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What are the pitfalls of buying off plan?

18th Apr 2019

With the demand to live in the city fuelling an increase in new developments, what are the pitfalls of buying off plan? Kevin Ross, director at Brown Turner Ross explains.

With the demand to live in the city fuelling an increase in new developments, what are the pitfalls of buying off plan? Kevin Ross, director at Brown Turner Ross explains.

It’s clear that there is still a big demand for city centre living in Liverpool. If you were to visit a city centre estate agent or perhaps walk around the city you would see dozens of new developments with attractive publicity showing exciting contemporary buildings with state of the art facilities. But if the property isn’t yet built are you taking a risk in plumping for something off plan, rather than on something that is finished?

The short answer is yes. There are many off-plan developments which are funded by the buyers of the units within the development. Often such developments require a highly geared structure of deposit payments which mean that the buyer will be required to pay up to 80 percent of the purchase price before the property is even finished. In such circumstances the buyer needs to understand that they are effectively funding the development and it should be reflected in an appropriate level of discount.

It needs to be remembered that the standard deposit to be paid by buyers is 10 percent of the purchase price. If the developer is asking for more, then it needs to be considered greatly as the risk is clearly much higher.

Although the buyers solicitor should be able to ensure that protections are in place, in many situations it is impossible to cover every eventuality and the mechanisms required by the developer may make the buyers vulnerable to the possibility of insolvency by the developer. The developers would usually build under a Special Purpose Vehicle (SPV) meaning that if they did become insolvent the company could fold without any comeback to the directors of the company.

There has unfortunately been some history now in this city of developers under performing. Millions of pounds of deposit money has not been properly spent and the buyers have been left with a broken contract and very little options.

There are many great developers out there that build a fantastic homes but it’s important to look at the company themselves and what they have done previously.

Off plan buying does therefore have its place but it’s imperative to take proper legal advice on the terms and to understand the risks when they arise.