I wrote this piece at least a dozen times in my head over the years. I have posted on forums, drafted email responses to listener and reader questions and delivered pretty much the same speech to a few mentees as well. You see, I am not a big fan of off-plan, new-build property investment and I have ten very sound reasons why I really don’t like it as a property investment model. However, I also have one exception to the rule, which can potentially trump the other ten…or some of them anyway.
Real World Property Training (RWPT) Facebook post: 10 Reasons Why I Dislike Off-Plan, New Build Property Investment...Plus One Exception. Here you will find details of how to get hold of the full 7-page, 2,500+ word report, including my top tips on how to stay safe with off-plan.
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Transcription of the show
Hello and welcome to another edition of The Property Voice Podcast, my name is Richard Brown and as always it is a pleasure to have you join me again on the show today.
You do know that I love property don’t you? And I know that you love property as well, that’s why you are here of course…so we understand one another then don’t we? J
However, there are one or two things about property that I really don’t like that much if I am totally honest with you. Today is all about one of these: off-plan, new-build property investment.
Join me on a mini-rant as to why I really do not like this type of property investment if you will. However, as a reward for putting up with my apparent negativity on the topic, if you stick around towards the end, I will give you one very good reason why I actually love new build property along with a way to get my top tips to manage most of the reasons why I dislike it!
So strap yourself in…let’s go!
I won’t lie to you, I wrote this piece at least a dozen times in my head over the years. I have posted on forums, drafted email responses to listener and reader questions and delivered pretty much the same speech to a few mentees as well. You see, I am not a big fan of off-plan new-build property investment and I have ten (10) very sound reasons why I really don’t like it as a property investment model.
I do have with one exception to the rule, which can potentially trump the other ten…or some of them anyway, so make sure you stick it out to the end to find out what my one thing I DO like too!
OK, so straight into it, with ten reasons to dislike off-plan, new-build property investment.
Reason to dislike #1 - Developer Risk
With an off-plan / new-build property, there is one significant risk over and beyond that of buying from the existing housing stock – the developer.
Lots of smaller developers have left the market – going bust, diversifying or being acquired. They often operate on fragile finances, which can change quite a lot over a 2-year development project.
A development from a major housebuilder (building over 500 units a year) should provide some comfort as to their longevity, but that is not all that matters.
Other factors to consider are reputation, track record, build quality and of course financial strength.
Reason to dislike #2 - Market Shifts
If I told you that within a year we would have a global financial crisis preventing mortgage lending without at least a 40% deposit and a housing crash that would wipe out around 30% off the value of house prices, would you commit to locking your money up with a contract you could not get out of? No…thought not…but that’s exactly what happened from spring 2007 and a whole bunch of off-plan apartments at that time!
OK, so you may say, things go in cycles, which is true. However, can any of us predict with any degree of certainty when the next down cycle will be and even if we could, what about other so-called ‘black swan events’ like the UK exiting the EU? You see, over a 12 to 24-month development project, a lot can change.
Reason to dislike #3 - Lender Risk
Lenders are strange folk apparently. They usually employ lots of people to help them calculate, manage and then avoid all kinds of risk with their money. A lender’s first question is always ‘how will I get my money back on this deal and if not, what kind of realisable security do I have?’.
This type of thinking means they produce a bunch of rules and guidelines and when it comes to off-plan, these rules can also affect our deal. Maximum numbers of units with a single lender, maximum numbers of units sold to investors on a site or in a block, maximum number of floors, the right type of guarantees, the right developer (see Reason #1 from earlier) and so on. Many an investor has no clue whether they will get a mortgage on an investment property in a new build development until they apply often many months after tying themselves into the deal.
Reason to dislike #4 - Valuation Risk
How do we usually value a property? Well, for a standard rental property, we will most likely look at recent, local comparable sales values to assess whether we are paying the going rate. When we buy off-plan, how do we undertake this kind of analysis? Well, we certainly can compare to recent, local sales values but these will be out of date by the time the property is ready to complete in around 18 months’ time. How can you value something that does not exist?
Reason to dislike #5 - No Rental Income
If I were to buy an off-plan property, I would usually have to tie up a large amount of my capital (deposits, fees, progress payments, etc.) with no guarantee of capital growth, which would be speculative anyway, and certainly no rental income either. As the typical new build project runs for around 18 months, that’s a long time with no return on my money. I don’t like leaving my money lying around too long without it working for me to earn a return.
Reason to dislike #6 - No Opportunity to Add Value
As an entrepreneurial investor, I am always looking to maximise my returns. Forcing the appreciation, rather than chancing it with capital appreciation, is certainly one way of achieving this. I can often beat the market by improving a property in some way and that also gives me an equity buffer in case the market turns against me.
A new build property has no opportunity to add value at all…
Reason to dislike #7 - Time to Repay Developer Premium
If we were to build our own home, what would be the costs involved? The most obvious would be the cost of land, the cost of materials and the cost of labour. When a developer builds a property, they have similar costs but also add on their profit margin and quite rightly. This profit margin is known as the ‘developer premium’.
This can often produce a disconnect between new build pricing and existing stock pricing. When it comes to selling that property, or sometimes valuing it for lending purposes, this premium does not always stand up to scrutiny. The minute a new build property has been bought and lived in, it becomes second-hand. This means a would-be buyer is not as likely to pay a premium as they would for that new build when it is brand spanking new…they will probably go and buy off the next new build development site down the road instead, unless the price is discounted sufficiently.
How long does it take before this developer premium is written off? Well, it can vary, but I usually allow 7-10 years myself.
Reason to dislike #8 - Build Quality
Creaky floorboards, paper thin plasterboard walls, cheap fixtures, fittings and sanitary ware are just some of the potential challenges faced with a new build property that can give rise to unexpected issues arising. Also, many new builds come without carpets, white goods and even grass in the garden, which is another expense to factor in.
Say no more…
Reason to dislike #9 – Snagging Issues
One of the major selling points of a new build development used by the builder is the new build guarantee, usually from the NHBC. It is designed to provide assurance to the buyer that the developer will put right any issues that arise after completion.
However, a few problems exist in the system. It is a hassle to deal with snagging, it takes time, the developer’s interest is to deny any claim and minimise cost, which is at odds with ours as the property owner and not all house guarantees are the same either! I am aware of several cases where people have either given up or had to go through arbitration or the courts to resolve their disputes.
Reason to dislike #10 – Snake Oil Sales People
This one is slightly more irrational, to be honest. However, I just can’t help but notice that with new build development often comes glossy brochures and slick one-sided illustrations of the potential and no mention of the fact a refuse site is around the corner, or the road won’t be finished for a couple of years along with phase 4, or the service charge on the flat starts to increase soon after completion…and so on…and so on.
Ok, so that was all a bit negative and possibly slightly controversial wasn’t it? So, let’s try to even things up with my ONE reason to like off-plan, new-build investment property shall we? J
Reason to LIKE #1 – When the Deal Stacks Up!
So far, I have given a range of reasons why I don’t like off-plan property investment. However, I have actually bought a few new-build properties and there was a common denominator in each case…they were either completed or very near completed when I did.
Buying direct from a developer towards the end of their development can sometimes produce a decent opportunity and one that can offset some of the risks in buying off-plan as mentioned earlier.
For example, one project that I did buy was presented to me when a developer wanted to get off site and sell off the last remaining units quickly. This meant an opportunity for a discount that I could actually have some confidence in. In other words direct, recent comparable valuations. Once I was satisfied that the price was fair, or even discounted, this was an easy yes.
However, it was still not without its risks, for example, many other investors had bought at the same time and for the same reason. When they applied for financing, the later ones struggled to get finance approved due to ‘concentration risk’ issues identified by many lenders (remember Lender risk from earlier). They often found themselves having to process several mortgage applications before being approved, or simply change strategy and sell on instead.
So technically, whilst I have bought several new-build properties, none of them were actually off-plan! That’s my get out of jail free card here…you can make a new build investment property work for you, but it is far better when it is already built and not bought off-plan.
So, in conclusion, you can tell that I am not a fan of off-plan, new-build property investment. Yes, it can and does work for some people under the right conditions. But, for me, I prefer to reduce the number of risk factors in the deals I get involved with, or at least to have some element of control over them. For this reason, I tend to find happier hunting ground with existing stock for property investment opportunities. Alternatively, I can take on the role of the developer myself to some extent and add value with a corresponding developer’s premium of my own built in J
Now then, I must confess that I originally wrote this piece for the new Real World Property Training blog that I am developing together with Damien Fogg. Therefore, in order to be respectful of that and also provide some added value to you dear listener, here’s what I am going to do.
I am going to post a summary version of this onto the brand new Real World Property Training Facebook Page. Then, I have a much longer 2,500+ word article which, in addition to more great rationale as to why not to invest in off-plan, also has my top tips of how to protect yourself from these ten potential downsides to off-plan property investment as well.
So, it’s not all doom and gloom and if you fancy a bit of off-plan, then this list will definitely help you out. To get it, all you need to do is visit the Real World Property Training Facebook Page, like the page and then tag yourself in the off-plan post which you will find there and I will make sure you get the full article along with the top tips. That’s fair, isn’t it? All the links will be in the show notes, but I hope you know by now that you can also just drop me an email email@example.com and I will try to make life easy for you too 😉
Just don’t tell Damien Fogg that I have ‘repurposed’ the off-plan article that I promised him for the RWPT Blog though, will you? 😉
So, have I struck a nerve with you today on the subject of off-plan – have you found it to be a successful property investment strategy? By all means, get in touch…ideally on that Real World Property Training Facebook post I mentioned and we can have a very civilised discussion about it there I’m sure!
In the meantime, that’s me for another week then. But as always, I would like to thank you very much for joining me on the show today and until next time on The Property Voice Podcast…it’s ciao ciao!