What are the risks of buying investment property off-plan?
The REW Property Check is so imperative to the process as we will ensure the more common risks and developer pitfalls are either mitigated or do not exist on that project – otherwise we simple do not take a project on. That said, it is important to be aware of what can happen behind the scenes and how the developer prepares and plans for this to mitigate risk for themselves and all their customers that invest with them.
What is a Long-Stop date?
From the developer’s perspective they protect unforeseen issue and delays with a Long-Stop date and this is stated in the purchase contracts. A Long-Stop date gives a 12-month (sometimes 6 months or 18 months) buffer to complete the development if something unforeseen was to happen out of the developers control. If the project you have invested in pays per annum interest on your deposited funds and does fall into the long stop period, the interest continues to accrue as normal Long Stop Date see FAQs
This occasionally happens with off-plan development for a number of different reasons. It is important to be mindful that a developer may have an issue which causes a delay, however time lost can be made up by the contractor and the project can still completed on time.
- Site testing and clearing: Archaeology reports, contamination reports etc. There are a number of tests and reports carried out on a site before a spade can go into the ground and dependant on the report outcome e.g: historical ruins or remains, it could hold-up the start of construction.
- Funding – if the build of the project is buyer-funded only and for example 25% of the development needs to be sold via pre-sales before they can start, this may cause a month or two delay. However, the developer would have normally built a buffer of time in for this so it does not affect the completion date.
- Contractor failing – if the contractor is not meeting its obligations to the developer and is in breach of contract, the developer will have to find a new contractor. Again, this can cause a 1-3-month delay at the time, but this could be recovered under the new contractors’ terms.
Where the developer has chosen to fund the build or part-fund it from a lender, this may cause delays if the lender falls through at the last minute – especially if the developer’s sales strategy is asking buyers for lower Exchange deposits. Cases of this are more common with peer-to-peer funding or similar. When we property check a project and funding is still to be signed off, we always check what contingency is in place and will not start selling a project until the developer has secured funding for the build.
Developer failing to complete a project
This is where our property check mitigates the chance of this happening. A project that fails to be delivered by the developer is likely due to the project not being ring-fenced properly or cash-flow not being managed properly. A project should always have someone e.g. a QS, an architect or a company cost managing the project efficiently and effectively. When a developer fails to complete a project, the solution is always dependant on how the project is funded. For example, if there is a lender with a first charge, it may go into administration with a specialist company. If a developer requires more funds, lending could be acquired, or a new developer could come in and purchase or take over the project. There are often many solutions to a development failing to complete.