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Is cashback property the new way of attracting buyers or is it just a carrot that developers are using to blind potential buyers looking to make quick cash when budgets may be stretched to breaking point?
Say you buy a property for £100,000 in cash and the developer immediately gives you £10,000 'cash back' then you have in effect purchased the property for £90,000 - fantastic! But how many people buy their property with cash? If you purchase the same property for £100,000 and have taken out a 100% mortgage and the developer gives you £10,000 'cash back', if you do not immediately use the 'cash back' to pay that amount off your mortgage, you have, in effect, taken out a loan that you have to repay.
Delayed 'cash back' is emerging as a popular way of working the situation. Some developers are offering cashback property that gives you the cashback after say 2 years. This means that you are, in effect, making a loan to the developer. They have the use of your money to finance their business for the next two years. This delayed 'cash back' is starting to become more common because it is a cheap way of raising finance.
This way of doing business is extremely popular in countries where a financial infrastructure does not exist for developers to raise the money easily from banks, therefore, they raise it from the customers - it makes perfect sense. In fact, this way of working means that the overseas property market has an abundance of new companies setting up who may not have the credentials to raise all the money they need from the banks, but through carefully crafted cash back schemes can get their development up and running. As long as these schemes are honest, properly costed and run by competent management teams they can be to everyone's advantage.
In simple terms, you are being asked to pay upfront more than your property actually costs to build so that the developer has your surplus funds available to finance the building of your property and the next property too. What you have to think about and assess is what your property is going to be worth at the time when you'll be getting your cash back, say two years time. Will the future value of the property be at least the value you are being asked to pay upfront now? In this situation it's important to be realistic and do your homework. Check the value of the property, which will probably be 'off plan' at this stage, against newly built similar properties in the area. This will give a guide to how much extra you are being asked to pay towards the financing of the development's next phase.
If it is say 20% then this should be the minimum starting point of the 'cash back' offer. However, there are two more considerations. Firstly, you are providing interest free risk finance and that should be worth something. Secondly, by being an early buyer you are providing credibility and are helping get the project off the ground. It therefore might not be unreasonable to see a minimum 25% to 30% 'cash back' after two years. If the developer is raising 40% more from you than a similar property is worth then a mouth watering 50% 'cash back' may be in order. These deals are starting to appear in many popular overseas property and domestic property markets. Remember, you are in a good position to negotiate in your favour. There are certainly some great deals to be done when it comes to cashback property.
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