Buyer-funded development
Buyer-funded development, also known as investor-led fractional sales, is a model of financing property development that typically involves using deposits from individual buyers to fund apartment buildings. Buyers of the apartments purchase off-plan, paying deposits of up to 80%.
This model of financing has become more common since the 2008 financial crisis as it has been harder for developers to fund schemes through traditional borrowing from banks or institutional lenders. It differs from more conventional models of off-plan development where buyers’ deposits (usually 10%) are held in secure escrow accounts and released only on project completion.
It has been subject to wide criticism as a risky form of investment, with the Solicitors’ Regulation Authority warning that buyers may be ‘unwittingly financing high-risk or fraudulent property development’. Since the large deposit is paid up-front, it can be spent on project costs and fees before any construction work actually begins, and when construction does begin it can be without the commitment of funding necessary to enable it to be completed. There is also no safety net if the developer becomes insolvent, funds run out, or if the developer fails to deliver the project as proposed.
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