With the 3% stamp duty surcharge now in effect and the reduction to mortgage interest relief set to be phased in from next April, many property investors have been rethinking their strategies for the future.
When George Osborne first announced that mortgage interest relief would be restricted to the basic rate of income tax (20%) back in July, some property investors started toying with the idea of putting a bit more buy to sell into the mix to even out any buy to let losses. With the announcement of the 3% additional stamp duty in November, this plan also became suddenly less feasible.
There’s still one property strategy that manages to avoid all of these issues, however, and that’s the idea of ‘flipping’ off-plan properties. Some investors have enjoyed great success with this tactic in the past – an Evening Standard article reports of one estate agent who clubbed together with some other investors and made a fortune on a central London development, while investors in the early stages of the Battersea development were reportedly pocketing profits of £150K for doing little other than putting down a 10% deposit.
This idea is that one gets in at an early stage of an off-plan development, putting down a deposit but then selling on the rights to the property for substantially more than the originally agreed completion price before the transaction completes. Stamp duty is only due when a sale completes, there’s no stamp duty liability and there’s no need to get a mortgage. In addition there’s no issue of mortgage interest relief not being fully deductible.
Sounds great, right? So why isn’t everyone doing it? Well, it’s a risky way of investing in property and for every tale of easily-made riches there are plenty of tales of woe. Those who lost out after investing in new builds under construction just before the financial crash are plentiful and their losses were so great that in many cases it was banks that footed the bill, many of which remain wary of mortgaging new builds even today.
If this is a strategy you’re considering, here are some things you should keep in mind.
Check the fine print
The first thing you need to find out is whether or not the contract on any development you’re considering is ‘assignable’. If it is, it means you can sell the property after exchange but before completion. If it isn’t, then you can’t, so there’s no potential for flipping.
Typically developers ask for a reservation fee to hold the property, then for a 10% deposit at exchange, which is usually within 28 days. Some may ask for higher deposits or staged payments, so make sure you know exactly what cash you need to stump up and when.
You should also check there is an insurance policy in place that will protect you if the developer goes bust during the building phase.
Have a Plan B
Obviously Plan A is to sell on the contract for a huge profit and laugh all the way to the bank. What if the property market falls in the meantime? What is there is a glut of investors selling their assignable sales in the same development and it causes prices to stagnate?
In both scenarios it may make more sense to complete on the purchase and retain it until things improve, possibly renting it out in the meantime. But could you get the funds together using cash or a mortgage? If the answer’s no, you should think carefully before proceeding. You could lose your deposit if you don’t complete and even by sued by the developer if it can’t resell the apartment and cover the shortfall.
Do your due diligence
This is true of all property transactions. It is even more important with off-plan purchases. Because of the timescales involved, it’s unlikely you’ll be able to have a mortgage agreed at the time of stumping up the deposit, although it’s a good idea to speak with a broker about the possibility of getting one if you need to down the line.
Developers frequently claim to offer discounts of about 5% to those that get in early and if you factor in the market moving up in the meantime, you could easily be looking at a 10% profit by the time it’s almost ready to complete. But often the original prices are heavily inflated estimates of what the developer thinks the properties will be worth in future. If there are no other properties on the market in the area for the price the developer says it is worth, be wary. If there are earlier releases of the same development now on the resale market for lower prices, be very wary.
Do your homework on the developer – check out its previous developments and how they’ve looked upon completion and fared in the resale market. It’s also a good idea to get familiar with the area in which your development sits and the resale market. If it’s popular with buyers of period houses, a towering new build may not attract much interest, but if it’s filled with older new build developments, a superior one in the same area might fetch a premium.
Find out how many lots have been sold to investors – if too many have, it may mean you face a lot of competition when selling on the contract.
Try and find out if the development is being offered to overseas investors – many buyers in Asia and the Far East have no idea of the true value of property in the UK and because they have a tendency to overpay, developments targeting overseas buyers can have highly inflated prices. Keep an eye on the overseas market generally – recent reports suggest some Chinese buyers may be turning away from London in favour or other UK cities, which might mean prices for off plan units in northern areas rise but those in the capital fall.
Don’t be afraid to haggle
At present there’s a lot of uncertainty in the market due to recent stamp duty hikes, macro economic conditions and the looming Brexit vote, particularly in prime central London.
There’s nothing wrong with trying to get a better deal than what a developer is offering. Even if you can’t get a discount, see if you can negotiate one of the best plots in the development, or get extras such as parking or high spec appliances thrown in.
Be aware of the tax implications
Just because you avoid stamp duty doesn’t mean you’ll avoid tax altogether (sadly). If buying in your personal name, it’s likely you’ll be required to pay income tax on any gains made rather than capital gains tax, which is only relevant if the property was, or was intended to be, a rental property. There may be ways to mitigate the tax due by investing via a company structure and claiming entrepreneurs’ relief – see our previous article for full details.
As you can see, flipping off-plan property is certainly not for the faint hearted. But if you’re canny and do your homework, it can pay dividends and does provide a way of avoiding some of the government’s recent attacks on property investors.
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