What to Consider Buying a New Build Property

When buying a new build property there are a number of additional points to consider when compared to a purchase pre-existing property. You will often be buying “off plan”, the completion date may not be fixed when contracts are exchanged and you will need to know what, if any, warranties are in place.

The builder will often impose a short deadline by which you must exchange to ensure that you do not lose your reservation fee and it may offer a number of incentives.

Buying “Off Plan”

When buying a new build property it will often be the case that the property will not actually have been built at the time you make your offer, or indeed by the time you exchange contracts. This is known as buying “off plan”, because your decision to purchase is based on plans and artist’s impressions, though there may also be a show home to view.

One important point to remember is that the contract with the builder may allow him to deviate slightly from what was originally agreed. There should not be any major deviations, for example the property will still need to have the agreed number of rooms and have the same approximate floor area but the shape of the rooms may alter or the positions of walls.

One variation that often leads to disputes is where some feature of an estate, such as bin store or a children’s park, is moved so that it is nearer the property than originally anticipated. People often find these features unsightly or inconvenient but if they do not materially affect the value of the property they may not be sufficient to constitute a breach of contract.

Reservation Fees When Buying New Build Properties

When making an offer, particularly where the builder is one of the larger developers, you may be required to pay a “reservation fee”. This will reserve the plot for you for an agreed reservation period, usually 28 days. The reservation fee will be deducted from the purchase price if you proceed to completion but is usually non-refundable if you do not proceed.

If contracts are not exchanged within the reservation period then the builder may sell the plot to someone else, in which case the reservation fee will be lost. As a result it is important to ensure that before reserving a property you have a solicitor instructed and a mortgage agreed in principle, so as to avoid delays.

In current market conditions, where properties are not selling quickly, this risk is less evident but it does exist.

National House Builder’s Council (NHBC)

The National House Builder’s Council is an organisation which regulates house builders in the UK. Membership is voluntary and those who are members are not obliged to register all of their developments with the NHBC but if they do, they must meet certain standards of build quality. The NHBC will inspect each property on a development before completion and once satisfied will issue a warranty certificate (called a Buildmark Certificate).

The warranty provides insurance against poor workmanship. It lasts for 10 years and for the first 2 years it covers major and minor issues. For the remaining 8 years it covers major structural defects only. Where the developer fails to do the works required under the warranty NHBC will step in and do the work.

As well as providing cover after completion, the NHBC also insures against the developer going bust following exchange of contracts but before completion. In the event that this happens it may complete the development or it may simply return the deposits (up to a maximum 10% or £100,000, whichever is lower) to would be purchasers.

Planning Permission and Building Regulations Approval

The construction of a new property requires planning permission and it is your conveyancer’s job to check that the appropriate permission has been obtained and the property has been built in accordance with it. Where the property is part of a new estate the permission will relate to the estate as a whole rather than individual plots and it might be necessary to check that the development as a whole is to be built in accordance with the permission, though the transfer from the developer of each plot should contain a covenant to construct the development in accordance with the permission.

Incentives Offered By Builders

Builders will often offer incentives to purchasers such as free carpets or cash back or agreeing to defer payment of part of the purchase price to a later date. It’s worth asking what incentives the developer can offer before making your reservation and even haggling a bit if that’s possible, it’s surprising what the developer might be prepared to give.

Whatever incentives are agreed must be reported to your mortgage lender if you are obtaining a mortgage. They may affect how much you are able to borrow but failure to disclose may amount to mortgage fraud. Your conveyancer should report the incentives as they have a duty to the lender however you should check that they have done so. This should be done at an early stage since a response from the lender will be required before contracts can be exchanged.

Shared Equity Arrangements

Shared equity is a particular type of incentive, where the developer will lend you a portion of the purchase price and secure the debt as a charge on the property, ranking immediately after the charge to your mortgage lender. This arrangement works well where you do not have the cash to pay a deposit. Mortgage lenders are currently not offering 100% mortgage deals therefore first time buyers must come up with at least 15% – 20% of the purchase price from other sources.

A shared equity loan is usually interest free and there are no monthly payments to make. Instead, the loan must be repaid by a set date (perhaps 7 years from completion of the purchase) or when you sell the property, whichever is earlier.

The amount you repay however increases proportionately with the value of the property. As an example, if you buy a property for £100,000 using a £20,000 shared equity loan then the loan is equal to 20% of the purchase price. This means that you must pay the developer 20% of the sale price (if you sell before the end of the term) or 20% of the market value of the property at the end of the term. The affect of this is that the only equity you will ever have in the property is the remaining 80% less whatever is owed on your mortgage. If your mortgage is subject to an early repayment charge therefore it is quite possible that for the first few years you will be in negative equity. This is because you will owe your lender more than you originally borrowed and you will owe the developer at least what you originally borrowed from him.

It may also be the case that even if your property goes down in value, you have to pay the developer the full amount of the shared equity loan.

Exchange of Contracts with Completion On Notice

Where the property is not built, or is only part built at the time of exchange, which is often the case, completion will not be on a fixed date but will be “on notice”. This is because the developer cannot guarantee when the property will be finished.

What this means is that there will be a clause in the contract which states that completion is to take place within a give period, usually 7 or 14 days, from the date on which the developer serves a notice confirming that the property is finished. Where the property is covered by NHBC this notice should be accompanied by confirmation from NHBC that it has inspected the property and is satisfied that it is ready for occupation.

If there is no NHBC cover then a building regulations completion certificate or architect’s certificate will be required.

If you are unable to complete within the notice period then you will be in breach of contract.

Expiry of Mortgage Offer Prior to Completion

Completion of a new build purchase may take place many months after contracts are exchanged. As a mortgage offer will typically be valid for a maximum of 6 months, perhaps less, this creates the risk that the offer will be withdrawn prior to completion.

Where market conditions are poor and prices are falling there is a danger that of not be able to obtain either an extension to the offer a new mortgage for the same amount. A great number of people got into trouble in this way during the credit crunch. They exchanged contracts on properties at inflated prices that were not due to complete for perhaps 9 – 12 months and a combination of sharply falling prices and banks refusing to lend meant thy could no longer obtain finance.

Failing to complete in these circumstances not only means you will lose your deposit but also that you will be liable to the developer for any losses he suffers as a result. This includes the difference between the price you had contracted to pay for the property and the price for which it eventually sells, as well as any additional marketing and legal costs.

If possible you should ask for a “longstop date” to be entered into the contract, which is a date by which if completion has not taken place you are entitled to withdraw without penalty. The date should be prior to the expiry date of your mortgage offer.

Snagging Lists

After you move in you should compile a “snagging list” for the developer to deal with. This is a list any minor defects you discover such as ill-fitting doors, unfinished skirting boards etc. This should be presented to the developer as soon as possible.

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