Questions to Ask About Overseas Property Developments

Offplan deals can offer property profiting potential in any market. But you need to invest wisely. Here are five questions to ask...

How accurate is the valuation?

It's relatively easy to predict the value of a property that's being built. You can find out what comparable properties are selling for, how much of a premium to add on for a new-build and where the market is heading.

What you want to know is how much you could sell that property for today if it were finished. You then have to decide for yourself what is going to happen to prices between now and completion. From this, you can estimate the likely increase and the profit potential.

How do you find this out? Talk to local estate agents and ask them what they think. For example, "I'm thinking of investing £150,0000 in a new apartment on the seafront. What should I expect to get for that? Another question is this, "How do you see the market going over the next year or so?"

If the valuation doesn't stack up, walk away.

How realistic is the discount? 

Developers offer incentives to encourage early buyers. If the developer can sell a number of units early it makes the development more attractive to subsequent buyers. To attract early buyers, developers will offer various deals such as deposit paid, stamp duty paid, free furnishings and cashback mortgages.

All of these are built into the sales figures. You can often negotiate the price downwards if you leave the freebies out. You will nearly always be able to negotiate a reduction of some sort.

Whether you are offered a gifted discount or a reduction is significant. Some lenders will treat a gifted discount as part of your deposit. This means there is less cash to find at completion. Speak to your mortgage broker about those products which may suit you best. But note that if completion is two years off these products may not be available then.

Is the contract assignable?

With an offplan property, you are speculating that the value of the property you are contracting to buy will increase in value between now and completion. If the value does increase, your profit is the difference between the two figures (allowing your trading costs of course).

One way to profit is to sell the contract on to another investor who wants to take over the deal. You do this pre-completion. To do it, the contract you're signing must be assignable.  This means you can sell the contract to a third party. This can be a very profitable way of using available cash.

Say you put 5 per cent deposit down at exchange. Say £10,000 on a £200,000 property. If you sell two years later and there has been an average 7 per cent  per annum increase, your profit is £28,980  (£200,000 +7% pa compound equals £228,980) Or 289 per cent in two years.

Am I ready to complete?

When you buy into an offplan deal you enter into a legally binding contract. You will be asked to pay a deposit and exchange contracts usually within 28 days. When you enter into this agreement you may intend to sell the property before completion. But you need to be flexible!

If you choose a property which decreases in value then your best option may be to complete, rent the property out for a year or so and sell it. To do this, you must be sure you can get a mortgage on the property. The developer should put you in touch with a lender who is already familiar with the development. If they can't, you may want to walk away as this is a worrying sign.

Speak to your mortgage broker before you commit. The best advice is the same as for any property deal. Shop around for the best deal. The mortgage lender recommended by the developer may not have the best deals on the market.

Can the property be let after completion?

For a BTL mortgage, you need a rent that will cover your outgoings. Your mortgage lender will want to know this too. They want evidence that your rental income will exceed your mortgage repayment by at least 130%.

The developer should provide you with a likely rental figure but don't take this at face value. Speak to local letting agents to find out if this is achievable. Bear in mind that this is exactly what your lender's valuer will do when the time comes.

If you're buying in an area where 300 identical one-bedroom flats are coming into the market the same day why should somebody rent yours! None of us can predict the future but if you've done the legwork in the first place you can buy offplan, avoid the major pitfalls and make some money.