The Property Planner, Buyer and Professor take a deep dive into the risks of purchasing off the plan. Because the risks are many and varied, this will be a two-part episode with an episode solely on financial risks to come next week!
In this episode David Johnston, Cate Bakos and Peter Koulizos take you through:
- Pros of purchasing off the plan – for a balanced view, we take you through the advantages of purchasing off the plan. Following the pro’s, we then detail the risks that buyers need to be aware of.
- Risks of buying a property that doesn’t exist. You may be able to visit a display home, but often you are looking at plans, dioramas and drawings – and unless you are an architect or builder, it can be quite difficult to visualise the end product.
- Alterations to the property without your consent. The contract will normally allow the developer to make changes to the property within a certain percentage of variance, and without your approval. Often this results in unexpected changes/reductions in floor area to the plans, specifications or differences in the quality of the final finishes.
- Lenders may not accept the property as security if the alterations cause the square metreage to fall beneath their prescribed level.
- Contracts often favour the developer and the build completion almost never runs on time.
- The timeline to settlement is uncertain and you could be waiting between 12 to 48 months. In the meantime, your lifestyle, financial position, lender policy, property value and the market could change. The lost opportunity is pertinent if the project is cancelled or builder becomes insolvent.
- The value of the property can fall before settlement, and combined with a large number of off the plan purchases being overpriced from the start, valuations coming in lower than the purchase price can cause significant out of pocket expenses.
- Limited recourse against the builder in the event of a dispute, your contract of purchase is with the developer and not the builder.
- Are you dealing with a spruiker or an independent advisor? Is the person selling the property receiving an income from the developer for the sale? Beware of spruikers masquerading as advisors!
- And of course, our ‘gold nuggets’
Listen and subscribe
Apple 
Android 
Resources:
- High rise towers – yet another reason to stay away!
- High rise towers – even more reasons to stay away
- Off the plan
- 11 things to be aware of with off-the-plan high rise apartment purchases
- High-rise CBD apartments to be hardest hit by coronavirus, warn analysts
- Labor’s changes to negative gearing will spark rise in property spruikers
- Q&A: Which apartments should you invest in?
- What if your off-the-plan unit loses value before it’s finished?
- Lenders placing further restrictions for off the plan purchases
- Buying Off the Plan? Plan Ahead
- Dissecting 10 years of Core Logic data – capital cities & regional areas (Ep.42)
- Diversification 101 – How and why to plan for diversification within your property portfolio (Ep.43)
- Why the family home is often the biggest piece of the investment puzzle (Ep.22)
- Why you need to plan for your future home when buying an investment property
- Unpacking land to asset ratio (Ep.16)
- Mortgage Strategy 101 – Ep 6. Offset Optimisation
- Why your Mortgage Strategy is more important than your interest rate! (Ep. 9)
- Mortgage Strategy 101 – Ep 12. How to keep property as you accumulate!
- Mortgage Strategy 101 – Ep 8. How to keep a stepping stone home when you upgrade
- Mortgage Strategy 101 – Ep 5. Risk Management
- Why your approach and assessment of risk is paramount to property success! (Ep.10)
- How to succeed with Property and Create your Ideal Lifestyle
- Mortgage Strategy 101 – YouTube video series.
Show notes
- Pros of off the plan apartments:
- Ability to leverage – put a very small amount down to secure your place on the property ladder.
- Newness – the brand-new feel.
- FHOG and stamp duty savings – the price caps and the rules are different in every state.
- You know what it’s going to cost, unlike at auction.
- If value goes up between purchase and settlement, you could find yourself in a good position.
- Buying off the plan often involves a wait of 12-48 months before settlement. This can be advantageous for a buyer if they require this time to accrue extra capital.
- Unique position, view that cannot be built out and will not have an issue with over supply.
- Dwelling risks:
- Purchasing something that doesn’t exist yet – unless you can read through building drawings, you are flying blind.
- On top of that, developers have discretion to vary the product up to 5% – it could be floor area, specifications, etc. What you are buying is generally not guaranteed. This is a great risk when it comes to the 50 square metre rule for banks lending finance. Developers are able to do this as long as it does not ‘materially prejudice the buyer’. TIP – request a schedule of finishes for your particular apartment.
- Dimensions are everything – It can be hard to properly visualize the reality of your investment. TIP – It is important to find out the exact dimensions of every room. Take a tape measure and string to a park and map out the floor plan once you have it. Be sure to be aware of the height of the rooms, measuring this against a surface, such as a brick wall, from which you can picture the room. If the developer limits the dimensions of your property during construction beyond 5%, seek to renegotiate the purchase price of the investment. Consider including this in your initial contract with the developer.
- You cannot inspect the actual finished property – TIP see whether the contract stipulates whether you can visit the site during construction.
- Most likely going to be on a main road as a high-density building – loses investment points for this. They often have a different zoning, which banks have less appetite for.
- You’re funds are stuck in a contract if the builder goes broke or plan changes and it’s handballed to another developer.
- Building guarantee or warranty does not cover you if builder dies, disappears or goes into liquidation.
- Time risks
- Timeline to settlement can vary and is unknown so you have an uncertain completion date. You don’t know if your lifestyle or financial position may change. If you’ve purchased a home and currently are renting, you don’t know when you’ll have to pull the trigger on moving.
- Timeline can go past the cut off period – the developer may ask you to extend the sunset date.
- Finance issues – things outside of your control which could change in the meantime – for example, changes of income, expenses, kids, lender policy, property value, economy, market could = more cash needed, forgoing the deposit.
- Contract risks
- You pay a ‘holding deposit’ – in reality it is an expression of interest payment, an agent can take as many holding deposits for a property as they like. The agent must give you a receipt and confirm in writing that there is no obligation to buy and they must refund it to you if you choose not to buy. There’s no obligation for the agent to sell it to you either.
- OTP contracts are normally 200 pages long – it is massive and lawyers will charge you extra to go through them. Normal contracts of sale are 30 to 50 pages.
- Limited recourse from the builder – your contract is not with the builder, it’s with the developer.
- If the plan of subdivision is not registered by the time specified in the contract, or the default time of 18 months, you have the right to end the contract and get your deposit back.
- Sunset clause – get money back if building is not finished on time. The developer does have leeway in the finish date though. It is common for projected completion dates to be put in the contract, however, there is always a risk for projects to go beyond these estimated completion dates. In this case it is common for contracts to state that after this date either the buyer or vendor can terminate the contract. There is the risk that a developer may rescind the contract to on-sell the development at a higher cost, yet there have been policies enacted to restrict this practice.
- TIP – The best thing you can do as an investor to protect yourself from unexpected delays to your project is to inquire about relevant permits and their status before signing a contract as well as researching the developer’s history to see whether they have completed projects ahead of schedule.
- Limited recourse with the builder if there is a dispute. This is because the developer enters into a major domestic building contract with the builder, and you buy the property from the developer
- Building guarantee/warranty does not cover you if builder dies, disappears or goes into liquidation.
- Value risks
- When people purchase, it is normally very hard to negotiate the price – the developer wants them all to have the same price, it supports the value going forward for the next sale. To preserve the price, they keep everything to their chest so you don’t know how much the previous apartments have sold for. They can also offer rebates – you may negotiate a better price, and they will try to keep the contract price the same and offer a rebate.
- Valuation short fall – much higher chance that the value will drop and you will have to dig into your own pocket to complete the purchase. Data that 50% of settling OTP properties in Melbourne have fallen short of valuation of initial purchase price and 40% in Sydney.
- Hidden costs – Developer’s often include their profit margin (15-25%) in the purchase price of your investment. This can also include marketing costs and incentives (added inclusions such as rebates, furniture, entertainment systems or even cars to your purchase). If your developer offers you a brand-new television and entertainment system when buying off the plan, be aware that you will in the end be paying for this incentive.
- It’s harder to ascertain value – there are no comparable sales analysis.
- Beware of spruikers!
- They are not independent or giving tailored advice – they are receiving a profit from selling it to you. If you’re not paying a fee, how are they getting paid? They have gotten very good at looking like they’re giving advice – all property goes up in value (it doesn’t) and all of the tax benefits on the depreciation schedule.
- If you’re in a seminar or a sea of other people – if you’re being offered the same product as the people sitting next to you, this is most likely not the investment strategy for you.
- Are they a member of PIPA or REBAA?
- Bigger developers have the biggest sales budgets, so they’re generally more convincing.
- Third parties – mortgage brokers, accountants, solicitors – who are getting payments to refer you to different developers.
David Johnston- The Property Planner’s Golden nugget: biggest investment decisions are rarely simple, it pays to take time and effort in acquiring education and knowledge to make sure that you make the right decisions. Property purchases are after all the most expensive decisions we make in life. it is not the place to cut corners. Simplicity may be beautiful, but it often comes after wading through the complexity. When it comes to financial and lifestyle decisions, ensure you are clear on long term goals, risk profile, cash flow, changing circumstances and have a long-term property plan in place so your next property purchase does not de-rail future property purchases, so you’re not star struck by the shining lights of an off the plan property.
Cate Bakos – The Property Buyer’s Golden nugget: Asking the hard questions, if you’re getting advice from a free advisor, ask them to put in writing how they get paid. If you are paying a fee for service, ask them to give you a description of any other monies they are receiving, or if it is coming solely from you.
