Off-the-plan properties are a risky acquisition

Off-the-plan properties are a risky acquisition
Off-the-plan properties are a risky acquisition

It is often said that Australia has a housing shortage – which may or may not be the case – and governments have taken an active hand in pushing first-home buyers towards the purchase of off-the-plan sales by way of various incentives and handouts to aid increasing supply.

Sales of off-the-plan properties may do the hard yards when it comes to increasing stock, however in the short term they lock the buyer into a risky acquisition with a heightened potential of no short-term growth – and depending on location – poor long-term growth to enable an upgrade.

In addition, purchasers may not understand what they are getting. The contracts for off-the-plan dwellings come with the thickness of a copy of War and Peace and are incredibly onerous to the purchaser.

Imagine for example, the local council disagrees with the planned development, or aspects of it.  Unless the developer can resolve the issue or draw a compromise with the town planner, the whole project is under threat of demise. Considering the amount of investment the developer has made in this project, he can’t risk a “fussy” purchaser withdrawing from a contract based on this alone.  Therefore the contract puts in place “special conditions” to protect the developer – conditions that can’t be altered by the purchaser and lock them in for the duration.

Developments can take many months and even years to come to fruition, and the developer has the entire period to resolve any disputes, during which the purchaser is tied in.

Apartment sales come with additional considerations that should be taken on board before buying into one of the many off-the-plan blocks commencing construction in our capital cities.

For example, owners’ corporation fees stated on the contract at the time of signing are also subject to change.  The fees for each lot are generally not finalised until completion of the contract, therefore there’s significant risk they can blow the budget further down the line.  The intricacies contained in the special conditions generally allow no provision for dispute resolution or a “change of mind” – the purchaser is locked in.

One of the few benefits (aside from stamp duty savings) when purchasing new or off-the-plan developments is the compulsory seven-year warranty period on building defects, including a preliminary period during which internal defects can also be addressed.  This sounds great, however the risk comes in the “untold” details.

Also – exemptions do apply – for example, unit blocks higher than three storeys (in Victoria at least) are exempt from providing a warrantee period and in some instances, the warranty is only applicable for works valued in excess of $12,000.

Furthermore, it’s important to note that the bank cannot not provide a carte blanche guarantee they will lend against the development until construction has been completed.  Even with a pre-approval the final box isn’t ticked until a valuer can inspect the finished product.  During the period of construction – which can easily take in excess of 12 months or more – the market may have fluctuated downwards and therefore there’s a significant risk the valuation could fall short of the contract price.  The purchaser may have to come up with an extra $10,000 or $20,000 to complete the contract of sale or risk losing their deposit all together.

Finally, off-the-plan advertisements are often aimed at the investor, with temptations such as rental guarantees and potential capital growth.  The truth once again can belie the promise.

Rental guarantees are typically added onto the purchase price.  The developer may promise a 7% yield for the first 12 months or more, however once this period has expired, it’s highly unlikely the purchaser will be able to attract a similar amount on the open market.  The tenant renting the unit in the interim will not be paying the equivalent of 7% yield – rather the developer will be making up the shortfall (all accounted for in the asking price) for the period specified.

The shock to the purchaser’s budget once the guarantee has expired and the unit only attracts comparative rental can be significant.  Some may find they’re unable to meet their mortgage repayments.

 


 

In terms of capital growth, remember buying “new” comes with a premium attached. As with a new car compared with the ex-demo model, a well-advertised and presented development can boost demand (both foreign and local) more so than a similar second-hand equivalent that has lost its initial cut and polish.  Therefore, unless the investor is in it for the long run, he may find himself selling at a loss, or experiencing negative equity prior to any long-term growth.
All off-the-plan sales come with risks attached.  This doesn’t mean a purchaser need rule them out altogether – however it’s essential they walk in with eyes wide open and minimise the liability involved. A good developer will generally aim to please and complete the contract as promised, however there are no guarantees and the purchaser must allow for this

Before you buy in to the government incentives read the tips below.  You may well decide to leave off-the-plan sales for foreign investors and stick to the security of real estate you can touch before you buy.

  • If possible, check the builder's previous developments and get a feel for the quality and finish
  • Allow for the “worst-case scenario”.  Should the development fall through or fail to settle within the specified period, make sure there’s a back-up plan that won’t leave you homeless while searching for a plan B.
  • Read the fine print – get the contract checked – and understand the worst of the risks involved before signing on the dotted line.
  • Try and negotiate a deposit bond rather than cash.  Should the developer become insolvent or disappear prior to construction, tracing a cash deposit may be difficult.
  • Ask lots of questions!  Can you visit the site prior to construction?  Will you be consulted if changes occur to the specified plans?  Where will the deposit be held? (Usually a deposit sits in the real estate agency’s trust account and doesn’t accrue interest; however this isn’t necessarily the case with Off plan developments.) Can you exit the contract if the development fails to be completed on time?
Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.

Catherine Cashmore

Catherine Cashmore

Catherine Cashmore is a market analyst with extensive experience in all aspects relating to property acquisition.

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