment decision