There’s a huge cash flow advantage for developers to sell some or all of the dwellings in a new development before they build them – that is, off the plans. It reduces the developer’s – and their bank’s – risk considerably, because they know they are sold and they know for how much. They can then raise funds to proceed to the next stage of the development, safe in the knowledge that they are guaranteed X amount of income from the buyers upon completion.
Selling off-plan is most common for apartment buildings, terraced housing complexes and large new subdivisions of standalone houses.
The benefits of pre-sales mean that developers will often offer a discount to early buyers. Buyers can get attractive deals by having the vision and foresight to invest in a development while it’s little more than a set of drawings. But the discounts are also there to help compensate for the risks and drawbacks of buying off the plans, which are:
- Time – you may have to wait a long time between paying your deposit and taking possession.
- Vision – it can be very difficult to accurately visualise how your unit or house and the entire development will look and feel when they’re built, and to know how well they will be built.
- Market uncertainty – if the property market drops between the time you sign the contract and completion of the project, you’ll be paying above market value.
- Developer uncertainty – you could lose money if the developer runs into financial problems and the project doesn’t go ahead.
This is an extract from The Streetwise Home Buyer. The full chapter covers much more and you can download it below for free.
- Key things to check
- And if you’re buying as an investor….