Why developers and builders give discounts on new build and off plan properties?
Developers are prepared to discount properties by as much as 20% (or more?) on their new build homes and off plan properties: - To sell their properties off plan (pre-sell) – often to keep the bank happy
- To meet targets at the end of financial year
- To move to onto another development and/or clear stock plots
Different types of discount and how discounts work?
Discounts can be offered in different formats. The type of discount offered by the developer will depend on their experience and policies. Whether you will be able to take advantage of a specific discount will depend on your lender’s policies! In other words, each lender will only accept certain types of discount. It is normally part of a property clubs remit to work with a mortgage broker to identify a lender that matches your personal criteria with the deal being offered.The discounts below have been illustrated with an example of a property with a gross price of £200,000 and a developer’s discount of 15%, leaving a net price £170,000.
To purchase the property the investor would apply for a buy to let mortgage where he would borrow 85% of the property value (loan to value or LTV), and would therefore have to find a ‘mortgage deposit’ of 15%. You will note that in most cases the discount secured by the property club is greater than 15%, so this can be used to finance the 15% mortgage deposit.
1) Buying at the net or discounted price
- The investor purchases the property at the discounted or net price ie £170,000
- The investor has to use some of their own cash (£25,500) to finance the mortgage deposit on the lower/net price (ie 15% of £170,000),
- The mortgage repayments are lower, so the rental cover will be higher – this means that the deal is more likely ‘to stack’ (ie the rental cover and other criteria will allow the investor to secure a buy to let mortgage)
- The investor has already gained £55,500 of equity in the property
2) Buying at the gross price and using the discount to finance the mortgage deposit – minimising the cash input
- The property is bought at the gross price of £200,000 and the mortgage deposit of £30,000 is paid by either:
1) A gifted deposit where the developer agrees to pay part or all your deposit (cash may or may not change hands)
2) Permitted discount – where the lender allows all or part of the discount to be used as a the mortgage deposit - In these cases the mortgage will be 85% of the gross price and the rental coverage will be lower – so the deal may not stack
3) Buying at the gross price and receiving a ‘Cash back’ from the developer or builder
- The property is bought at the gross price of £200,000 and the mortgage deposit of £30,000 is paid by the investor
- In some cases the investor will borrow the money to pay for the deposit (by bridging or using credit cards)
- In most cases there will be a ‘simultaneous exchange and completion’
- The buyer receives a ‘cash-back’ from the developer equivalent to the discount, usually 1-7 days after completion
- The developer may prefer to pay the property club a ‘marketing fee’, allowing the club to refund the buyer their cash-back
- Some investors will use the same deposit money to buy a number of properties sequentially, allowing the deposit to be ‘rolled-on’
4) A ‘Back-to-back’ deal, involving the use of a bridging loan and a re-mortgage
- A bridging loan is used to fund the purchase at the net or discounted price
- ‘Bridging’ will typically cost 1% of the gross price per month
- You then get a ‘back-to-back’ re-mortgage within 1-31 days for 85% of the full listed value
- This releases the cash to pay back the bridging loan
- Only certain lenders will allow you to re-mortgage in such a short time
- In most cases there will be a simultaneous exchange and completion to minimise the delay in releasing cash - often the re-mortgage also happens on the same day
- In these cases the mortgage will be 85% of the gross price and the rental coverage will be lower – so the deal may not stack
5) A ‘no-cash’ deal or ‘packaged deal’
- This is when property clubs achieve ~20% discounts and they can use a broker to “package the deal” or offer a ‘no-cash’ deal
- The buyer only pays a reservation fee to show their commitment. The deposit, stamp duty, valuations, legal fees and finders fees are all funded out of the discount
- Depending on the format of the discount this may involve a bridging loan and a “back-to-back” mortgage (which may incur a 1% fee)
- This is popular with new investors who think they do not need any of their own cash to make millions out of property
- Generally the property club is taking finders fees in excess of 2% and the investor is not benefiting from the full discount – this tends to be less popular with the professional investor who will always try and minimise their cash investment
Examples of each type of discount and the resulting rental cover
| Gross price | Discount or deposit type | Net price | Price you buy at | Who pays deposit | Deposit to find | Mortgage amount | Mortgage payments (5%) | Rental cover for £800/ month | |
| Buying the property at net price | £200,000 | 15% off price | £170,000 | £170,000 | Buyer | £25,500 (15% of net) | £144,500 (85% of net) | £602 | 133% |
| A gifted deposit | £200,000 | 15% paid by developer | £170,000 | £200,000 | Developer | £0 | £170,000 (85% of gross) | £708 | 113% |
| Permitted deposit | £200,000 | 15% discount allowed as deposit | £170,000 | £200,000 | Not required (lender) | £0 | £170,000 (85% of gross) | £708 | 113% |
| Cash back | £200,000 | 15% cash back after completion | £170,000 | £200,000 | Buyer for 1-7 days | £30,000 for 1-7 days - can bridge | £170,000 (85% of gross) | £708 | 113% |
| Back-to-back (bridging/ re-mortgage) | £200,000 | 15% off price bought with bridging then re-mortgaged | £170,000 | £170,000 | Bridging loan for £170,000 | £0 | Re-mortgage for £170,000 to repay bridging loan within 1-31 days | £708 | 113% |
