Off the plan properties: The Good, The Bad, The Ugly.
I had a client ask me this week whether he should purchase an off the plan apartment, as he liked the idea of owning something new. I personally have a love and hate relationship with this type of product; some people have had great success while others have had nothing but regret and misfortune.
Like I did with my client, I will discuss in this blog the things you need to consider before you sign on that dotted line.
What is an off the plan purchase?
When you buy off the plan you are committing to buying a property that has not yet been built. You initially pay a deposit and settle on the entire value after it is completed. In other words you are not required to take out lending (for the full purchase price) until the developer has finished the property.
When you purchase a product of this nature, it means that the price is fixed (based on current market value) and it will not change once it is completed. This provides you with peace of mind that there will be no additional building costs or hidden extras. While the property is being built, you may also experience significant capital growth and 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 inside a trust account until the property is built. The idea of securing an asset that is expected to grow with little to spend at the beginning is very tempting. Given that it can take anywhere between 6-12 months to complete, it provides you with plenty of time to sort out your finances before you are committed to take out lending.
You also have the ability choose your design. Many developers can provide you with different colour schemes, floorplans and specs. This can be appealing as many of us have different views on how the interior style of a home should look like. It is also worth noting that all newly built properties must come with a 7-year builders guarantee. In Victoria, the law requires a builder to meet obligations when they do building work as stated in the ‘Domestic Building Contracts Act 1995’ for more information you can click on Consumers Affairs Victoria.
As you would have read in some of my previous blogs, buying new comes with great tax advantages like the ability to claim depreciation on your fixtures and fittings. If the objective was to acquire an investment, you can potentially offset your tax as much as possible. To learn more about this I strongly suggest you speak to your accountant, they will help you understand what can and can’t be used as a deduction.
If there is delay you will have to wait much longer than anticipated to moved into the property. Examples that can push back construction are things such as the developer waiting for council approval, permits and/or compliance items that need to be met before development can commence.
If you encounter a delay your settlement date will also be affected, leaving a lot of ambiguity around finance. At times it could take years for the property to be completed, and you may end up with an apartment or a unit that is worth significantly less due to a dip in the market. This can lead to less lending than originally anticipated as banks are extremely conservative 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.
The final product may not meet your expectations as you did not have the opportunity to view the property before it was purchased. This is another factor you need to consider when buying off the plan, as you are essentially putting all your trust in the sales agent & developer.
Most off the plan products are sold to investors, leading to an unbalanced owner-occupied spread. If all the properties settle at the same time you will find that there will be a lot of competition amongst investors. Many are desperate to find a tenant and so they might be willing to drop rent leaving you with no choice but to do the same.
Another important thing you need to look out for is body corporate/strata fees! When you purchase an off the plan apartment/unit you don’t necessarily know what the fees will be. If you are buying in a complex that comes with a pool, gym, rooftop garden and cinema, there is going to be high maintenance costs that come along with these amenities.. You could be paying thousands of dollars every year on top of council fees and any other unexpected expenses.
The developer goes bankrupt before completion. This is the risk you take when you purchase an off the plan property. We witnessed this with ‘one of Sydney’s major property developers, Ralan Group, who 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 are constructed poorly, leaving buyers no choice but to take legal action. This can be a lengthy process as well as expensive and extremely stressful one.
Unfortunately, I have also seen cases where a buyer’s financial situation have 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.
Overall there are risks and potential benefits to purchasing off the plan, so research is heavily recommended. Understand the terms and conditions and ask the sales agent as many questions as possible, such as the reputation of the developer? what is the potential investor vs owner occupied split? and what is the sunset clause?.
If you wish to explore this further or you are not sure whether to purchase off the plan or established, the team at Alfy are ready to assist. Our main priority is to look after the buyer, understand their needs and how best to mitigate risk.
Until next time.