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Off Plan purchase, a double edged sword

YOU’D never buy a pair of expensive jeans without trying them on first. After all, the cut could be unflattering and sizes are not what they used to be. Somehow, property investors feel comfortable risking a lot more than the cost of designer clothes when they buy an apartment without having stepped inside.

Recently at our seminar one of the attendees came up to me and told me he had £90,000 buried in an Off Plan property with Galliard Homes, bought for £550,000. It’s a three bedroom flat overlooking the River Thames. He told me if I could get the deposit back for him he would be happy to invest in Central London. I’m sure he would, but I never told him to invest there.

This issue with Off Plan purchasing has become very dangerous. Many bought Off Plan property prior to the credit crunch of 2007/8, riding the wave of increasing prices. Many were sold on the basis they were getting a discount from the valuation price. The valuation of a property is what someone would pay on the open market, not what the valuer says it is in the hope of getting hundreds of more valuations in the block. During this time brokers were in the fortunate position of choosing which valuer would do the valuation when applying for a mortgage. They would be able to get this by going through a packager rather than to the lender directly. This perk has now been stripped from them.

Furthermore if this ‘discount’ is applied to most of the block it can no longer be defined as a discount. This whole set up was based on the hope of increasing prices and credit. If the prices kept going up and the finance was still available this situation would not have arisen. But there’s a good saying: ‘you don’t know who’s swimming naked until the tide comes in.’ When credit is withdrawn from the market you really know what is driving the property price. If it’s driven by credit it will suffer badly, as many Off Plan investors have realised.

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There have been many cases where people have put in their 10% and exchanged, and then the price has dropped below what they paid. They simply thought they could walk away and write off the 10% they had put down. No Sir!

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Many of the developers recommend their own solicitors to the buyers, many buyers claimed they were not made aware of all the conditions regarding Off Plan purchasing.

Many are in the unfortunate position of being chased by the developer trying to force them to complete in the face of bankruptcy. They are obligated to complete the transaction. Even if the property value has dropped to half of what it’s worth.

In 2010 in London alone there are about 300 legal claims against defaulters by builders including Berkeley Homes, Ballymore and Telford Homes according to Estates Gazette.

Berkeley signed about 3,300 contracts with buyers between 2006 and late 2008, of which 85% were Off Plan. The firm strongly denies any suggestion of mis-selling and says “all customers were provided with clear information about the apartments at the point of sale and would have received advice from their solicitor on their legal obligations prior to exchanging contracts.”

The firm says it believes it is unfair and inappropriate to some buyers to renegotiate contracts or resolve other buyers’ problems in ways “which fail to recognise the terms of the original contract”. It also claims the collective has encouraged some purchasers not to enter into financial discussions with the firm.

There is a point of view from the developers end in that if an investor buys a property for £100,000 and then sells it at £150,000, he would have only paid £10,000 to make £50,000. I doubt any investor has gone to the developer and offered them some of their profits. So why are they expected to help them when they make a loss?

It’s a fair point, and one which was echoed by the courts in December 2009 when the high court in Bristol ordered a property investor to pay £133,282 in damages, costs and interest to Prestige Homes South West, after pulling out of a deal to buy two Off Plan flats in Plymouth.

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Bear in mind this is a double blow as this person will have already lost a deposit , and does not have the flats any more because the contract was rescinded. Prestige Homes, part of the London and Westcountry Estates Group, said the result was only what it had been expecting.

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Buying Off Plan has its risk but also its rewards. If you purchase in the right location and at the right price you can multiply your money manifold. Parallels can be drawn between this type of investing in property and spread betting in stocks and shares.

It’s clearly not for the faint hearted. Many of our investors go for excouncil properties in strong locations, the reason is simple, the numbers speak for themselves. From the yield point they do not have to wait many years for gain as they make money every month from the rentals. The growth will be there we believe due to the central location. Even if the prices never go up – which has not been the case in these areas, even through the credit crunch, these are still great investments from the yield point of view.

This week we exchanged on a property we sourced for a client in Marble house for £285,000, the rental on this property will be £450pw generating £23,400 per annum. For an investment of £90k this property will generate a net income of over £8k. This is the second property this investor has bought from us. With the first property he was naturally nervous as it was his first time, with the second his main worry was not the investment but whether we would complete on an auspicious day or Murat! The first property has risen £100k in less than a year and he is extremely happy.

The Real Deal

Cheap As Chips

Large one bedroom ground floor flat in Bayswater

Under stamp duty threshold at £247,500

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Call now to reserve

Suresh Vagjiani

Managing Director

Sow & Reap

A Property Investment Company

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!Tips of the Week

The mantra for property is always Location, Location, Location! Property in a good location will attract quality tenants and strong capital growth

Ex Local Flats are excellent for income with low service charges and long leases, they generally won’t eat into your rent unlike many other flats

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