For those not familiar with the term "off plan" this simply means property that is not yet built and may not be ready for up to several years from the purchase / reservation date.
People will usually buy on this basis if they believe property prices are likely to rise over the intervening years. This route is particularly attractive to investors who believe they can lock in the price now and profit over the period of the build. In a property boom this is a favorite route of investors to buy investment property. .
It was common in London especially in the late 90's and up to 2007 for people to form queues outside of new build sales office before the initial release of a new development. I myself witnessed scenes on new build developments in Canary Wharf where prospective buyers camped out overnight to get first place in the queue to purchase a property.
On one particular development buyers had to pay a reservation fee and enter into an agreement to buy before they were allowed to even view the plans of the flats they were looking to buy! Prices of the flats were rising during the actual sales event so that those further back in the queue had to pays £1,000's of more than those at the front.
In some cases this method of purchase worked out well for the buyer. Some clients I worked with were able to eventually buy without having to put in any actual money to the purchase because the lender accepted the equity growth from launch as the deposit.
In other cases and particularly after the credit crunch that hit in 2008 this method of purchase became disastrous. Lenders pulled out of the newbuild market or severely restricted their loan to values thereby leaving many clients unable to raise finance. This meant they effectively ended up losing their deposits and still faced the prospect of being sued by the developer for completion.
Another method of making money from newbuild is to buy off plan and then sell on the contract before completion, a method known as assignment. This was very profitable for investors in the good times but after the credit crunch lenders refused to accept assignable contracts.
So its sensible to be cautious when assessing any potential off plan investments. Developers have, over the years, tended to build lots of new build flats primarily aimed at investors.
High density flats are cheaper for the builder and they can build much more of them than the 2 - 3 bedroom houses which the UK so desperately needs.This "investor led" development approach has meant that there has been a glut of flats built around the country and particularly in Northern Cities like Manchester, Liverpool and Leeds. The reality is that a constant stream of new flats coming on line will only have the effect of depressing both capital growth and rental levels.
My advice for buying off plan then would be as follows:
* Look carefully at the area you are buying in. Would it be better to buy a second hand property?
* Think carefully about the type of property you are buying. Remember when your flat is ready there maybe 50 similar properties coming to the market at the same time. If you're an investor that is not an attractive prospect.
* Make sure you have worked out how you are going to finance your property and do not leave it until the last minute.
* Keep a regular eye out for new offplan property for sale