Purchasing a New Build Property “Off Plan”: What are the Risks?

Purchasing a new build property can be a great option; you can move straight in the day you collect your keys and there is little stress or fuss as everything is clean and new.

Sometimes your new build home is already built and, if this is the case, the developer usually offers a fixed completion date. Often though, a new build property is purchased “off plan”, this means that the developer may not have even started building at the time you make your reservation.

One of the potential benefits of purchasing “off plan” is that you secure the price you will pay for the property some time in advance of possession. In a good economic climate the property may well increase in value by the time you take ownership but your original agreed purchase price is locked in. Of course, the opposite may be true; there is also a risk that the value of your property may drop before completion day.

Another potential risk faced when purchasing an “off plan” property relates to the deposit you are required to pay on exchange of contracts.

It is normal for the contract you enter into with the developer to contain a clause which states that the deposit paid on exchange of contracts can be released immediately to the developer for them to do with as they wish. Usually this is used by the developer to ensure that work on the development can continue. Where do you stand though if the developer “goes bust” before they have finished building your house?

If this were to happen your first and main recourse as a purchaser is usually through the 10 Year New Home Warranty that the Developer should have put in place. As your conveyancer we will ensure that this warranty is in place before proceeding to exchange of contracts and will also check that the contract that you sign confirms your deposit is guaranteed by this warranty provider.

However, this warranty generally only covers a maximum deposit value of 10% of the purchase price. Although it is usual on exchange of contracts to only pay a 10% deposit, or just 5% if you are purchasing through the Government’s Help to Buy Scheme, there are reports in the press of some development schemes requesting more than the standard 10%, sometimes up to 50%.

Another precaution that we will put in place for you is to register a Unilateral Notice on the Developer’s title. This is basically a note that will sit on the Developer’s title deeds registering your interest in the Developer’s land under your contract to purchase your property.

This notice serves to put you in the pecking order for repayment should the developer become insolvent. This, of course, will only work if there is sufficient value in the land which is subsequently sold to also repay any party in front of you, such as a lender who has registered a charge against the developer’s land.

In summary, buying an “off plan” property comes with some risk to your deposit and you should ensure that you understand those risks and have discussed them fully with your conveyancer before exchanging contracts and paying the required deposit.