When talking about UK investment property, what exactly is property forward pricing? Forward pricing is something that developers have been known to do.
Hopefully by the end of this web page you will have a better understanding of exactly what it is and how it can affect you as a UK property investor.
In short, traditionally property forward pricing is when a developer prices a property to what they believe it will be worth at the time of completion.
You are considering buying a 1 bedroom flat in Ealing, West London. Let us take a look at the figures in more detail, assuming that the developer concerned is forward pricing the flat by 10%.
- The Purchase price = £220,000
- If the property was completed today in the current market the actual current market price = £200,000
The property takes 18 months to complete, within this time the property market has risen by 20% more than it was when you agreed to the purchase price. (Keep in mind this is 20% more than £200,000 not 20% more than £220,000, simply because £200,000 was the real market value not the £220,000 you originally agreed to).
Taking this to be the case, have a look at the figures below.
- The agreed purchase price = £220,000
- Actual value of the property at time of completion = £200,000 + 20% = £240,000
- Therefore your potential profit = £20,000 (For this example we are not taking into account other fees such as solicitors etc.)
The potential for huge amounts of profit if things go your way and you are in a rising property market is exceptional. This is one of the ways many people have made a very nice living from buying off plan properties.
However before we start to rejoice and see pound sounds dancing before our eyes lets take a look at the same scenario in a slightly different property market and see what influence property forward pricing has had there.
Let’s assume that the property market has not increased as much as in the first scenario. This time the property market has only gone up by 5% by the time of completion. (Just to remind you. This is 5% more that £200,000 not 5% more than £220,000).
- The agreed purchase price still = £220,000
- Actual value of the property at time of completion = £200,000 + 5% = £210,000
- Therefore you have made a loss that = £10,000 ( This again is without even taking into account other fees such as solicitors etc).
Hmm, having second thoughts about this deal? This sort of loss is being incurred by inexperienced property investors on a regular basis. Property forward pricing is not the only reason investors are losing money, but it can be a prominent one.
Inexperienced investors (as well as more experienced investors, who should know better) are still buying these properties and making huge losses. They still remember the stories of years ago of people making an absolute killing from buying off plan properties and they think by following the exact same strategy that these investors of days gone by have followed, that they will get the same results.
Please don’t get us wrong! There are still huge amounts of money to be made from buying off-plan properties. And like with any property investment, if you can get it for the right price then you are quid’s in.
The point we are trying to make is not to blindly trust what a developer says to you. As we hope we have demonstrated,when dealing with property forward pricing and off plan properties it can be a fine line between a healthy profit and a huge loss.
You must do the correct due diligence and do comparisons with the local property market to make sure that your developer has not forward priced the development. And if he has and you still decide to buy you need to be very sure you are in a fast rising housing market or that you have some other good reason for making that decision.**Nothing on this website should be confused with financial or legal advice. If you need this, or any other type of advice, please seek the help of a competent professional. In addition, because real estate laws change all the time and differ from state to state, and even city to city in the same state, everything in these pages should be considered general marketing advice and ideas. Please see link to full Disclaimer at the bottom of this page.