By: Lewis Allsopp, CEO of Allsopp & Allsopp
Post handover payment plan offers from developers have become increasingly popular over the last few years, especially with first-time buyers who have struggled to get a mortgage from the bank. However, with prices on the decline, it often isn’t the most financially safe option because of property valuations coming in under the original agreed price with the developer, leaving buyers short of cash and in a very difficult and unexpected position.
Some developers in 2017 were offering a 10% upfront payment on the day of purchase to secure the unit and a further four instalments of 5% across the space of 12 months. Once the property is handed over buyers would get the valuation and mortgage the remaining 70% of the property. This payment plan takes away the Dubai Land Department and agency fees which would have been an additional 6% altogether if the payment plan wasn’t in place.
The payment plan sounds very appealing to buyers who are looking to space out their deposit, however, the problems have started to arise because of delays in handovers and the decline in property prices.
When handover of certain properties was complete, buyers who were looking to finance the remaining 70% of the property value were being left in a very difficult situation as the property is often being valued at less than the original sale price. Some developers, although projects were often delayed up to one year, are not offering any compensation and buyers are now short of their final payment by a few hundred thousand dirhams. A very nasty surprise at the end of what started as a sure way to buy a property at a great price with no hefty down payment.
The buyers who have been left with a shortfall have very few options to pay the developer back in full. Dipping into savings would be the best choice to make, however, not everyone has the luxury of large sums of cash lying in the bank. If they have family and good friends around, perhaps they could borrow the shortfall, but this is far from an ideal situation. Alternatively, buyers could turn to the bank for a personal loan if they have a good credit rating, but again, this is a risk. The final option would be to sell the property as a distressed sale to pay the developer back what is owed whilst writing of the 30% they have already paid.
If buyers are contemplating buying a property with a post-handover payment plan, they need to look into the risks involved and keep in mind that property prices can decline and equity may be lost. Buyers should ensure they have savings in place or ask the bank to revalue the property based on other sold properties in the area which are selling at a higher price – if this is the case.