The dangers of buying off plan in the wrong market...
Brett Alegre-WoodChairman, YPC Group
Hey guys,
We receive a huge amount of feedback from clients who purchase through other property clubs and property investment companies. Unfortunately, many of these companies go bust leaving their clients to fend for themselves on properties that were bought off plan. In some cases up to 2 or 3 years before completion.
On the surface of it, the biggest problem they're having is that values are simply not stacking up and without implying anything more sinister such as inflated valuations, hard sales tactics and implied guarantees, the initial valuation is generally the primary reason for their difficulty.
I could give you other reasons such as rents not being high enough, the properties being above commercial premises or perhaps exposure of the lenders, but whatever the case, they're definitely the biggest mistake that was made.
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This mistake was made some time before when they decided to purchase the property.
Let me explain...
I have always said that your strategy needs to meet the market you're in. Purchasing off plan in a stagnant or slow market is always a mistake. You simply cannot predict when the market will turn, and turn it will. In this case it was the credit crunch. The time before is was rampant inflation and high unemployment. And the time before that it was the government's lack of understanding of lag and monetary policy.
Irrespective, the mistake was exchanging in one market and completing in another altogether different market. In this case, a market in the midst of a correction.
Being an experienced investor and responsible business owner and mentor, I have not had my clients buying off plan for almost 4 years. I have watched the money being made by some property investment companies and the easy sales with no responsibility. It frustrated me to see them abusing so many of their clients' trust. The market has twisted and turned and many are now left holding a property worth less than they paid for it.
As if that weren't enough, some off-plan buyers have been dealt another harsh card. The credit crunch has meant that the mortgage they're likely to get is at 70%-75% rather than 85%. It's these sort of double whammys that have meant we have had many clients (6 in the last week alone) coming to us for help in how to structure a deal.
The lesson that needs to be learned...
The real lesson here is only buy off plan at the bottom with a long lead time or when the market is galloping.
On the bright side though: off plan's now looking like a good proposition once again.
We're still a little way off jumping headlong into off plan again because most developers haven't begun their building programs in earnest, but my feeling is that anything completing after June 2010 is fine. As usual, ensure you secure a discount from today's valuation and not completion date valuation and remember that due diligence is just as important now as it is always.
It's why at YourPropertyClub we have the 89-point due diligence checklist on every property we sell.
Live with passion,
Brett Alegre-Wood
PS. If you think you've bought off plan in the wrong market and want some impartial advice, give the team a call on 0207 812 1255.
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