June 30, 2015

The Risks and Possible Benefits of Buying Off the Plan

Buying off-the-plan real estate is often pitched by marketers as a “win win investment” But, how safe is buying property sight unseen?

Certainly people have made money buying real estate before it is completed. Some have on-sold their properties at a good profit before ever having to settle, but these are usually more exclusive properties close to major cities, where demand is strong.

There have also been many instances of people paying far more for an off-the-plan property at settlement than they could hope to attain in the prevailing market. Melbourne Docklands apartments, where oversupply drove down prices, are a prime example of where this happened.

Buying off the plan is undoubtedly a leap of faith and the dangers are twofold.

What does ‘buying off the plan’ mean?

First things first, let’s define what it means to ‘buy off the plan.’ When you buy off the plan, you basically pay a deposit and commit to buying a property that has not been built yet. In Australia, ‘buying off the plan’ is commonly used when referring to apartments, townhouses and spec homes.

A developer will typically have design and floor plans ready, providing you with a good visualisation of what the property is going to look like. They also have a scale model of an apartment block or a display home. Keep in mind that these plans aren’t carbon copies of the final product. The builder may run into problems or you may want to change things along the way.

Usually, buyers are only required to pay a deposit to the developer when signing a contract to purchase the property. The deposit typically falls between 5% to 20% of an estimation of the property’s worth once it’s built. The remainder of the price is often broken up into progress payments. Some developers require it when the property is completed, and the owner is about to take possession.

The main advantage to buying off the plan is that even before the building is completed, you already agree upon a purchase price. You only generally need to offer a small deposit. In theory, this means you could pay a lot less for a property now compared to its worth in the future when it’s time for you to move in. Prices in property could increase significantly during the time it takes to build the home.

When it comes to getting a loan, it varies across lenders depending on many factors. Some require a deposit or a pre-determined portion of the total contract price. In some cases, you need to have suitable equity.

Pros and cons of buying off the plan

What are some potential benefits of buying property off the plan?

Developer incentives

To entice buyers to purchase a property they can’t physically experience yet, many developers offer incentives such as lower prices for off-the-plan projects. This could mean the purchase price ends up being lower compared to the price of an existing property of a similar style.

The developer may also offer other benefits such as car-sharing schemes, furniture packages or gym memberships.

Government grants

It’s worth checking to see if you are eligible for government grants to help with the costs involved in buying property off the plan. For instance, the First Home Owner Grant (FHOG) scheme provides assistance to first home buyers, including those buying off-the-plan properties.

Stamp duty concessions

Most buyers purchasing property in Australia have to pay stamp duty, also known as transfer duty — a tax levied by territory and state governments. Some buyers who buy off the plan can apply for a concession or an exemption.

This means that depending on your circumstances, you can avoid paying for stamp duty or even just reduce it. While investors are generally not eligible, the stamp duty concession could be available for first home buyers or people who are planning to have the property as their main residence.

What about the risks of buying property off the plan?

Lower value of property

Some investors buy property off the plan with the intention of reselling it once it’s built — banking on the chance the property’s value will increase in the future. However, house prices can decline. This leaves investors with an asset worth less than the pre-determined contract value.

Construction delays

If you are buying the property as your principal place of residence, unexpected construction delays could mean you will be unable to move into the home as planned. If you’re a property investor, delays in construction could leave you unable to rent it out at the time you originally planned to — making you miss out on valuable rental income.

Development fails to be completed

If the development fails to be completed, you are entitled to get back your deposit. Of course, this could mean you have lost any capital gains and wasted time earning interest on the amount you have invested. Before signing, it pays to check the contract terms to see what happens in this scenario.

A development may also go bust if the developer ends up bankrupt, which could jeopardise your deposit refund. Always make sure to check if a developer is reputable and review your contract’s terms and conditions. You will need the independent assistance of a mortgage broker to help you understand contract terms.

Things to consider before buying off the plan

Things to consider before buying off the plan

First, you have to believe that the property you can only see on a plan will eventuate exactly as specified within a certain time.

If, like most of us, you do not find it easy to envisage exactly what you will get, it’s probably worth getting help from an expert. Even if there is a display suite it may not be truly representative of the finished product.

One service you could consider is from Archicentre, the building advisory service of the Royal Australian Institute of Architects, which provides advice on plans. These reports include things like an opinion on whether the rooms are of a reasonable size, the quality of the fixtures and fittings and the layout.

When building is completed, before you fork out your money to settle, Archicentre can conduct a practical completion inspection, including checks of the area of the building against the plans, confirmation that the promised fixtures and fittings have been included, and comments on the overall standard of the building.

Each of these services start from around $400, says managing director Robert Caulfield, depending on the state and how much work is involved. Other precautions you should take include:

Second, only buy from developers with a good reputation and whose work you can see.

Make sure every detail is specified in the contract, including fixtures and fittings — for example, not just a stainless steel oven, but a particular brand and model.

The second major pitfall relates to price. It’s difficult to establish whether the asking price is fair when there are no benchmarks. “Buy tomorrow’s real estate at today’s prices” is the spiel of the marketers. That assumes property prices always rise, which of course is not the case. For example, if you bought a unit off the plan three years ago in Sydney’s outer west and are settling on it now, it is likely to be worth less than you are paying.

With investments be very suspicious of rental guarantees, which can be used to set artificially high prices. For example, if gross rental returns are 10 percent in an area and the vendor guarantees a $400 a week rental, that would price a property at $208,000. But say that market rent is really $350 a week, meaning it’s only worth $182,000. If you fall for this you would pay 12.5 percent above market. The vendor only has to pay $5000 to guarantee the extra rental for two years and score an extra $26,000, or $21,000 net.

Seek help from What If We Finance

Contact What If We Finance if you are considering buying off the plan before you commit to any contract. As trusted independent mortgage brokers in Melbourne, we are dedicated to securing you the best loan possible and taking care of all the paperwork. We take the stress out of finance, contracts and negotiations so you can focus on what is important to you – securing your dream home.

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