Buying a house that hasn't been built yet

scarletjim

Is this safe? What are the pitfalls? Let me explain...

For years I've wanted to live near my mum, but there has never been a suitable property. I've just discovered that a company is now planning to build 5 town houses which sound like roughly the right spec, and have said they could probably do me a deal if I buy early. How would this work? Specifically:

1. How would payment work? Presumably pay a deposit now, the balance on completion? What if the building work is significantly delayed? What if they change their plans, could they just return my deposit or would they have to build whatvwas agreed?

2. How can I be sure they build to the agreed spec? Infact how do I even know that the spec is reasonable for the price I pay? Will a surveyor be able to value it based on the spec?

3. The company also offers part exchange, valuing my property as if 'for quick sale' - typically how much under standard prices might this be, is it just a rip off normally?

4. Last question, they said they might be able to do a deal if I buy early - anyone have any idea what sort of deal is likely?

Obviously these are mostly open questions with no right or wrong, but I'd be most grateful for advice, experiences and examples from anyone who has done something similar.

Yorkie1

I can't answer the specific questions but I'd be very wary about timescales and dates of exchange / completion. Over the last few years, quite a few people have found themselves in deep financial water through buying off-plan. The developer requires them to exchange contracts very early on. The property then takes time to build (understandably) - longer than any mortgage offer would normally last.

You therefore seek a mortgage late on in the process, after being committed to the purchase. Either you can't get a mortgage, or it's for a lower amount than you want, or the lender's surveyor values the property at less than the agreed purchase price, leaving you committed to the shortfall. If you don't or can't complete, the developer sues you ...

Be very careful and make sure your solicitor has all the necessary bases covered with appropriate get-outs for you if things don't work out.

scarletjim

Hmmm, thanks for the warning. Having read their customer charter it seems that the maximum I could lose is the reservation fee which is only about 2k so not a huge risk, but I might have misunderstood...

I am hoping the mortgage thing wouldn't be an issue as I'm only doing about 35% of it by mortgage, and would then pay that off once my current property sells. If I can do the part exchange route then I might not need a mortgage at all. Will still be very careful when I talk to the conveyancer tho.

Can anyone else add anything further on the subject generally?

scarletjim

Just to be precise regarding what I've just said above, if I simply change my mind pre-contract, I lose a small reservation fee (or some of it). Once contracts are exchanged, then if the builder either changes the design significantly, or experiences unreasonable delay in finishing it, then I can terminate the contract and have all monies refunded. So I guess the key in your advice is to ensure that 'significant changes' and 'unreasonable delay' are clearly defined in the contract and that I am happy with these clauses.

Yorkie1

It doesn't seem to allow you to get out if you have financial / mortgage difficulties.

It might all be fine, but I'd just be very wary and make sure your solicitor sees all documents before you commit to anything, even the reservation price.

Ulfar

The problem will be mortgage offers are only good for 6 months and they are conditional upon the banks valuation, this cannot be done until the property is nearly finished.

New builds tend to be overvalued by builders and currently under valued by banks this is a problem if you have already exchanged.

There are some new builds round the corner from where I am living, some of them have sold but the work has stopped on them until more sell but they won't sell because they aren't being worked on. It is all a bit chicken and egg.

In the current climate I would not exchange until the property is ready to be valued and nearing completion as well as any roads or other infrastructure that is part of the development.

Who knows where the property market will be in a years time.

geoffky

oh dear....plenty of stories about this one...do a search and find the tears..

sonastin

If you want to go ahead with this, make sure you get your own solicitor and make sure that he gives you good advice. If you're going to enter into a contract then it needs to include clauses that mean you're not committed to buying indefinitely - if they don't complete the property by x date you're off the hook, if your initial mortgage offer expires and you're unable to secure a different mortgage, you're off the hook, if the property is significantly different from the plans, you're off the hook, etc etc. Or pay a reservation fee but don't exchange contracts until the construction has reached a particular stage. A good solicitor will make sure that you don't find yourself in a situation where you're committed to buying a house you can't afford - its worth paying a bit more to make sure you get a good solicitor.

If you go down the part-exchange route, it does relieve the pressure of having to sell your house but it does make it harder to negotiate a good deal. Make sure if you go into this, its with your eyes open.

Ulfar

To echo sonastin, do not under any circumstances use a solicitor recommended by the developer.

There have been plenty of posts where this ends badly.

scarletjim

Lots of great advice here, thanks. Let's take the three major pitfalls that have been mentioned:

- major changes made - need to ensure contract gives me a clear get out if this happens.
- unreasonable delay to finishing the building - as above
- change to my financial circumstances. This is an interesting one. If I buy off plan, I would only do so if the discount for doing so would enable me to pay the entire amount using a). my current savings plus b). the value of my flat if part exchanged with them. Therefore if the market fell say 20% in the next year (very unlikely surely), then I would still be able to buy the new property. The value of the property would be 20% less, but I would have received a significant reduction in the price I pay due to the discount for buying off plan, so that partly offsets the devaluing. I would not have difficulties with the mortgage because there wouldn't be one. Does that all make sense?

A few remaining questions:
1. Does the above make sense, is my logic ok?
2. Is there anything else I need to consider?
3. How do you go about choosing a 'good' solicitor? I don't have a clue how to know a good one from a bad one, I've looked for on-line reviews but there isn't much about...

By the way, I would only even consider this if it means a big reduction in the asking price. If not, I will just watch them being built (I can see them from the window of my flat), keep an eye on adverts and sales etc, then buy one when they are running out (they are building five town houses all with very similar specs). Without a big discount, I see little benefit in buying 'off plan' other than being 100% sure of getting the one I want before someone else gets it.