Buying Bulk Off Plan
Buying bulk off plan has been a fast growing trend since early 2001.
In this time I have had the chance to experience first hand and with
fellow investors the things that can go wrong in this type of investing.
Many people doing this type of investing are relying on information
supplied to them by "finder" companies, and often pay fees of around
2% to get wonderful "no money down" deals and gifted deposits as well
as large discounts of around 15 - 20 % below the market value. What
most of these investors are hoping to do is sell back to back and make
a quick buck, or hold onto their property to rent it out.
The information we receive can make the deals sound very exciting, and
they fail to inform you that you are at high risk of competing with
fellow investors that have invested into the same development. Often
the deals can be for 60 apartments or more, and therefore there are
60 investors, or less if some have taken more than one property.
You are enticed by paying a small deposit, for a very high return in
say 1 or 2 years time.
Pre Valuations
Lets get a real picture of pre valuations that you may be supplied, or indeed that you can instruct yourself.
Valuer's are people, and some, like everyone else are prone to persuasion
and relationships, and can be encouraged to write a "suitable" valuation
for the person paying for it. If you are presented wit ha pre valuation,
you must ignore it completely, and do your OWN research on the true
market. In doing your research do not forget to mention to people you
talk to how many of these plots there will be when they are ready.
Take an example of one purchase I was involved in: Plot XX was available
for a discounted price of £220k, its list price was £390k, and its true
current day market value was £250 (my own research) - that means that
it would have sold for £250k in that week if it had gone on the market.
My valuation was paid for on the basis that I wanted to have a loan
to value financing, and achieved, from a friendly valuer, a valuation
report for £390k - this would have meant I would have been able to get
£332 cash out of this deal, giving 220k to the vendor, retaining £112
for myself. It also would have meant I would have not been able to dispose
of the property unless I could come up with the shortfall. This valuer
would have been in a lot of trouble with the lender if the property
had been repossessed. I have also had valuations done by video - but
that's a whole other story.
Specifications
When reserving your "fantastic deal" with the helpful finder, you are given mostly given very minimal spec sheets, which are in-fact open for interpretation.
Be wary with the term "High Spec". This term is totally non committing, what we might think is high spec, might not be our builders idea. Make sure you get named brands, or named equivalent brands so that you at least have some information to pass onto your selling or letting agent that can influence the price quite considerably.
It is important before exchange of contracts you fully agree the specifications of your property. One flat I almost purchased made a �100k difference to the resale price. The builder would not commit to spec to I rejected the deal.
Funding
Funding is a fascinating one, most of the finders will promise you that some of the deals are no money down, or cash back deals, and according to their figures they may be. This however does not mean that YOU can get that funding.
Pre planning is very important on this one. YOU may not be able to get the type of funding they are referring too, you may not meet criteria and should be prepared also to acknowledge that lenders update their products all the time, and although they did gifted deposits last month, may not do them in 3 months time. NEVER rely on what your finder tells you about funding. I have many investor friends that have been promised the impossible, as they just did not reach the criteria of the lenders with the products needed to complete on that basis. The investor then end up having to find extra funding that they just did not have available, and get loans and credit cards to fund their purchase - they then end up loosing it all if the property will not sell or rent for what they needed it to.
Back To Back Sales
Selling back to back is one of the hardest things to achieve. It is my experience that most selling agents have no idea of how to sell a property that is not built yet, and will complain that they can't sell it until they can take people around. This can be a major stumbling block. Lining up your buyer if you have one, to complete at the same time as you is the next block. You are aware of the urgency of completion, and could have had all your financing and searches in place, but you rely on the person buying the plot on you to get theirs together in time, then at last minute they don't get their mortgage offer through or they change their mind, and you loose the contract. This does happen - developers are more than happy to keep your deposit and sell to another buyer, as quite often the prices may have gone up since they sold it and they can make more money. This still leaves you with solicitor fees, losing a deposit and you will still have to pay your finders fee. So not being prepared to take over at the last minute can prove very costly.
Property Millionaires' Club October 2003 - Lady Lea
Bulk buying off plan has been a fast growing trend since early 2002. In this time I have had a chance to experience first hand, and with fellow investors what can go wrong with this type of investing. Here's what we have learned and what you need to be aware of.
1 - Spot the biggest profit killer. Many people getting involved with this type of investment rely on information supplied by "finder" companies and often pay fees of around 2% to get "no money down" deals and gifted deposits as well as large discounts of around 15 - 20% below the market value. What most of the investors are hoping to do it sell back to back and make a quick buck or hold onto their property and rent it out. The information you recieve can make these deals sound very exciting, but often fails to inform you that you are running a high risk of completing with fellow investors who have investedd in the very same development. Often these deals can be for 60 appartments ore more - therefor you could be competing with 59 other investors in the same building, assuming each property is sold to a seperate investor. You are enticed by paying a small deposit for a very high return in say, one or two years' time.
2 - Get the lowdown on pre-valuations. Valuers are human beings and some can be encouraged to write a "suitable" valuation for the person paying for it (see confessions a true property valuation). If you are presented with a pre-valuation, ignore it and do your own research. Take an example of one purchase I looked at. The plot was available for a discounted price of £220k, its list price was £390k, and its true current day market value was £250k (from my own research)
My valuation was paid for on the basis that I wanted to have "loan to value" financing and achieved, from a friendly valuer, a valuation of £390k. This would have meant I could get £332k cash out of this deal, giving £220k to the vendor / developer, retaining £112k for myself. It would also have meant I could not dispose of the property unless I could come up with the shortfall. This valuer would have been in a lot of trouble with the lender if the property had been reposessed.
3 - Understand the key facts about specifications. When reserving your "fantastic deal" with the helpful finder, you are mostly given very minimal specification sheets, which are open to interpretation. Be wary of the term "High Spec". This is totally non-commital and what you might think of as high spec might not be the builder's definition of the same term. Make sure you get named brands or at least name brand equivalents so that you have some firm information to pass on to your selling or letting agent. This can influence the price quite considerably. It is important that you fully agree the specifications of any property before the exchange of contracts. With one flat I almost purchased it made £100k differenc to the resale price. The builder would not commit to firm specification so I rejected the deal.
4 - Get the know-how on funding. Most finders will promise you no money down or cash back deals, and according to their figures, they may well be. But thiss doeas not necessarily mean that you will get that funding. Pre-Planning is very important. You may not meet the criteria. You should also know that lenders update their products all the time. Gifted deposits may have been on offer last month but not now. Never rely on what your finder tells you about funding. I have many investor friends who have been promised something quite impossible. They just did not meet the criteria. You could end up having to find extra funding - and you could end up loosing it all if the property will not sell or rent for what you would have expected. It is very risky taking out loans that you expect to repay from the resale of your property. There is stif competition on some new-build developments.
5 - Understand the reality of back-to-back sales. Selling back to back is one of the hardest things to achieve. It is my experience that most selling agents have no idea how to sell a property that is not built yet. They will complain that they have nothing they can take people around. Lining up a buyer to complete at the same time as you is the next hurdle. You are aware of the urgency of completion and could have everything in place - but you are relying on the person buying the plot from you to get themselves together in time. At the last moment, they might not get their mortgage and you loose the contract. This happens - developers are molre than happy to keep your deposit and sell to another buyer as, quite often the prices have gone up since they sold it and they can make more money. This leaves you with solicitor fees, a lost deposit and a finder's fee to pay.
Have you been offered an Off Plan deal or thinking about it?
You MUST read all of this section before you do any Off Plan investing. I cover how they work, the major pitfalls and specific deal examples of my own that went horribly wrong. Please don't get caught up in the seminar hype and make the same mistakes that I did.
Read it all by scrolling, or jump to sections here:
1 – The “Team” involved in a deal – and how the team work to get the sale through.
Supplier, Developer, Estate Agent, Letting Agent, Broker / Solicitor, Valuer.
Although all these guys are mostly independant of each other - they all have one thing in common - they make money out of you. With the Off Plan deal offering clubs / seminars and systems, they often have some kind of connection financially (eg the finder may get referral fee for the mortgage broker).
I'm going to talk you through each character and what they gain by the deal.
The Supplier/Finder - Often sends you to a broker & solicitor to make sure the deal goes smoothly, could be earning fees from this.
It is in his interest to get the whole deal going so that he gets his finders fee / commission. Sometimes offered a good deal on a plot himself – may tell you he has invested there …… yet consider that all his finders fees could pay for his property in cash – and he has no real exposure risk.
The Developer - Wants to sell the property – if the supplier has negotiated it to be no money down, he needs to tread carefully, feeds the supplier info he wants, “fluffs” the valuer and tells the Estate Agent how much they are worth
Estate Agent - My experience of lunching with some of the agents has given me a bit of incite. As an agent, they are usually the 1st people on the scene when the developer puts his offerings out. They do a preliminary valuation and they also get offered good deals to sell the development. They can set the value at whatever they want …. And whatever they are asked to do really. They also may like the second bite at the cherry if you want to sell it on BUT be warned, they often can not sell any on untill the whole development has been sold.
The Letting Agent - Agents “have” (and I know one personally) in the past been offered incentives by the suppliers to say that the rent is X amount (the figure needed by the lender to lend on the property). So even tho they may “know” that the rent could be £750 – they would say £1000 – just to get the development on their books.
The Valuer - Well this poor guy has not got a chance! Letting agent tells him what the supplier wants them to hear. The estate agent has been told by the developer what they are worth … and more often that not there are no comparables to go on. You can't say that 100 investors paying X are comparables – because they are a unique market, and caught up in clever marketing.
He also has to get his paid by the lender … and the lender is not likely to use him if they can never get a mortgage through.
How is a discount measured?
Personal experience and a lot of “lunches” tell me that the MORE money you invest, the more the developer will take you serious, and will share the profits with you. If you expect to get something low risk .. for nothing then you are likely to get shafted.
I did!
So most people offer say 15 – 20% discount ……. But do they?
What is the discount based on?
Where did they get the initial price (the estate agent? come on you just read about him)
Is the deal structured as a no money down …. So just an easy buy, and not a genuine discount.
Consider – not investing 15% like you should – makes you high risk. No breathing space.
Sales Tactics
Points to watch when being offered a deal – Sales Tactics
Discount
I have bought one myself
Package – No Hassle
Discount / Small Deposit
HMMM .. discounted from what exactly?
In my experience
2 – Research before you take a deal
Demand – rental / sales
Total number of units - DEMAND
How many are going to investors – DEMAND
Comparable PPSF (price per square foot)
What are the specific Specs – get makes / models in writing (makes difference to value)
Tips:
Don’t rent to a purchaser without a tenancy agreement
Don’t believe selling agents when a property finder has a lot of properties with them.
Ignore the words 15% discount – it is made up.
Check the redemption BEFORE exchange of contracts.
Don’t complete without snagging / inspecting
Check policy on crack sizes (they do have them)
Get release phase and any permission for viewing / use of property in writing.
Remember the price people will pay is current market value.
Confirm how the developer is helping you to complete (gifted deposit etc).
Be prepared for early or late completion.
Get the notice period of completion written into exchange of contracts.
Avoid Christmas completions for back to backs – there are no buyers around
Check resale rules on the development
NEVER complete without an inspection
Check with land registry that you have been registered if you are wanting to resale fast to avoid delays.
Don’t trust 6 months up front tenants (this is the 2 nd one I had problems with)