Mortgages.scot

An interesting question around reassignment received last week around purchasing a property off-plan from someone who has already signed a contract to purchase it. The questions come from someone who tried to purchase a property only to discover most lenders refused to lend on this basis and those that would want a much higher deposit, I have reduced the question length below as it was very long.

We agreed to purchase a new build flat due for completion in Nov 2020 from someone who had already agreed to buy it. Our solicitor suggested it was fine but it meant having to reassign the contract of sale. Most lenders said they would not lend on this basis. We found one that did but they insisted on a 35% deposit, which we didn’t have. I have searched the net but don’t understand why this is a problem can you help explain?

Reassignment of purchase

Ultimately what is happening here is that person A has agreed to purchase the property from the developer off-plan.

In effect, you are not actually purchasing the property but the contract person A has with the developer to purchase when the property has been completed.

Often it takes so long for the development to be completed that the value of the property rises sufficiently that it is an option for person A to actually sell it before they have even paid for it and make a profit basically doing nothing. Which sounds like the case here.

The issue with this for most lenders is that person A may have agreed to purchase at £500,000 and are selling to you at £650,000. Again the property has not been built yet so lenders are concerned that soon after purchase even if it has a valuation of £650,000 that the price could drop quite quickly leading to a negative equity position. New build properties often have what we call a ‘new build premium’ where you are already paying the developer a premium at £500,000 but try to sell it in a couple of years and that premium is lost so the value goes down.

Most lenders, want to ensure that the contract is between you and the developer directly. You agreed to pay £500,000, not an inflated £650,000. Indeed for lenders that would lend to you, they want to know what Person A agreed to pay and they will base the lending on that figure with you having to make up the difference. As you found out, the maximum LTV reduces way below normal levels to cover the risks.

There are other scenarios where the developer won’t re-assign a contract so what happens is that you need to pay £650,000 to person A (via solicitor) and person A then uses £500,000 of your money to buy the property at completion and at the same time transfer ownership to you. I am sure you can understand why lenders would not be happy with that.

Any purchase that requires re-assignment of contract needs to be carefully controlled, basically, best avoided unless you know what you are doing.