Flipping is flopping

Buying off-plan in the hope of selling before completion is getting risky, says Chris Partridge

Speculators who place deposits on flats before they are built, with the intention of selling them on at a fat profit before they have to pay the rest of the purchase price, are getting their fingers burnt by the uncertainty of the property market. The practice, known as "flipping" or "turning", made big money in the days when the market was growing at 20 per cent a year. Speculators would buy "off plan" at a discount when a development was launched, before construction started. A couple of years later, as completion loomed, they would assign their contract to someone prepared to pay the new market price for the property, making a substantial amount of money without even having to go to the trouble and expense of getting a mortgage and going through the legal processes of the purchase.

Speculators who place deposits on flats before they are built, with the intention of selling them on at a fat profit before they have to pay the rest of the purchase price, are getting their fingers burnt by the uncertainty of the property market. The practice, known as "flipping" or "turning", made big money in the days when the market was growing at 20 per cent a year. Speculators would buy "off plan" at a discount when a development was launched, before construction started. A couple of years later, as completion loomed, they would assign their contract to someone prepared to pay the new market price for the property, making a substantial amount of money without even having to go to the trouble and expense of getting a mortgage and going through the legal processes of the purchase.

Now, however, some speculators at the top end of the market in London are finding it impossible to get out of their commitment even at the original price, according to Adam Gaymer of DTZ Residential. "We have seen several people walk away from the contract, preferring to lose the deposit rather than take the loss on sale," he says.

These "buy-to-flip" speculators have been buying million-pound penthouses, only to find that developers have been putting so many penthouses on the top floors of new blocks that the market is over-supplied. "In the next six to 12 months a lot of people who bought larger units such as four-bedroom penthouses, especially along the river, will find there is a lot of competition," Gaymer predicts.

At the lower end of the market, flats priced below £400,000 are still selling well off-plan because genuine owner-occupiers and buy-to-let investors are still interested and supply is less than demand.

Over the past five years or so, as many as 65 per cent of individuals buying off-plan have been speculators, according to DTZ Residential research. But that is changing. Apartments priced at over £800,000 used to form 25 per cent of all off-plan sales, despite being a tiny proportion of the number of apartments on offer. Now, the figure has shrunk to 5 per cent, indicating complete disillusionment with their short-term profit potential. At the lower levels of the market, flats are still selling off-plan, mainly to owner-occupiers, Gaymer says. At South Central in Elephant & Castle, a Piers Gough designed apartment block due for completion at the end of 2005, the first phase of 40 apartments has already sold off plan at prices ranging from £180,000 to £295,000.

Grosvenor Waterside in Chelsea, a development of 600 apartments grouped round the old Grosvenor Dock, has had more than 180 off-plan sales at prices up to £500,000. DTZ Residential on 020 7408 1161 are agents for both developments.

Dominic Grace of Savills says that "flipping" is not as easy as it sounds anyway. "It has been quite difficult for investors to flip," he says. "When they originally buy they go through a well-oiled procedure, but there is no process to assign the contract to someone else because the developer does not want to know and estate agents are not interested." And with the prospect of increasing numbers of investors trying to wriggle out of their commitments because of static or declining property prices, developers are clamping down on the practice, Grace says: "We now recommend to developers to allow buyers to assign the contract but they cannot assign responsibility for failure to complete, so the developer does not lose control of the final buyer." As a result, if a flip goes wrong the original speculator will still lose their deposit.

The writing is clearly on the wall for "flipping", which is a threat and an opportunity for husband and wife team Sylvana and Neil Young of Young Property, a web-based property investor service. The Youngs specialise in selling new property to investors on their database, and do a lot of marketing on their website at www.youngproperty.com. One of the features of the website is a section specially for people who want to "flip" their off-plan investments. "There is no website that allows people to advertise properties they have bought but not completed on, and "flipping" properties is not something that estate agents deal with - they deal with bricks & mortar not concepts and plans," says Neil Young.

"We have introduced a section called 'flip sales', and offer the opportunity to advertise properties for free."

In the medium term, the prospects for a "flip sales" service look bleak as the speculators move to brighter prospects, but in the short term Young may be doing brisk business. There are, after all, about two years' worth of speculative buys that will have to be shifted in an increasingly difficult market, so the owners are likely to grasp any and all sales aids to hand.

Lee Grandin, managing director of specialist buy-to-let lender Landlord Mortgages believes buying off-plan can still be a good investment strategy, though not simply with a view to "flip". "It's still possible to make money from investing in off-plan properties, but an investment strategy which worked a few years ago will not necessarily deliver the same results today," he says.

To avoid losing on the deal, Grandin advises researching the purchase carefully to ensure you are getting a genuine discount against the current market value of comparable, but already-built, properties.

You should also avoid developments where more than about a third of the flats have been sold to investors, because they will be your future competition and drive down rent.