CategoriesInvestor Advice

*This post was inspired by our latest Pure Property podcast episode on buying off-plan property. Listen to it Here.

So, after doing some research on the best property investment strategy to choose, you’ve come across the intriguing concept of buying a property off-plan. But what are the best questions to ask to find out if this strategy is the one for you?

Buying off-plan is an excellent option for those looking to achieve high levels of capital growth and maximise their budget with a high-spec modern unit.

However, like all investment strategies, it is not without its risks. Off-plan investing is a niche and as such, needs to be be approached with care and due diligence.

This article will cover Track Capital’s top 10 questions you should ask when buying a property off-plan.

1. How Long is Too Long?

The first question to ask yourself would be; are you happy to wait? Investing off-plan could mean waiting anywhere from six to thirty-six months for a project to finish construction and be handed over to you.

Throughout this waiting period, it is important to understand that you will not be able to generate rental income from the property. If earning income straight away is pivotal to your investment strategy, off-plan may not be the right path for you. But that is not to say you’ll be out of pocket when all is said and done.

One benefit to buying off-plan is that you will usually be able to purchase your unit at a significant discount in comparison to paying the premium price you would on the open market.

With off-plan properties, you can put a deposit down and then capitalise on the full property value growth during the construction phase. This does mean you will have to be content to wait anywhere up to 2 years before you start seeing that monthly income roll in, though, and it is important to understand that.

 

2. What is My Level of Risk Aversion?

With any investment, there is always some element of risk involved and within reason, investors will take steps to manage these. 

Before embarking on an off-plan investment venture, you need to ask yourself what your tolerance level to uncertainty really is. You may perceive it as being riskier if the developer hasn’t got a strong track record. If this is a concern, you may prefer to go with a more seasoned and well-established developer.

An investment advisor should work with you to get a true indication of the risk you would face in any venture and how comfortable you are with that before proceeding. It is well-known that off-plan properties can be very lucrative, but with reward comes risk and it is important to bear that in mind. 

One main concern for investors is whether construction will actually start, or whether it will finish on time. Another is the safety of any deposit put down.

Off-plan products will often come with packaged incentives, and some offer rental assurances where the developer contractually guarantees a paid-for rental period. Many products also come with a deposit protection scheme. It is a good idea to speak with a trusted advisor to find out the best options available to you.

 

3. What is the Developer's Track Record?

This question forms part of your due diligence process and the answer should evaluate the developer’s experience and history.

You will need to find out what the developer has done before and whether they completed similar projects before. Was it in the same location? Did they finish on time and on-budget? What was the product finish like and was it in line with the images that you were promised?

You are also within your rights to ask how their previous similar projects performed. Did they rent well – and rent quickly? Another question to ask the developer is whether the value of their completed properties has increased since first launched. If the build is poor, that can affect future value rises. 

Get a good look at the individuals involved with the project and find out their history. All this should give you a  good insight into developers.

It is important to remember that even if a developer has had issues in the past, it doesn’t necessarily mean you should disregard them. Instead, look at how they dealt with their problems.

Construction is not easy or straightforward, so if a problem arose, how did the developer deal with it? Were they proactive and transparent in their handling? If the developer meets the challenges head-on and communicates well with investors, it is well worth staying with them and weathering the temporary storm.

 

4. How Much Do I Need to Pay Before Completion?

The reason this is an important question to ask is that you need to manage your cash flow and decide on the amount of money you are willing to put down. When purchasing an off-plan UK property, a deposit will be required in order to exchange contracts. You will also need to put down a reservation fee beforehand.

Off-plan construction phases, deposit levels and reservation fees will vary from both developer and developments. Deposits generally range from 10% to 30% to be paid upon exchange of contracts, but some development deposits can be 40% or even 50% of the total purchase price of the property.

Of these percentages, only 10% is usually insured unless the developer states otherwise. You need to make sure you’re comfortable with this, because anything over that warranty coverage will be exposed as a risk.

 

5. Is My Deposit Protected and If So - How?

There are a few different deposit structures that will provide protection to investors. The most common one is where 10% of your deposit is protected through a building warranty which the developer has to adhere to. This can be NHBC or an equivalent, where effectively 10% of your deposit is protected via a third party.

It will give you some peace of mind, knowing that money is secure. But what about the rest of your deposit? The remainder can technically be exposed, meaning it could be used for the construction of the build; held in the relevant legal solicitor’s account and drip-fed down to the developer as the construction progresses.

Some developers do offer some form of tangible security for your entire deposit, such as giving you a charge over the land itself. In that instance, if the developer had to sell the land to get their funds back, you would then be entitled to get some form of refund back.

6. What is the Timeline for the Construction Process?

Regardless of whether you are purchasing off-plan at an early stage or later on, you will undoubtedly want to know a structured timeline for construction.

Larger projects should be anticipated to take longer and because of this, there is more potential for delays and setbacks. In order to reduce delays, you can pick projects with a shorter turnaround time.

A good example of this would be a commercial to residential build, which tends to take less time to complete as much of the infrastructure is already in place. Other options include searching for off-plan properties with shorter construction periods or investing during a later stage of construction. 

However, it is worth noting that late-comers to off-plan investments are likely to pay a higher price for their units, as capital gain increases during the construction phase. 

Another reason to consider the timeline is when factoring it in for mortgage applications. The majority of lenders will extend an offer for a maximum of six months before it becomes invalid. Ideally, you should be looking to apply for your mortgage 4 to 5 months prior to completion.

7. What is Likely to Happen in the Construction Period?

While you are analysing developments and project opportunities, you will likely be given a lot of content by both the developer and also an agent or a consultant that you’re working with. Between them, they should fully prep you with information about any major projects happening in the area, the regeneration of the current market, growth percentages and all the details that will enable you to make an informed decision.

Ultimately, you need to ask; what am I going to end up with when all is said and done? An example of this would be purchasing a property at £200,000 that is 24 months away from completion. Going by the current UK market growth, the local market you have invested in may perform exceptionally well during the construction phase.

The result could be that the property you purchased for £200,000 could end up being valued at £240,000 by the time you are handed the keys. This indicates a huge return on investment when you only had to put down perhaps 25% for your deposit.

8. What Are The Expected Returns from the Rental Income?

This is a very important question because you are investing in a property as a financial asset, with the intention of making money on a monthly basis from rental income. You will also likely be considering the capital growth aspect as well, but on a monthly month basis, the rental yield will be generating your income.

You will find that most developers will have an information pack about that, which should give you an indication of what they are expecting the rents to be. They will also have comparables of similar properties at similar locations to enable you to accurately forecast rental income.

Despite developers offering you their information pack, it is wise to also perform your own due diligence and seek the advice of an independent advisor.

If you are offered an assured rental, make sure to ask whether that yield is realistic within the local market. Remember to ask what the returns are likely to be once the guarantee period is over and whether the assurance accurately reflects what you are likely to get later on.

9. What is the Forecast for the Local Property Market in 5-10 Years?

When investing in property, the most lucrative strategy is to think long-term for capital appreciation rather than just focusing on monthly yield. Don’t hesitate to ask an advisor to provide a full data-backed analysis of any local market they are recommending you invest in.

This will involve looking at the economic forces likely to have a long-term impact on the area, asking for information on the planning of the area immediately around your development and looking at how properties similar to your own are also likely to perform in the long-term. You can use this plan for the future and to create whatever exit strategy best suits your overall goals and ambitions.

10. What Are the Incentives for Buying Early?

Every investor will enjoy asking this question. Buying an off-plan property will usually include a range of unique incentives and perks which can vary widely from development to development.

The key phrase here is: if you don’t ask, you don’t get. Developers can offer bespoke discounts, rental assurances, interest on deposits, furniture packs, free parking spaces and a whole lot more. Don’t be afraid to negotiate – ask the question! Your advisor is there to fight your corner, and they will work hard to secure you the very best deal possible.

Remember to factor in these incentives when calculating your net profit, both short and long term. There are thousands of pounds in savings just waiting to be snapped up by the savvy investor.

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