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Buying off plan, what you need to know before jumping in the deep end and why we don’t recommend it.
The thought of buying an apartment off plan can be an exciting experience, there’s the shiny marketing material, the display suite with Miele appliances, the freedom to choose your colour scheme and the thought of moving straight in with nothing to do. It’s easy to get wrapped up in the buy now, pay later, rent guaranteed excitement that the developers sell you.
In this blog, I wanted to share with you some of the hidden pitfalls that the glossy sales brochure don’t tell you and why we always recommend steering clear from off-plan purchases.
Purchase Price: When developers are selling a new development, they give kickbacks to many professional services (financial advisors, mortgage brokers & accountants) to recommend their developments to their clients – usually around 6 – 8% of the purchase price. Then there’s the cost of the marketing, stamp duty reductions, the developer's profit margin and for investors those rental guarantees*. Once it’s all said and done you can be looking at an additional 10 -15% in costs that have been lumped onto your purchase price. When you go to resell the apartment, this cost can no longer be factored in and you may find the property isn’t worth what you paid for it.
WBP Property Group undertook a study in 2015 that valued 1,700 properties purchased off the plan with 50% of the valuations coming in lower than the contracted price. They noted that in some cases prices of apartments in the area had just naturally fallen by the time the development was completed, however, most of the time the apartments were just overvalued by the developer in some cases with a 10 – 15% difference.
Buy Now, Pay Later: Developments can take anywhere from 18 months to 3 + years to complete and in most instances to purchase a property off plan all that’s required is a 10% deposit. If over that period an area’s capital growth declines due to infrastructure or employment problems or simply because many developments have flooded the market the property may no longer be worth the contracted amount. The bank will do a final valuation on completion and if the valuation and the contract value don’t align the bank will only lend you money based on their valuation. This can cause a shortfall which means you’ll have to stump up the difference or risk losing your deposit and the apartment.
Not What You Were Expecting: Unfortunately, you don’t have much control over the workmanship going into your build and if it’s not up to your standards, there is little you can do. Many developers don’t allow you to see your apartment until it’s completed. The purchaser is typically given a 30 – 60 min window to view the property for the first time and list any issues. We have heard stories of the Sqm’s being smaller than the contractual agreement, doors hanging in different places and floor plans being tweaked without prior consultation. A 2012 study by the City Futures Research Centre found that 85% of off plan apartments built after 2000 have building defects and of that, 75% are still yet to be repaired.
Is The Developer Above Board: Unfortunately in any business, things can turn nasty. If a developer does come into money trouble during the construction phase, you have the potential to lose your deposit and your new apartment.
The Sun’s Not Always Shining: In all new development contracts, there will be what’s called the ‘sunset’ clause. This clause allows the developer and purchaser to cancel the sale/purchase of the apartment if it hasn’t been completed by an agreed date. If the area you have purchased in has increased in capital value during the build phase the developer can slow the progress of the build and not hit the agreed date, give you back your deposit and resell the apartment at a higher value based on the areas capital growth. Leaving you with no apartment and potentially priced out of the suburb you wanted to live or invest in.
The More The Merrier: With apartment developments, this isn’t always the case. With an additional 230,000 apartments being completed in Australian capital cities we have concerns there won't be the same demand for people wanting to buy or rent them, causing prices to drop and investment properties to sit vacant.
We certainly aren’t saying all off plan developments are bad, however, they are not something we will ever recommend. If you do want to buy something off plan it’s important to do thorough research, know the area, what your contract does and doesn’t include and find out the history of the developer.
Milk Chocolate purchase residential and commercial property in Australia on behalf of Australians living abroad, looking for a home or investment property. To see how we can help you get in touch here.
Thanks Michael
*A rental guarantee is when the developer promises to cover your rent until you find a tenant, usually between 4 and 8 weeks. They aren’t being friendly; this cost is simply added to your purchase price.
Source:
WBP Property Group
City Futures Research Centre
CoreLogic
Domain.com.au
The Australian Financial Review
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