Off the plan purchases take place before a project is built. A client sees the plans, development information, and estimated revenue. Some projects are successfully built without any major setbacks. Others incur issues, such as delays, funding shortfalls, and changes in local government plans.
This project comes with its fair share of risks, but brokers should be aware that these clients are in it to win it. These clients are investors who understand that if the project successfully gets off the ground, the payoff is big.
Here we take a look at off the plan purchases in terms of potential pitfalls. Brokers who are aware of these potential roadblocks can handle them better with their clients.
Interest Rate or Income Change
Loans for construction projects have a different set of disbursement rules and regulations. Repayments are different from residential property loans, too. If the client’s income suddenly changes, it impacts their ability to repay the financing. This project takes a few months before income is realized, so there needs to be a source of income during that gap of time.
Interest rates depend on the market. All construction loans don’t lock in the interest rate. It’s important to be aware of how these details impact the client before income starts to flow.
Property Value Drops
Financing for a new build project depends on the value of the property. Lenders use a loan to value ratio. Exercising fiscal responsibility prevents a drop in property from impacting the project from a financing perspective. It’s good to have a Plan B, just in case the forecasts fall. short.
Resale Value Drops
A person involved in this project believes that the development is worth the asking price. The opinion of potential buyers is a different story. If the property is going to be sold, it’s a good idea to line up buyers who see the property the way the builders do in terms of value.
Off the Plan Purchases Conclusion
A savvy client is a worthwhile client for brokers. These clients are willing to dive into investments that pose some risk because the payoff is sizable. At Mortgage Street, our lending teams have the tools to assess risk and balance it with the potential reward. For more information, contact us today.