Investing in off-plan properties, i.e. properties that are sold before or during the construction phase, can be highly rewarding due to the potential for capital growth, lower purchase price, and the opportunity to customise features. However, the inherent risks, such as delays, changes in market conditions, and potential developer issues, makes due diligence even more critical. Here are some elements we recommend you consider before committing to a purchase.
Quick Tip: Scroll to the bottom of the article to download the same spreadsheet we use for conducting our in-house due diligence!
Research the developer
A developer’s reputation is arguably the most critical factor in off-plan investments, so what should you know about them?
Past, present and future projects
By reviewing past developments, you can gauge the quality of construction and design the developer typically delivers, which can be incredibly helpful when you are buying something that is not yet built.
It will also highlight their track record and reliability, if a developer has consistently completed projects on time, to a high standard and within budget, you can have confidence they are likely to do so again, equally if a developer has a history of delays, budget overruns, or poor-quality work, this could be a red flag.
If the developer is involved in future projects within the same area, it can be a positive sign that they believe in the potential growth in the area.
Financial Stability
Check out both the developer’s and construction company’s credit score or accounts filed. A developer struggling with cashflow or carrying debts may not complete the project or try make money-saving changes.
Customer reviews
Seek out reviews and testimonials from previous buyers. Pay attention to any recurring issues or complaints, particularly regarding communication, build quality, and after-sales service.
Research the site
Who owns the site
It is worth finding out the title number for the land and ordering a copy of the title deeds and plan from HM Land Registry as this will show who owns it, where the boundary lines are, rights of way and any covenants.
When the developer owns the site, it adds a layer of security to the project as it shows there is already a commitment to the project, as the developer has already made a significant investment in acquiring the land, which in turn reduces the likelihood of the developer abandoning the project, as they would stand to lose their investment in the site.
If the developer does not fully own the site or is involved in legal disputes over the land, the project could face significant delays. Furthermore, lenders are typically more cautious when financing off-plan projects, and one of their primary concerns is clear site ownership.
It is also worth checking if there are any charges against the title, this indicates if there are any debts associated with this and how much. If a developer has taken out a loan to purchase the land and they default on this, the lender will have a controlling interest on the site.
Check the planning status
If the developer doesn’t have the necessary planning permissions, the project could face legal challenges, delays, or even cancellation.
Planning permission documents detail the approved scope of the development, including the size, design, layout, and use of the property. Often developers market their projects using appealing visualisations and promises of luxury finishes, expansive green spaces or other attractive features. Reviewing these documents allows you to verify that the project aligns with what was promised.
Research the area
Checking the area demographic and needs for housing will establish how easily the property will let, for how much and to whom. It will also help you choose which type of letting you will use, for example, if the area has strong demand for holiday lets, student lets, or long-term lets. It will also help to plan for any potential exit strategy.
Investigate the current and planned infrastructure and amenities such as transport links, schools, shops, etc as these factors can significantly impact property value and rental potential. Also consider what else is being built nearby, other developments can create competition but also could enhance the area.
Check the payment schedule
Usually this will include the initial reservation fee, which is a commitment by the client required to take the unit off the market. Often the developer will set a deadline to exchange, usually 28 days, where you will pay a deposit which can range from 10-30%. It is important to find out before you exchange where the deposit will be held. Is it being used to fund the build, and is there any deposit protection in place?
Some developers will offer a payment plan where you can spread the cost of the downpayment over a length of time, such as 1% per month for 18 months, 5% per 6 months, or even 15% now and 15% in 6 months. If you choose to use a payment plan, be sure you can fulfil those future payments as defaulting could result in the developer rescinding the contract and keeping any money you paid so far.
The outstanding balance is then payable upon completion of the unit. If you are looking to purchase with a mortgage, it is worth having a preliminary conversation with a mortgage broker to check your ability to obtain a mortgage, however you will not be able to apply for a mortgage until closer to completion as mortgage offers only last 6 months and the lender will require a valuer to visit the property once its finished. It is important to note that the mortgage rates available at the time of reserving your property may not be the same as when you go to apply and they could in fact be more expensive, so ensure you budget for this.
If you fail to complete on the property after you have already exchanged due to not being able to raise the funds, the developer has the right to keep your deposit, so it is vital to be confident you will be able to obtain the required funds.
Review the Contract Terms Carefully
It is always recommended to review the draft contract and draft lease before investing in an off-plan apartment, and these are the areas you want to focus on;
Lease length
Leasehold properties are where you own the property itself, but not the land it sits on. Most apartments are leasehold as you own the apartment but not the entire building, however in recent years it is becoming increasingly common for leaseholders to buy or be given freeholder shares, meaning they own a percentage of the land/building.
Most leases are 999 or 250 years long; however this can vary from one development to another and can be even shorter. The lease term can affect your mortgage applications as lenders don’t like to lend on short leases (under 70 years) as this can affect the resale value, meaning your mortgage application could be rejected or you may need to put in a larger deposit.
Ground rent and service charge
Ground rent is the amount you pay each year to the freeholder and doesn’t provide any services.
It critical to check how often the ground rent is reviewed, and how much it will go up by, as this can affect your ability to obtain a mortgage or its resale. For example, there have been instances where the ground rent increases to a percentage of say open market value or doubling every 10 years or reviewed at too frequent intervals.
Covenants
Covenants are legally binding promises or obligations set out in a contract, lease, or deed, and dictate certain actions that the property owner or tenant must perform or refrain from performing. There are two types of covenants, Positive Covenants which require the property owner or tenant to perform certain actions (e.g., maintain the property, pay for certain repairs), and Restrictive (Negative) Covenants which prohibit the property owner or tenant from performing certain actions (e.g., making structural changes, using the property for a specific purpose).
Some of the main covenants investors should look out for include restrictions on subletting or the types of lets (short-term lets such as Airbnb are commonly restricted), occupancy restrictions dictating who can live there, maintenance obligations which force the owner into paying for expensive repairs, insurance requirements which dictate the owner must obtain expensive policies, and even right of first refusal which states you must offer it back to the original owner/ developer at a discounted rate before putting the property for sale on the open market.
Understanding these covenants and their implications is crucial for a buy-to-let investor as they can limit flexibility, increase costs, or reduce potential rental income can significantly impact the attractiveness of an investment.
Exit clauses
Exit clauses in a contract for buying off-plan properties are provisions that allow either the buyer or the developer to terminate the agreement under certain conditions. Some of these clauses will benefit the buyer, others will benefit the developer, so it is worth understanding these clauses to help mitigate risks.
Clauses that you should be specifically aware of include, but are not limited to;
Completion date clauses (long-stop dates) which is the date the developer agrees to have the project completed by. Usually if a development is delayed passed the long-stop date, they are in breach of contract and the buyer can rescind from the contract and get their deposit back.
Material Change Clause which permits the buyer to exit the contract if there are significant changes to the property’s design, specifications, or quality that materially differ from what was initially agreed upon. If the final product deviates significantly (e.g., in size, layout, materials, or amenities), it could affect the property’s value and rental appeal.
Developer Insolvency Clause which allows the buyer to exit the contract if the developer becomes insolvent or goes into bankruptcy during the construction phase.
Pre-Sales Requirement Clause which may allow the developer to exit the contract if they fail to achieve a certain level of pre-sales by a specific deadline.
Force Majeure Clause allows either party to exit the contract if unforeseen events (e.g., natural disasters, wars, pandemics) significantly delay or prevent the completion of the project.
It is also important to check what the contract states about returning your deposit upon notice to rescind, how long does the developer have to return your deposit and do they have the right to withhold doing so until they resell the property to someone else.
Insurance and Warranties
Deposit protection
This is when the developer protects the buyers deposit in an insurance backed scheme which guaranteed by an independent warranty provider recognised by the UK Council of Mortgage Lenders, which will either complete the development if it hits problems or repay your deposit.
Building warranty
This warranty provides peace of mind by covering the cost of repairing structural defects for up to 10 years, protecting the buyer from unexpected repair expenses and usually covers the overall building rather than the internal area of the apartment. The most common is the NHBC Buildmark Warranty is a 10-year warranty provided by the NHBC (National House Building Council), covering structural defects and other issues that may arise after completion. Other similar warranties include the Premier Guarantee and LABC (Local Authority Building Control) Warranty.
Vendor Warranty
Vendor warranties usually cover the fixture and fittings of the property such as the kitchen units, worktops and appliances, internal doors and joinery, bathroom suites, tiling and fitted furniture. This is usually covered for up to 2 years.
The vendor might also pass on warranties for things such as the boiler or other fitted appliances.
Conclusion
At E.R.E Property we conduct thorough due diligence on all our developments before presenting them to any clients. As always you should conduct your own due diligence too. Scroll down a little further and click to download our helpful sheet to fill in on all future property investments.
Additionally, if you are thinking of investing in an off-plan property, download our helpful guide or call one of our investment consultants today on +44 (0) 113 380 8930
