Some time ago we wrote about buying off plan and what that means for a buyer.
You can read the full article here, but we can give you the gist. Buying off plan is when you purchase a property that hasn’t actually been built yet. However, the buyer of that property might want to sell on before the completion of the build. They might want to do this to take advantage of a rise in value, or they might not have been able to secure funding for the mortgage.
When the buyer does this, they’re not selling the property itself (it hasn’t been built yet), they are selling the contract they have with the developer. This is called an Assigned Contract. It’s called this because the developer is reassigning the contract from the original client to the next.
When buying an assigned contract, there are two transactions to go through: the assignment purchase, where the original purchaser sells the contract to the new buyer, and the final closing with the building developer. This is when the rest of the money is paid and the keys are exchanged.
Much like buying off plan, assigned contracts took a bit of a dive shortly after the credit crunch, but have since been making a revival – largely due to demand and government schemes. Selling off plan contracts has become particularly popular with investors. When an investor buys off plan, they can resell the contract at a marked-up rate, without the risk associated with buying a property off plan. They can also avoid paying stamp duty and land registry because they haven’t actually bought the property yet.
Also similar to off-plan buying is the risk associated with buying an assigned contract, which depends on the market. If the value of the property drops before the completion of the build, then it will be particularly tricky getting a mortgage against the value of that property.
Getting a lender to invest in you for an assigned contract can be difficult anyway. Lenders will often not give anyone a loan for an assigned contract that’s had multiple reassignments – it is too reminiscent of the years before the UK financial crisis. You’ll also most likely get a loan-to-value (LTV) of 75%, but only based on the original contract price. That means if someone put down a deposit on an off-plan property valued at £500,000 and wanted to sell it on for £650,000, the buyer could raise, at most, £375,000 in borrowing (only 58% LTV) because they could only get 75% LTV of the original £500,000 value.
But if you can clear the hurdles of buying a contract for a development, you will be able to take control over how the property is constructed, giving you design options that wouldn’t usually be available if the property were finished. You’ll also have the satisfaction of living in a property that has never been lived in before. Due to the recent increase in popularity of buying off plan with property investors, there is a good chance that if you are buying a contract with the intention to move into the property, then you will be buying an assigned contract. While it may well be more expensive than buying directly from the developer, there will be more options available to you if you consider assigned contracts, and the price will still likely be lower than that of a completed build.
We’d be glad to advise you on any off plan or assigned contract purchases you may be considering. Feel free to get in touch with us by using our contact page if you have any questions!