Off-the-plan purchases involve putting down a deposit, usually 5-10 per cent of the developer’s asking price for the unit, with the rest of the purchase price due on completion.
Many buyers see it as a good bet, with a relatively small upfront deposit, a couple of years to save more towards the ultimate purchase price and the prospect of a capital gain between signing the initial contract and final settlement.
Unfortunately, and especially in Brisbane and Melbourne, there is already an oversupply in off-the plan developments in some areas, with a lot more coming on the market in the coming year or two due to the long lag time. Where the potential renters are coming from for all of these projects is anyone’s guess.
While it is impossible to predict the future, we suspect the future for many new units and apartments like these includes high vacancy rates, and property values that are lower than the investor initially paid.
Other than the above supply/demand issue looking a bit grim, buying off-the-plan also has quite a number of additional risks compared to buying an established property, which we have included below.
- Final product is unknown – Buying a property “on paper” without having viewed the property is a significant risk. When signing the Contract, the buyer does not know exactly how the particular property will look when construction is finished nor the precise quality or standard of fixtures and fittings. Sometimes the fixtures and fittings are different from how the buyer imagined, or what they were like in a display unit at the time of sale. The finished product may not live up to your expectations in terms of, for example aspect and quality, creating uncertainty between Vendors and Purchasers
- Delays of several years – Buyers often complain that they have entered into a Contract whilst the settlement doesn’t take place for several years. Therefore, they do not know if the final price will be above or below the market value at that time
- Developer bankruptcy risk – There is always a risk that the developer goes bankrupt before completion
- Expected financing may not be available in the future, once the construction of the property is completed and your bank is unlikely to be able to offer unconditional bank approval to you before exchange of Contracts. The bank will mostly offer pre-approval for off-the-plan buyers. However, pre-approval is not a guarantee that the bank will give you a loan until the property is complete. At the time of settlement, when the property is completed, banks may not be willing to lend the same amount, the valuation may be lower than the purchase price or the buyer’s income and circumstances may have changed. In all these circumstances, the buyer would need to come up with a larger down payment than expected. In addition, the interest rates at the time of settlement may be very different from those prevalent at the time of purchase
- Defects can be expensive – There are usually clauses in the contract dealing with defects. However, particular attention needs to be given to ensure that the buyer’s interests and rights are protected following completion and that there is provision for dealing with a dispute without the buyer having to resort to commencing legal proceedings which are costly, time consuming and stressful
- Unexpected issues – The Vendor may register By Laws that give exclusive use of the common property to certain Lots. Other buyers in the developments may have been unaware of this and not expected that the building would have say communication towers, signage or exclusive use of the roof garden. The Vendor may also allow the right to change the By Laws and often pets are a major issue
- Unit entitlement – At the time of entering the Contract, the unit entitlement (i.e. the proportion used to calculate levies) may not be known and this may be unfair. The lower the unit entitlement, the fewer levies that have to be paid however the less say that the Lot owners will have at the meetings of the Owners Corporation
- Buyers often complain that they are putting aside a 10% deposit for many years. However, Vendors may need the full 10% deposit to convince the financiers, mortgagees and banks that the purchaser is genuine in the case that the Vendor is unable to proceed and the bank has to step in and complete the project
Generally, if you are keen on property as an investment, we suggest looking at an established property, such as a house or townhouse, and ideally less than 10km from the CBD (ideally within 5-7km). While these may still be impacted if there was a glut of properties, having an established purchase history and less supply of stock will support the value and ‘rentability’ much more.