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sound advice Bulbasourus.

I have a portfolio of 40 UK properties and 2 abroad. The first I ever bought was off plan in Bethnal Green 21 years ago. After watching the price go down 6 months after I bought it an estate agent told me that I should always expect off plan to go down due to the cost of marketing that is in built in the developers budgeting. He likened it to 'new' versus 'second hand' cars. As soon as you drive it off the forecourt it's worth less than you paid for it.

I swore never to make the same mistake again.

19 years later (2 years ago) I bought another property from a blue chip uk developer - the only other new property I have ever bought. Not inner city flats but a cul de sac house in Sussex. My property manager worked on saturdays at this development and told me that I was getting it at 25k less than that which someone else had agreed to purchase it for, it had come back to the developer and now they were prepared to drop the price if I could act fast. I trusted my manager with my life (and still do) and am absolutely sure that she beleived this.

Recently I looked out of interest at what these properties were now selling for by going onto one of the official land registry 'price paid' sites. Low and behold it turns out ALL the other properties were sold for less than I paid for mine. And guess what - all the prices being acheived on sale as a 'second hand' property were less than anybody paid originally!

never again!

By contrast the 40 properties that were not purchased 'off plan' have performed much better.

I don't pretend to know all the reasons why this is so but my feeling is that it's very difficult to know who is paying what for these types of properties because of all the 'deals' that are potentially being thrown in (like your guaranteed rent example).

There has to be risk attached to these deals. I ask myself - why would the developer sell at say 10% below REAL market value if he wasn't passing risk on to somebody else. If the development is rock solid he will be able to get the finance a lot cheaper elsewhere - given the staged payments that he will receive

I'm sure that buying off plan can be great in a fast rising market in the right development, particularly if you turn it before it becomes second hand, but if the market doesn't bail you out you may well rue the day.

That's fascinating chiefjuju and pleased to meet someone with a handle as silly as mine !

As a job amongst other things I trade options and I think the off-plan valuations are infected with this. Consider the following :-

I can buy a flat today £100k or I can buy an identical flat offplan in 2 years time for £110k if I put 10% down .

The logical thing to do with no frictional costs and a yield equal to or better than the mortgage rate would be to buy the property for £100k since the rental yield would offset the financing cost plus provide a return on my equity.

However if I only need to put down 10% on the offplan (i..e 11K) then I have bought an option to but the property at £110k in 2 years time and this may look more attractive. Consider 2 outcomes :-

1. Property drops to £80k in 2 years
2. Property rises to £140k in 2 years


In scenario 1, one is down £30k via the off plan route but one has only deposited £11k so my loss is that, just £11k. Legally the "loss" is actualy much greater than this as the developer can enforce the contract and sue the purchaser for losses in reselling the property. However, this will not be going through the head of the off plan purchaser who think he can only lose 10%. ( As a tip one should exchange via a shell company rather than one's own name then assign into one's own name at completion so you cannot be chased for the money if you default on the contract)

In scenarion 1 if I had bought for £100k one would now be down £20k plus all the costs of buying furnishing (say £30K in total ). Plus one would have an asset that would be hard to sell and would be a "millstone"

In scenario 2 the £11k for the off plan becomes a hassle free £41k - happy days! With a bit of luck he sells on before completion in such a hot market so his name does not appear on the land register thus helping to evade local CGT etc (esp. if you are in another country) !

One may be better off with buying at £100k under scenario 2 but willl have more frictional costs versus the off planner who sold before completion so may not be as good as one thinks.

A lot also depends if you are buying to hold rather than flip and this would push you more down the second hand route.

I think this goes some way to explaining why off plan can sell for more than "second hand". i.e. one has limited "perceived" downside with offplan ( i.e the deposit on exchange) but big potentially upside with no hassle/tenants etc.

The truth is a little different of course as developers will now start to sue rich offplanners who fail to complete.

Hello Bulbasaurus,

Let me challenge your points:

1. Property is an investment but estate agents are not investment advisers even though they sell property as an "investment"

Estate agents usually do not pretend to be advisors but they are solid source of information. It is for the investor to take well informed decisions.

2. Their advice is biased since they work on commission basis

If information provided by estate agent is biased, he acts against himself. Biased information may allow him to close one deal only. It seems that you mistake estate agent with developer.

3. Always have a valuation on off plan purchase prior to exchange and make sure the valuer uses existing stock as comparator - not other offplans which may also be overvalued.

Warsaw, 2005, prices going up 50-70% per annum. You have your valuation at exchange. 18 months construction period ends. You valuation is 70% undervalued. Secondly, if you want as your comparator 'not other offplans' it means that you compare two different things i.e. primary market with secondary market.

4. NEVER, NEVER believe the rental yield that agents say you can achieve. Have 3 LOCAL rental agents provide rental estimates.

That is true. There are very few investors who trust just one source of information.

5. Ignore rental guaranatees - they are there to confuse the economics

That is also true. The only rental guarantee is your tenant as long as you have him.

6. Establish what % of properties in an area are going to investors rather than people who are buying to live there. If it is > 50% then you should worry! Are local investors buying in the development - if not then WORRY!

Yes. I fully agree. I would even say that if the number is higher than 30% - WORRY.

7. Obtain an in principal mortgage before exchange even if completion is a long way off. Finance may be a lot more difficult than the agent implies ( especially now)

Only very inexperienced investors expect mortgage advise from estate agents.

8. Do not buy in holiday destinations unless you plan to live in the property for several months each year.

This I do not know.

9. If buying City Centre compare it with flats 2 or 3 miles out. If it > 50% more expensive ask yourself if this differential is sustainable.

Krakow, 2007. Krakow Old Town, City Centre - 12,000 PLN per sqm vs Krakow, Nowa Huta 3 miles away, 6,000 PLN per sqm. And there is nothing wrong about it. It is better to ask estate agent who can explain the difference in 3 sentences.

10. Make sure that your contract ensure that all infrastructure is in place before you have to complete and that all deeds etc are provided

It is obvious and in Poland, Slovakia, Czech Republic and Romania developer needs to get occupancy permit (or equivalent document) to hand over your apartment. If there is no infrastructure, there is no permit.

11. NEVER pay more than 30% before completion. Too much (potential) incentive for the builder to leave the property half built and run off with whatever is left in his bank.

Developers finance constructions not from the payments from the future owners but from a loan from a bank. In case apartments are in short supply, the demand and prices are high and then there are many buyers who are wiling to take a risk and pay even more that 30% in order to buy apartments. If there are many apartments available on the market, developers accept 10% at exchange and wait for the 90% to be paid at completion due to the reason mentioned in sentence 1.

12. Track record and size of builder - the smaller then the riskier (obvious but worth mentioning)

I know many developers who are small, reliable are providing much better quality apartments than big developers, whose mass production sometimes results in a considerably lower quality of the products.

My conclusions are drawn on the basis of the Polish, Slovakian, Czech and Romanian markets.

Regards,

Stanislaw Staromlynski
stan@i-propertyassets.com

Stanislaw I suspect Bulbasaurus had others rather closer to home in mind on point 7 not just estate agents!
Huw

I think we have to draw a line between one-off sale estate agents - who are massively incentivised to make the sale - at any cost...

... and those agents or advisors, who's business is built on repeat business - where the agent/ advisor is strongly incentivised to 'get it right' as their future business depends on their ability to keep customers.

You have to look at the motivations of the people you work with first - and then on that basis decide.

Warren Buffett has a saying that he wants to know the people he is dealing with 'have skin in the game'.

ie. have a finanical interest in a successful outcome.

Most ordinary agents - or fly by night 'buy to let experts' don't.

I believe this forum (amongst other things) means PS have 'skin in the game' - and this - and other things, is what makes us different.

Cheers
Neil