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Look before you leap if you fancy an off-plan deal

Buying early can save money, but watch out for falling prices and other problems. By Chiara Cavaglieri

Britain has started building again with the construction sector expanding at its fastest rate in nearly six years last month. Government schemes have given housebuilders a boost and things are finally picking up, sparking a rise in the number of homes being sold off plan.

When it works, it is a great way to snap up your ideal home on the cheap, but buying before the first bricks have been laid is also laden with potential problems.

During the boom years, buying off plan was a popular concept and investors battled for the best plots, confident that by the time their property was built, it would have increased in value.

"When the market plummeted, so did the demand for off plan," says Katie Hunter of Waterfords estate agents. "More recently though, there has been a slight resurgence, especially of the larger schemes, mainly in thriving inner cities where developers know there is an abundance of willing investors, although buyers are a lot more cautious."

In August, the Markit/CIPS construction purchasing managers index rose to its highest level since September 2007, largely driven by residential building. In London, sales figures for new-builds are 43 per cent ahead of 2012 and three in five units are being sold off plan, according to a recent CBRE residential report. Off-plan sales are even higher in some boroughs including the City (84 per cent) and Newham (97 per cent). This has fed into other parts of the country with Linden Homes selling nearly three quarters of the units in weeks at its new Huntington Court development in York.

Early birds with worms

In a rising market, buying off plan can reap financial rewards. You could agree to pay say £150,000 and by completion it could be worth more. Developers offset the cost of building works with off-plan sales and are therefore willing to offer discounted prices and cash incentives such as stamp duty repaid to entice early buyers.

You will have to put down a deposit immediately, typically 10 per cent, but otherwise you pay the rest on completion, which is great for cash flow. Participating developers will allow you to reserve a new home with a 5 per cent deposit under the Help to Buy scheme, although you cannot exchange contracts before three months to legal completion of the sale.

If you buy early enough it's also possible to pick and choose the plot that suits you best. And you may have a say in the final specification and choice of fixtures and fittings. New homes are energy efficient so you can expect lower maintenance bills and, depending on the builder, you may be allowed to pitch in ideas.

"It may be possible to negotiate a shell-only purchase, whereby the owner takes on a serviced completed shell and then fits out the rest themselves," says Michael Holmes, spokesperson for the National Home Improvement Show. "This will reduce the price."

The best-laid plans

There are, however, a considerable number of potential downsides, not least because successfully buying off plan relies on prices going up – if they don't, you will have lost money before you've even set foot in it. Signing a contract in good times is never a guarantee that the value will not collapse while it is being built.

A new home is sold at a premium of 5 per cent-10 per cent and research also suggests period properties offer far greater long-term returns. This year property investment advisers Huntly Hooper said older homes in central prime London produced quadruple the return of new ones over five years to the end of 2012 (a return of 42.7 per cent compared with 10.7 per cent).

Securing a mortgage can be a headache too as a few lenders impose restrictions around loan-to-value ratios. Your bank or building society may withdraw or alter its offer before completion if property values take a downward turn. Developers can go bust, taking your deposit with them, and if you have to pull out of the deal, the developer could hold you to the contract you signed, which means that if they have to re-sell at a lower price, you will pay the difference.

"You may be able to secure a better price, but be wary of deals saying 'buy off plan and save 40 per cent' - they can't really justify this as a sale price hasn't yet been established," says Kate Faulkner of independent property advice site Propertychecklists.co.uk.

It's also important to find out when the rest of the development is due to finish or you risk living in a building site for the first few years.

Pays your money...

The bottom line is you don't know exactly what you are paying for with off plan. Ask to see all specification details including a full set of landscape drawings, electrical plans .new homes do have a 10-year warranty from the National House Building Council. However, they are notorious for small defects such as kitchen cupboards that don't close properly, broken roof tiles and loos that don't flush properly. They have a reputation for small rooms, thin plasterboard walls and lack of storage.

Condensation is a common problem now new buildings aren't left to stand to allow the plaster to dry completely so you may have to invest in a dehumidifier and leave internal doors and windows open to avoid water damage. If you're really unlucky and the development is built on brownfield land you could face far more serious issues such as flooding, poor drainage and sewage. Find out whether there are any other planning applications nearby which could impact your new home. Above all, do your homework on the company behind the development.

Once you've signed the contract don't sit back and hope for the best. Make regular trips to the site and don't be shy about asking questions. If you buy off plan overseas there are even more pitfalls, so don't sign anything until you've sought some professional, independent advice.