If you are looking to buy your first home or trade up, you may feel tempted by some of the freebies offered on new build properties. These can range from free white goods or a new carpet to a significant financial contribution to your purchase costs.
Here, Anjum Khaliq, one of our conveyancing specialists, takes a closer look at developers’ incentives and whether they are always as good as they appear.
What are developers’ incentives?
A developer’s incentive is a marketing ploy to make a property more attractive to buyers. They are particularly popular in a slow or crowded market and can be an effective way for a developer to distinguish its scheme from many similar ones.
Often incentives are things that could easily feature on your wish list for your new home, such as a fitted kitchen, soft furnishings, white goods, or a landscaped garden. Sometimes the offer is unrelated to the property, and season tickets, iPads and foreign holidays have featured as enticements. Superficial offers like these may be unlikely to sway you unless you are already seriously considering a property.
However, developers sometimes offer financial incentives that could make a real impact on your budget – things like cash back, help with professional fees or mortgage payments. Some developers may even offer to pay your stamp duty.
How lenders view developers’ incentives
If you are borrowing to fund your purchase, your lender will want to know about any incentive you receive. This is because an incentive can mask the true value of a property, leaving you and the lender at risk financially should property prices fall.
For example, if you buy a new build property and the developer throws in a high-end kitchen and pays your stamp duty, you may think you are getting a bargain. If you are borrowing a high percentage of the purchase price, you may struggle to repay your borrowings from your future sale proceeds and your lender may worry about you defaulting on the loan. This risk is greatest in a falling market, and the incentives, which may have inflated the original price, are unlikely to add significantly to your home’s resale value.
Usually, the developer or seller’s conveyancer will tell the lender and your conveyancer about any incentive on a special disclosure form. If your solicitor becomes aware of changes to the arrangements or other incentives, she may need to tell your lender.
Most lenders will accept incentives up to 5% in value of the purchase price. However, they may adjust the amount they are prepared to loan if the incentive is significant.
Why it pays to be cautious
A recent Which report showed that many developments, where superficially impressive incentives were advertised, were priced at the top end of their local market. You should also bear in mind new build properties tend to sell at a premium over existing housing stock.
It may be easy to visualise yourself moving into that sparkly new show home, with its free fitted carpets and American-style fridge. But do some research first and ask yourself whether it is really such good value when you compare the cost per square metre of accommodation.
You may struggle to recover your costs when you sell, and a slightly older property could be a better buy in the longer term.
Does this mean you should never accept a developer’s incentive? Not necessarily. You may decide that the build quality, furnishings, or energy efficiency justify the cost of that new build: any sweetener the developer throws in is just a bonus. But be sure to make an informed choice.
There may also be some instances where an incentive has real value and should factor into your decision making. This may be because the developer is under genuine pressure to shift a property, for example because it is the last plot on a development or because the potential savings make sense for you.
However, always consider all the facts carefully and how they could apply to your circumstances. Even the stamp duty saving may not be that great if you are a first-time buyer because of the reliefs already available.
Always take independent professional advice
It is always prudent to discuss your plans with advisors whom you can trust at an early stage. This should be someone truly independent of the developer or seller and who will always put your interests first. They can help you see things objectively.
Some developers may try to link their incentives to you using their preferred broker or conveyancer. This is most often the case where they are contributing to your legal or moving costs. A recent report by a House of Commons select committee found there to be considerable evidence of this practice and stressed the need for consumers to be able to access independent and reliable legal advice. After all, a conveyancer who relies on repeat business from a developer may not always be as critical of their terms as one who is only interested in what is best for each client.
How your solicitor can help
Your solicitor will be able to guide you through the home buying process, including the implication of any developer’s incentive. It is important to tell him or her all the terms you have agreed with the developer so they can ensure the sale agreement correctly reflects them. The solicitor will also be able to check the terms and conditions to ensure there are no nasty surprises.
Most important, they will give you clear, unbiased, advice about your purchase. One of the biggest criticisms levelled at some developer-recommended conveyancers is their failure to explain sufficiently the ownership structure of the development and onerous lease terms, such as ground rent. A good solicitor will see beyond the developer’s gloss and help ensure your purchase is right for you.
For further information about buying off a developer, or about buying or selling your home in general, please contact me – Anjum Khaliq – or anyone in our conveyancing team.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.