How do you finance buying a new build show home?

by Readers Question

11:18 AM, 11th November 2014
About 4 years ago

How do you finance buying a new build show home?

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How do you finance buying a new build show home?

I am in early talks with a large Home builder. They will be putting up 350 units in a town where I currently have 3 properties. I like the town and I like the idea of a new build. I’m looking to buy 1 or 2 three bedroom houses from them.

It was suggested by the developer that I could buy their show home and then that could be leased back to me for the duration of the build (2 years +, 5% yield and an uprated showhome spec). I quite like the idea of that.

Meanwhile it’s been suggested by a broker that this is a commercial proposition so that would likely mean a commercial mortgage, higher rates fees and a bigger deposit and that usual BTL rules won’t apply. I don’t like the idea of that! How do you finance buying a new build show home?

Any suggestions on how the showhome could be best financed?

Alternatively, to get in early I could always secure one or two of the ‘normal’ plots off plan as potential BTLs. But in doing an off plan deal I do understand there are some risks.

Any suggestions from the community?

Thanks

Claudio Valentini



Comments

Mark Alexander

11:20 AM, 11th November 2014
About 4 years ago

Hi Claudio

I have invited a couple of our recommended brokers to comment on this thread.
.

Tony Atkins

13:47 PM, 11th November 2014
About 4 years ago

The Show House: the developer is after your up-front cash and a confirmed sale, which may be a good deal for you if you feel the 5%+ yield is worth losing two years off your 10-year warranty and some wear and tear. I'm sure the developer will be offering financing deals to potential purchasers, so why not ask them what they or their provider can offer from their internal resources, without going to a third party? It could perhaps be a temporary commercial loan with a tenant (the housebuilder) who is provided to guarantee you, say, three years of rent even if the site is built and sold out after two years six months. The commercial loan would then revert to a conventional buy-to-let loan, on terms guaranteed when you took out the loan.

Off-plan deals are generally a good idea in a rising market, as you benefit from the rise in prices without having to pay anything. What are the risks, besides the builder going bust?

Claudio Valentini

14:50 PM, 11th November 2014
About 4 years ago

Thanks for your comments Tony.
The show house proposition does have pros and cons, but I take your point. How accommodating will the builders be to doing some kind of deal? I'll find out soon enough. I won't mention who they are but I'm told they are quite an aggressive bunch so I won't be holding my breath on that one!

I read in your profile 'Ask you anything', so here goes:
Is it normal practice on a new build for the builder to ask for an unconditional exchange of contracts 28 days after reservation? I'm being told that these particular builders follow this process.

The potential risk here is that if the build takes longer than the mortgage offer is open for and subsequently the mortgage offer expires. Imagine handing over £20k on exchange, something happens 6 months down the line and you can't get the finance...Creek and Paddle time!

Life is a risk, but any thoughts on how to mitigate the risk in that particular scenario (other than building it into the contract of sale?)


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