Buying a new build property off-plan’? what you need to know

Buying a property before it’s been built can have its pitfalls, so be sure to know the facts before you proceed.

New build property house plans

What does ‘off-plan’ mean?

Buying off-plan means buying a new build property from a developer before it’s been built. Buying a home that is still on the drawing board is a very different process and there are a number of things buyers must be aware of.

Meet the developer with a clear strategy in mind

When you meet the developer you will probably visit a show home and look at plans and a virtual 3D model of the home.

If you decide to buy, the first thing you will do is negotiate a deal with the developer. As with any seller, the developer will be expecting a negotiation and will usually begin with a higher asking price.

Negotiating on a new build purchase won't be solely about the price. At this early stage, the developer may be offering various incentives including:

  • paying your deposit
  • free fixtures and fittings
  • free carpets/flooring etc
  • kitchen upgrades
  • a turfed garden
  • paying your Stamp Duty

The developer may also encourage you to use their preferred solicitor. Developers have received a fair amount of bad press over recent years. Substandard build quality, hidden costs, leasehold houses and spiralling ground rents are a few of the scandals that have hit the industry.

Buyers are advised to instruct an independent conveyancing solicitor to avoid any potential conflict of interest.

Ideally, you should have a solicitor lined up at the point you agree to buy the property.

Read more:

Don't get caught in the leasehold property trap

Are you being offered a warranty?

Developer incentives can be very tempting, but make sure you focus on the long term. You should expect a third party warranty on your home for up to ten years.

If the developer is not offering a warranty (not all do), you should consider buying from another developer. The warranty is one of the major benefits of buying a new build.

The majority of developers in the UK will be registered with the National House Building Council (NHBC), but there are other equally acceptable warranty providers, including:

  • Zurich
  • Local Authority Building Control Warranty (LABC)
  • Premier Guarantee – all of which are equally acceptable

Contracts exchange at the start of the process

Once you have agreed on a price, your solicitor can begin the conveyancing process.

When buying off-plan, contracts will be exchanged very early on in the process. You will need to pay a deposit (typically 10% of the sale price) on the day of exchange.

There will then be a long period (sometimes years) between exchanging contracts and completion day. During this period, complications could arise.

Your home could be worth more, or less, when you move in

The extended period between exchange and completion can work in your favour. If property prices increase in the interim, your new home will be worth more than you paid for it by the time you move in.

If the market declines, however, your new home will be worth less than you are paying for it and you may have difficulties securing a mortgage.

Depending on the size of the deposit, your lender may not view the property as adequate collateral for the loan. In this case, you would either have to raise a larger deposit or speak to another lender.

If you are ultimately unable to obtain a mortgage you could lose your deposit. The lender may even try and sue you to recover their costs.

Make sure you are financially robust

At the point of exchanging contracts, you are legally committing to complete on the purchase of the property once it has been built.

If you fail to complete you won’t only lose your deposit, but your developer may sue you.

Savvy off-plan buyers will have a contingency plan in place in case their financial circumstances change.

Contingency plans may include alternative funding sources or being prepared to inject more cash into the deal. Ensuring that the purchase does not ‘max you out’ would be preferable, as it leaves some margin if the property market declines between exchange and completion.

"Flipping" the property

Another option, should you fund yourself unable to complete the purchase, would be to 'flip' the property. Flipping is when you sell the right to buy the property to another buyer before the property is ready to complete.

If the market has increased this could even be profitable, for example:

Stage Amount
Property value at the original purchase £250,000
Deposit paid by you £25,000
Value of property agreed when selling the right to buy the property 12 months later £275,000
Buyer pays you your deposit plus the increase in value £25,000 deposit plus (£275,000 - £250,000) = £50,000
Profit (Amount you receive from the new buyer less your initial deposit) £50,000 - £25,000 = £25000

However, if the market falls you would make a loss, for example:

Stage Amount
Property value at the original purchase £250,000
Deposit paid by you £25,000
Value of the property agreed when selling the right to buy the property 12 months later £240,000
Buyer pays you your deposit less the decrease in value £25,000 deposit less (£240,000 - £250,000) = £15,000
Loss (Amount you receive from the new buyer less your initial deposit) £15,000 - £25,000 = - £10,000

Flipping the property could therefore be loss-making if the market falls between exchange and completion. It may still be the preferable option if you don't lose all of your deposit or if the developer is threatening to take legal action.

However, the above example highlights the importance of having a financial buffer when buying off-plan.

You should also make sure that the contract of sale includes a right for you to assign the right to purchase to another buyer if you cannot complete. Ask your conveyancing solicitor to confirm this before you sign the contract.

In summary

Buying off-plan requires a level of confidence in the future. Equipping yourself with as much knowledge on the process as you can before you begin is essential. Sort your finances out, negotiate hard, do your homework and instruct a conveyancing solicitor as early in the process as possible.

Further reading:

What you need to check before buying a new build property

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Gaynor Haliday, Legal researcher

Author:
Gaynor Haliday, Legal researcher