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No, it's not just credit cards that are offering you cash back these days - more and more developers are offering cashback property as a new way of attracting buyers. But what is it and is it as good as it seems at first glance?
So, what is it?
Basically, when you purchase a property the developer will give you a percentage of the sales price, usually up to 10%, back as a cash incentive. Sound too good to be true? Well, to really benefit you have to look at these two scenarios - both include a cashback deal on the same house.
Imagine you purchase a property for £200, 000 and the developer immediately gives you £20,000 'cash back' - essentially you have purchased that property for £180, 000 and everybody's happy. However, this scenario relies on you having bought your house with cash and not taken out a mortgage, and how likely is that as property prices continue to rise? OK, now for a more realistic scenario; say you buy the same property for £200,000 and have taken out a 100% mortgage. When the developer gives you £20,000 '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 an extremely popular alternative. 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.
In countries like Turkey and Bulgaria, where a financial infrastructure does not exist for developers to raise the money easily from banks, delayed cashback is becoming the norm. Quite often developers in these countries will ensure you share the developer's profits, by helping initially with finances of construction costs. For example, it's common for developers to offer investors a return of 30% of the purchase price straight away or a tantalising return of 50% of the purchase price in three years' time - and when you think about it, why not. Firstly, you are providing interest free risk free finance to the developer and surely that's worth some kind of premium? Secondly, by being an early buyer you are providing credibility and are helping get the project off the ground.
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. The main issue really is what your property's going to be worth at the time you'll be receiving your cash back. Will the future value of the property be the same, or ideally exceed, the price you are being to pay upfront now? Cashback property can certainly throw up some appealing deals. But like any pursuit in the property game, it takes a little research, a little guile and a lot of knowledge to ensure you come out on top.
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