Off the plan properties: The Good, The Bad, The Ugly.

Recently I had a client ask me whether he should purchase an off the plan apartment, as he liked the idea of owning something brand-new. Personally, I have a love/hate relationship with this type of investment product, because some people have had great success while others have had nothing but regret and misfortune.

There are many things to consider about investing in off the plan developments and I discuss the pros and cons before you sign on that dotted line.

What does off the plan mean?

When you buy off the plan, you are committing to buying a property that has not yet been built. This means that you are buying a property often without an inspection, so you will need to base your decision on floor plans and artistic renderings instead.

So, if the property hasn’t not been built yet, what is an off the plan purchase procedure? You will need to pay a deposit initially and settle on the entire value after it is completed. This means that you are not required to take out finance for the full purchase price until the developer has finished construction.

The Good

The main benefit of purchasing off the plan developments is that the price is fixed and based on current market value, so there are no additional building costs or hidden extras.

The property may also experience significant capital growth during construction and you may end up with an asset that is worth more than what you initially paid. 

Deposits can vary between developers (5%-20%) however it is common that a 10% deposit is needed to secure the property. When you sign the contract of sale, the deposit usually sits within a trust account until the property is built. Given that construction can take anywhere between 6-12 months to complete, this provides home buyers with plenty of time to save and sort out your finances before you need to take out any home loans.

Another benefit of buying off the plan is that you also have the ability to choose your design. Many developers can provide you with different colour schemes, floor plans, and specs for your property investment. This can be appealing as most home owners have different preferences for the interior style of their home.

It is also worth noting that all newly built properties must come with a 7-year builders guarantee, and in Victoria, the law requires a builder to meet certain obligations as stated in the ‘Domestic Building Contracts Act 1995’, for more information you can click on Consumers Affairs Victoria.

Buying new property often comes with great tax advantages, like the ability to claim depreciation on your fixtures and fittings. You could save a lot of money on stamp duty, as most states and territories in Australia offer greater duty concessions on newly constructed properties. 

Additionally, if a buyer signs a plan contract before construction of the property begins, the stamp duty will only apply to the land value, rather than the finished product. To learn more about the tax implications of buying off the plan,  I strongly suggest you speak to your accountant as they will help you understand what can and can’t be used as a deduction.If this is your first property investment then you may be able to take advantage of the first home owner grant (FHOG), as this grant can be applicable for off the plan developments. You can learn more about what applies in your state by visiting firsthome.gov.au.

The Bad

Of course, there are some downsides when it comes to buying a house or property off the plan. Delays with construction mean that you will have to wait longer than expected to move into the property. Additionally, the finished property may not meet your expectations, as you did not have the opportunity to view the property before it was purchased. 

You may even end up with an apartment or a unit that is worth significantly less due to market fluctuations. This can lead to less lending than originally predicted and any shortfalls will need to be covered from your own pocket. This is because your lender only values the property at completion and sometimes the final value may be less than expected.

If you are investing in an off the plan property for rental income, you may face another set of challenges. A large proportion of off the plan products are sold to investors, which can lead to a saturated market. Often, you will find that there will be a lot of competition amongst investors, which could mean less rental income and more trouble finding tenants.

Another important thing you need to look out for is body corporate or strata fees. Residential complexes can come with a wide range of amenities and there are often high maintenance costs associated with these. You could be paying thousands of dollars every year on top of council fees and any other unexpected expenses.

The Ugly

One of the worst situations that a property investor can face is if their property developer goes bankrupt before completion. Unfortunately, this is one of the risks you take when you purchase a property off the plan. An unfortunate example of this happening was when one of Sydney’s major property developers, Ralan Group, ‘went into voluntary administration, leaving billions of dollars worth of apartment projects in doubt and around $500 million owing to creditors’ (ABC).

There have also been instances where developments have been constructed poorly, leaving buyers with no choice but to take legal action against the property developer. This can be a lengthy process, as well as an expensive and extremely stressful one.

Unfortunately, I have seen cases where a property buyer’s financial situation has changed due to a loss of job or an unexpected reduction in income. Since finance is applied at the completion of the property, the lender may not be willing to provide the purchaser with the finance as their current lending criteria cannot be met. This puts the deposit at risk and if an alternative buyer is not found, it may be extremely difficult to recoup.

Invest in off the plan developments with the property investment experts

Like with any investment, there are risks and potential benefits to purchasing off the plan, so research is heavily recommended. Ensure that you understand the terms and conditions, and ask the sales agent as many questions as possible about the reputation of the developer, the potential investor vs owner occupied split, and about the sunset clause.

If you wish to explore investing in off plan developments further, choose the buyers agent Melbourne property investors trust, Alfy.  Our main priority is to look after the buyer, understand their needs and advise on how best to mitigate risk.

Until next time.

Kosta