Buy now, make money in your sleep!! Great when it works – and I won’t deny it can. But buying off the plan is not without its own risks – let’s look at what they are so we can work out who should NOT do it.
To be clear, I’m talking about long term off the plan sales, something where the land or the unit won’t be ready for 18m or longer. And most particularly this does apply to units simply because when any given development is completed there’s a lot of competition isn’t there, such a concentration of properties in one block – if even 2% of them are “on the market”, its multiple properties right in front of the one buyer – as opposed a whole street of homes where maybe one is on the market. Further – they’re mostly identical or at least fairly similar, so the only way to compete is on price.
1 – Valuation risk
When you agree to a price today it’s on the assumption that prices will be at least that or higher when the development is complete. It’s speculative and slightly risky. What can happen is a valuer comes in at completion and compares your (shiny, sparkly brand new) unit to others in the area that have the same attributes and have recently sold and settled. Should be cool. Note they will only compare against settled sales of existing units – what we call secondary sales - and nothing else in the same development as you. That’s just how the market is defined.
I’ve seen it happen, though, where someone holding a number of units in a neighbouring development – could be the developer themselves held onto some stock – and has recently sold them at a discounted price. So your two bedroom 90m2 apartment is being compared with – an acknowledged older, dicier looking – 2 bedder 90m2 in the same suburb which sold for $100,000 less. Suddenly your valuation comes in short. The valuer makes adjustments for age but that’s still a lot to overcome.
If you don’t have extra equity in another property or spare cash to draw upon you’re in trouble.
Likewise, if we do decide to buy ‘off the plan’ it’s important is for us understand that the pricing is done very carefully – the developer expects the property to go up in value (as do you) and they want a share in the growth. The property will be priced attractively enough for you to be willing to take the risk – but not at todays pricing either. Effectively you’re sharing the expected growth and the odds are slightly on the side of the developer who has you committed to buying regardless of what actually happens. The point I am making here is that any valuation you do today based on the completed value of the property will more than likely come in under the price you’re paying today. It’s up to you to decide if you are comfortable with this risk that the market will rise to that price (and hopefully beyond).
2 – Change of lender policy.
I saw this in pre-GFC (Global Financial Crisis) days, we had a consortium who formed a “trust” buying land in Melbourne and everything looked rosy, but again moving forward the GFC did hit and when the land was ready lenders would no longer lend to this structure.
If your situation is likely to change dramatically, for example, you’re thinking about starting a new business – this may not be for you.
Similarly, you might have kids, change jobs, change careers, separate or any of a number of reasons why you may not qualify for the required finance down the track, life does not stand still; anything could happen.
And, if you’re an unusual structure, or your broker advises you haven’t got a lot of lending options because of something peculiar about you – maybe look at something that’s ready now while you do fit lender policy.
3 – Affordability.
In a very big development; as you can appreciate, at completion date there’s very suddenly a whole lot of units on the market all at once. As a potential tenant it’s a veritable “buyers market” and they’re going to be easily incentivised to rent one unit over another. Developers often offer a rental guarantee to their purchasers to combat just this issue, and that’s a plus (but don’t doubt its built into the unit price).
Competition is always fiercer in a larger development, both for tenants and for purchasers when you do decide to sell down the track.
If you are reliant on maximum rent and any period without a return is going to hurt you significantly, maybe you should look at house and land that’s ready to go now.
What’s the worst that can happen?
Well, I won’t give you legal advice but it’s my understanding that if the wheels fall off and you aren’t able to settle on your ‘off the plan purchase’ you will almost certainly:
Lose the deposit that you’ve paid – usually this is 10% of the value of the property you’re buying
Or if you used a deposit bond, you’ll have the bond issuer chasing you to repay them
And you can be sued for the difference in price if the developer is forced to sell for a lesser price than your contract. This could get ugly.
A note about timing.
Its an extremely rare...extremely rare development that EVER runs to schedule. The best the sales staff can give you is an estimated completion date, and you should rely on the "sunset clause" date (it's in the contract, look for it) as the very last date the developer has to complete the property. Even this can be wangled if they can prove delays outside of their control have impacted on the timing. Just be aware & take a look at the site - can you see it being done on time based on current state of work?
Bottom line, let’s look for some positives.
Get great advice so you can enter this with your eyes open.
Occasionally the developer will help you onsell the property without settling, depending on the contract, and in this case you could even make a little money.
Or better yet all our ducks line up and settlement is fine and you’ re valuation shows a handsome growth in value, I mean this is why you did it to begin with!.