Why is now a good time to buy new build property and what is the best way to negotiate a great deal out of a developer?
If the press were to be believed I wouldn’t be surprised if you thought that buying a new build property or any other kind of property would be a terrible idea. I am not going to try and dissuade you that property prices have reduced. It is a fact and depending on which index you follow prices have reduced in real terms by 20 – 25% over the last year.
One of the expected outcomes of a downturn in the property market is that the market has changed from being a seller’s market to a buyer’s market. Reduced prices have resulted in more choice for buyers and better rental yields. As a landlord and a property sourcing agent I have followed the private market and the developer market closely. My experience is that the private market (individual sales by home owners) reacted to the recession quickly but that it took much longer for the developers to start offering great deals.
The problem with the developers waiting to offer good deals is that when they did offer the deals they were becoming desperate for sales, especially as their year ends and half year results were expected (Tip – the best time to buy from a developer is 4 – 6 weeks before their year end as they will offer much better deals to improve their results improved).
We are now in a unique position with regard to new build property. There are some great deals to be bought but these will only last for a limited time. Most building has stopped (how many mothballed sites have you driven past recently?) and will take a long time to restart as nervous developers and funders look for more than the green shoots of recovery to starting building and lending again. I feel that there is a one year opportunity to buy new build deals and then there will be a 3 – 4 year period where there will be very little new build property built and that will also finish off the deals. Developers currently have stock on their books that they are desperately trying to sell. I have likened new build sales to a fire sale and this makes dealing with developers with targets and losses looming very difficult.
Developers (especially the large national house builders) can be very difficult to deal with and have to be handled carefully. It is easier to deal with regional developers as one can often talk to the decision maker rather than a number different people in the larger developers.
But why buy new build property at all? There are a number of good reasons to do so but let’s first consider the downsides. The problems with new-build as opposed to traditional resale property are:
Higher costs – service charges and ground rents
Rentability – when a lot of new build property comes on the market it can take a while to rent.
Traditionally lower yields but this is changing with the good deals in the current market (8 – 10%)
Oversupply – some areas have too many new-build properties and the rental demand cannot support the supply.
However the advantages of buying new-build property now is:
Great deals – up to 60% off asking price and 35% off RICS survey
Attractive to tenants
Low maintenance
Mostly city centre locations where infrastructure is good
As an investor I always used to stick to northern terraces. The yields were good and there are plenty of tenants. However I am now buying new-build apartments while the advantages listed above continue to apply.After you have decided that you want to buy a new build apartment the next difficult stage is deciding how to approach doing this (I am a property sourcer but the following comments are objective and are my thoughts as an investor). The easiest way, if not the cheapest, is to source a property through a property sourcing company. There are some good sourcing companies out there but also some very poor companies. The problem for the investor is working out which property sourcing companies are good. As there is no official trade body I think the best way to judge a sourcing company is from a personal recommendation from a friend or a colleague. If you don’t have a friend who can give you a recommendation I would suggest attending a property network meeting and talking to other investors over drinks after the meeting.
You will find that other investors are often happy to help and will share any experience with you, good or bad. Let’s assume you find a sourcing company, they should manage the process for you but will also charge you a fee for doing so. I believe that if a sourcing company can add value then they should charge a fee – how much that is and whether it is good value or not only you can judge!
The other way to get a good deal from a developer is to approach them directly yourself. As a private individual though you won’t have the links and purchase power that other agents and larger investors have. It is worth considering collaboration with other like-minded individuals (via forums, network meetings or social network sites) to buy new-build property. If you get together you can share information and also have more negotiating power.
The key to negotiating a new-build deal is to negotiate around the RICS survey price, not the developer’s asking price. Developers can put any asking price on a property that they want to and a discount from this is worthless if the survey shows a totally different figure. Many developers will be resistant to this approach but more are accepting that this is the only way investors will and can buy. A starting point would be to ask for 40% below RICS and completion within 28 days.
It is a high discount but if developers can get a quick completion then that is very valuable to them. Make sure you have a good solicitor and mortgage broker so that if the deal is accepted that you can act quickly. Once you have proven yourself to a developer you will be in a much stronger position to negotiate further deals or get better plot positions in other developments. Whatever new-build you are looking to buy always go to the development in person or get the opinion from someone you trust about the development. What could be classed as a city centre development could be either in an ideal location or a really bad position.
The developer isn’t going to highlight any positional problems to you so it is ‘buyer beware’ and make sure you do your homework. Also check with letting agents on realistic rents and rentability of any proposed purchase. I would suggest ringing at least three agents to get their opinions and rent forecasts on the development and how long they expect your property to rent.
In summary the deals are there but won’t be for long, negotiate hard and make sure that you do your homework on the site.
Fraser Macdonald Managing Director, Property Fit Ltd
