Should you buy an off the plan property, or one that is already established?
This is a great question; especially with the influx of apartments currently being built – a staggering additional 160,000 across Australia by the end of 2017.
When buying an established property what you see is what you get. It’s a tangible asset. It is being sold in an open market and you have had the opportunity of comparing it against other similar properties.
Purchasing ‘off the plan’ is quite another matter, as the property has not actually been built yet, and may not be completed for one to two years or more.
Selling property, usually an apartment, ‘off the plan’ is a way for developers to fund construction of their developments through presales. Many offer what seem to be enticing incentives to property investors such as generous rental guarantees that ensure their investment generates positive cash flow for a set term following settlement.
While some property investors have profited from off the plan investments there are many pitfalls you need to be aware of in order to mitigate any risk.
Let’s explore the advantages and dangers that may exist with buying off the plan. Outside of the outcomes I’ve seen my clients experience over the years which I’ve used to form the basis of these points, I’ll also add examples that my partner has had across her two properties – both very different in outcome.
The Possible Advantages of Buying Off The Plan
On the surface, buying off the plan has some possible advantages:
- You simply pay a small deposit to secure your property (with the balance being payable upon completion) and hopefully the property increases in value in the time between paying the deposit and settlement.
- In some States, such as Victoria, you pay stamp duty only on the land component of the transaction.
- Some property investors have profited from ‘flipping’, i.e. paying the deposit, waiting for their investment property to rise in value then reselling, often before settlement, at a profit.
Example: In one of my partners off the plan purchases, she couldn’t afford to buy a property at the time. To get into the property market, she bought off the plan and used the next two years to save the rest of the money required. The advantage in her words was, “it made sure I stopped spending money on clothes & shoes”, and forced her to save the deposit and additional funds required. Ten years later and she still owns this property that has been a good growth asset for her.
… And the Dangers
There are four major risks with buying off the plan:
- The property may be worth less, not more, once completed (in both of my partners examples this was the case) and you may not be able to obtain finance to complete the purchase. In this scenario, you may have to sell at a loss and be left owing money on the difference between the original purchase price and the sale price.
- Rental demand could fall in the location prior to settlement or after your rental guarantee period expires, leaving you with low or no rental income to service your loan.
- The property may never be completed or be seriously delayed. There have been numerous cases of property developers going broke through the construction phase causing great distress for their clients.
- You have no control over the quality of the fixtures, fittings and finishes. The developer will specify the various items, but what if they aren’t provided? What if the quality of the tradespeople is poor? Sure, you can challenge the developer, but that could be a long and expensive process.
Example: In the second property my partner purchased she found rental demand had fallen due to a glut of properties all coming on the market at once, and had to drop the rent considerably from what was proposed, as well as having multiple months at a time where the property has gone untenanted. Lastly the property has dipped so much in value that even trying to sell at a loss has not found a buyer. This one has not been a success.
Check the Price is Right
This is the single most difficult part of buying off the plan! Compared to the sale of an existing property you don’t have an easy comparison to other similar properties to guide you.
The cost of an off the plan property may be bumped up to cover commissions to sellers’ agents and project marketers and other items such as cost of a rental guarantee.
Key here is to have your own independent valuation done on the property – don’t rely on the in-house valuations provided by the developer.
Do Your Research
It’s also advisable to speak with property managers in the local area to assess rental demand for the type of property you are looking to purchase off the plan. Also, check the level of similar developments in the planning stages locally. Will there be a glut of similar properties to yours coming on the rental market at around the same time as your settlement will be due?
With off the plan property investment, it’s very much a case of ‘buyers beware’. Exercise caution, do your research thoroughly and you will certainly mitigate your chances of having your fingers badly burnt as many less wary investors have learned at a heavy cost.
Prepare for the worst
Whatever you do don’t rely on the property going up in value between deposit and settlement. In fact do the opposite, be prepared to put in extra deposit money in case the valuation on the property doesn’t meet sale price. Hopefully you don’t need it but best to be prepared.
For any guidance concerning financing an off the plan property or any investment properties speak to a mortgage broker who can help guide you through the process.
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