I’ve noticed a recent rise in interest amongst my City based clients in contracts for reassignment.
This, in layman’s terms, is buying the right to buy a new build property from a third party and not the original builder. This is a relatively new concept in the market and I have only seen this type of purchase in prime central London locations to date.
In short, a third party puts down a deposit on a new build property. This transaction often takes place a few years in advance of the property being built. This third party commits to purchase knowing it may be a few years before the property is constructed, hoping to get a discount on the potential sale price for committing so early in the process.
This third party then hopes that the property market will rise between the time they have put down this deposit and the completion of construction of the property.
Typically, a few months before the development is ready to be occupied the third party puts the flat up for sale. Our client can then purchase the right to buy the flat from the third party and the builder.
It is important for our client to remember they are not buying the property from a third party only the right to purchase the property. Often the property is not ready for completion at this early stage. There is no scope for our client to negotiate on the contract with the builder as it has already been signed by the third party.
There are typically two transactions involved in this type of purchase.
- The ‘assignment purchase’ which is where the third party sells the contract to our client. This typically covers the deposit they have already paid plus a premium – their profit.
- The ‘closing contract’ with the builder, where our clients pays the rest of the money based on the price agreed by the builder and the third party originally.
The builder still has a contract with the third party. Typically, the builder informs the third party and our client when the property is ready, both of whom have a fixed time to complete the transaction. I have seen variations of how these deals are completed so a good solicitor with experience of this type of contact is essential for this type of purchase. The transactions are often done at speed as the third party wants to hold onto the property as long as they can to make sure they get the maximum rise out of the property market (in an increasing market).
This is a risky transaction for a client and a third party for a number of reasons.
Firstly, no lender that I am aware of will guarantee this type of finance that far in advance and mortgage offers are usually valid no more than six months. A client’s personal circumstances or changes in the economy may affect future resale ability, funding options and liquidity. Often the third party is either an individual who is not UK based or a property club so extra due diligence from the solicitor is required. There are some cases of historic mortgage fraud with contracts for reassignment so it is important to approach these transactions with caution.
However, for some clients it can give them a chance to buy in a development in a prime location that they believed had been pre-sold from launch. The bulk of high street lenders (Barclays, Halifax, Santander, Nationwide to name but a few) will not consider lending against this type of purchase due to the involvement of a third party. However, LIFT-Mortgages have access to a mainstream lender with excellent rates that will consider lending against contracts for reassignment. Typically, the lender lends no more than 70% of the value on completion of its construction.
Central London is a unique market and speaking to an experienced broker with an understanding of the market is key.