Should you buy off the plan?

21st Jul 2015By: Greville Pabst

Being a savvy property investor isn’t just about understanding the principles of selecting property with strong performance prospects, but also understanding the potential traps that await the un-informed buyer who hasn’t done their homework.

The property game can be a highly competitive one, especially during times when demand outstrips supply. With population growth in most Australian capital cities set to continue upward trends, demand for housing will also continue to grow. In this context, we’re seeing an increasing growth of ‘off the plan’ units and apartment developments.

While there are advantages associated with purchasing property before construction commences, such as tax benefits and the need for only a small deposit, investing in this area is typically more complex than buying established property and, therefore, can represent greater risk.

While each instance of purchasing off the plan is different and should be assessed on a case by case basis, there are some key points to consider before signing any contracts.

Location, location, location

This old adage applies regardless of whether you’re an investor or homebuyer and can be universally applied to property types. However, location is about more than the right suburb, it’s about the right street, the right position in the street, and in the case of units and apartments, the right position on the block. Developments located close to lifestyle amenities and public transportation benefit from greater demand, as do specific properties within developments offering the right aspect, orientation, floor plan and level of natural light.

Do your research

Compare prices of similar developments to get an idea of what you should be reasonably expected to pay. Ensure you’re also aware of Owners Corporation fees, which manage gymnasiums and swimming pools, as these can often run into the thousands of dollars per annum. It’s worth seeking independent advice from a solicitor and a qualified property valuer or advisor. The minor outlay for unbiased professional advice could save you thousands in the long run.

Carefully review the contract and ensure you’re protected. What will happen if the construction period exceeds the settlement date? Will the developer provide compensation? Are there any restrictions on the title which may limit the property’s marketability to tenants, such as those in place with student accommodation? Answers to these questions, and many more, are crucial to your decision.

Know your developer

Avoid purchasing in developments where you can’t review the developer’s previous projects and ask for previous client referrals. Completed units and apartments don’t always turn out how you imagined. Review building plans and layouts, as well as building materials and fixtures, and where possible, include the specifics of these details in your contract of sale. Poorly constructed apartments will often sit on the market far longer when it comes time to sell, while those offering quality construction methods and materials perform better despite instances of oversupply.

Review resale evidence

Large developers have a long history of projects with resale evidence. It’s worth tracking past resale performance of some of the developer’s projects. If past performance has been poor, and properties were selling at a discount at time of resale, then it’s possible that future developments could follow a similar trend.

Almost 50% of off the plan properties valued by WBP in 2013 were valued at a minimum of $5000 less than the purchase price. Of those properties, the average loss was approximately $34,000. WBP’s research also shows that one-bedroom investment apartments under $400,000 showed the least amount of discount relative to purchase price, at the time of resale. It’s the higher priced two and three-bedroom apartments in the $600,000-$800,000 price bracket that tended to fall short at valuation, by amounts ranging from $50,000 to $80,000.

Finally, do not be swayed by rental guarantees, stamp duty savings and marketing campaigns that sound too good to be true and are commonly used to disguise a property’s poor growth potential. Off the plan property prices typically include a developer profit margin of 25% to 35%, in addition to high commissions for the selling agent. These are costs that can far exceed the value of any rental guarantees and stamp duty savings and can take years to recoup, in capital growth terms.

Seeking the right professional and independent advice for any property investment opportunity, whether it be off the plan or an established property, as well as conducting thorough research, will ensure buyers avoid exposure to potential property traps.