What is a Guaranteed Buy Back?

What is a Guaranteed Buy Back?

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Guaranteed buy backs are sometimes offered with off-plan property sales as a means of providing an exit strategy for the purchaser.

Buy-backs are typically offered with alternative property investments, such as Purpose Built Student Accommodation, or, care home investments, where the exit strategy may be limited.

Guaranteed buy-backs are sometimes offered at 5-10 years post completion with an uplift of 10-20% of the purchase price.

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How can the developer Guarantee to Buy Back the property?

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The developer will need to secure funding to re-finance the development and buy the whole building back, or, have secured an onward buyer, albeit these are likely to be conditional offers.

Buy backs cannot be guaranteed, although, in most cases the developer will endeavour to secure an exit as it should provide them with additional profit on the development, in additional to providing capital back to buy-to-let investors, who have realised a profit and want to invest in their next project.

The developer will also have a vested interest in the operational success of a development, if they are trying to generate additional profit.

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How are Buy Backs legally Guaranteed?
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There are typically two types of legal mechanism to facilitate a buy back:

• Call Option – this provides the Seller (the developer) with an option to buy the property at a fixed price within a specified time-frame

• Put Option – this provides the buyer with the option to force the developer to buy back their property at a fixed price within a specified time-frame, although this is dependent on the developer having the funds to do so 

Regency believes in complete transparency and if a developer intends to re-sell a development in the future to a corporate investor, hedge fund or pension fund, we ensure that our literature is clear as to whether or not the buy-back is guaranteed.

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Should I rely on a developer Guaranteed Buy Back?
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Developer buy-backs can be a really good way of exiting your property investment, however, they should not be relied on.

Buyers should assess the future re-sale value if they chose to sell through an estate agent, or, investment property agent on the open market, at market rates.

You need to ensure that the forecast rent is achievable by the end of your rental assurance and that the property is being managed by a reputable company, with ground rent that isn’t too high and a reasonable service charge.

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How should I ensure that the forecast rent is achievable?
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Regency Invest use various resources to assess each development before we market, including seeking rental appraisals from lettings agents, desktop research on property portals and forecast growth from industry leaders in market analysis for rental and capital appreciation.

This research is needed to ensure that the rental returns remain good at the end of any rental assurance period, or, if the property is to be self-managed. The net rental income may also impact on the re-sale value, if the property is a yield-based investment.