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Assured buy back schemes

An assured buy back, often called an exit guarantee or an assured appreciation, gives investors the opportunity to sell the property back to the developer for an increased price at an agreed later date.This gives the investor a sense of reassurance as they know that they are able to get their money back, plus a percentage more, after a specific amount of time. The assured buy back is part of the sale contract, and so there is a legal obligation for this guarantee to remain in place.

How does it work?

Again, the scheme is usually offered on off-plan properties and often properties abroad. The developers of the property usually offer this scheme as they need some extra money to help with the build and pull the development plans into place. The developers sell the property at a substantially discounted price, in order to entice the investor in.

A discounted price of this magnitude is needed because there are so many risks involved, with the investors investing money into a project that is no more than drawings on a piece of paper, as the property has not yet been built. The assured buy back is offered if the developers are certain that they will make a profit after buying the property back at the later date agreed in the contract.

The assured buy back scheme benefits both the developer and the investor as the developer has the financial backing needed to complete the build, and the investor receives a healthy return on their initial investment, usually receiving between a 110% - 150% buy back amount.

What are the risks?

A common risk when being involved in an off-plan development is that there is always the chance that the development company could go bust. If the company does go bust then the investor will have empty or part developed land, which can then be very difficult to sell on.

However, if the developer goes bust at a later date, such as after the development is complete; they may not be able to honour the agreement. This is a risk because, although you will have your property, you still won’t be able to have a guaranteed return. This can be partially prevented by running checks on the development company, and taking a look at previous developments they have been involved with, but it can never be fully prevented by you as you cannot always predict what might happen.

Another risk is that by the time the agreed date has arrived for the assured buy back, prices may have risen above the agreed buy back price, meaning that you may not want to sell the property back to the developers. If the buyback agreement was optional you will be able to sell the property to whoever you like or even not sell it at all, otherwise you would have to sell it back to the developers.

In order to avoid this problem, an optional buyback agreement is a good choice, as it means that the developers are obligated to offer you the money to buy the property back, but you have the right to refuse to sell.

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Hopwood House - Property Investment