I'm a first home buyer, is off the plan a good investment? Ask Margaret

Hi Margaret,

I got a question regarding buying off the plan in Bungarribee region close to Doonside in NSW.

The off the plan property will cost somewhere between $550,000 to $600,000 after construction, whereas the ready to move houses in the Doonside region are in the range of $480,000 to $500,000, albiet without the first home buyer grant and without stamp duty exemption.

Is it an attractive buy from a first home buyer perspective? Does it makes sense to buy property which is valued at least $50,000 to $60,000 higher than the ready to move, relatively new houses.

And what sort of growth is expected in Doonside and the surrouding region? Additional things I am considering are affordability, community, proximity to transport, schooling and resale value after five to seven years.

Regards,

Rajesh

Margaret's answer on the next page. Please click below.

Hi Rajesh,

When off the plan marketing was first established, it was a great chance for buyers to obtain under- market value properties. Developers needed to get a proportion of pre-sales in order to qualify for development finance and so they offered up to 25% of the development as pre sales, usually at the prices of the day, or less. 

Lucky buyers committed to buy and years later, when finally finished, often found they were paying a lower price for property which due to market movements was now worth more.  The developer got his finance as the bank happily provided the money on the basis of the pre-sales.

These days developers are much greedier, trying to sell entire developments off the plan at tomorrow’s prices.  The entire risk sits with the buyer who is fully exposed to many drawbacks.

These include:

• Their commitment to the sale can often mean that, while they wait for completion, a bank won’t lend to them for additional purchases, as this off the plan purchase is a commitment with no income as yet.

• The market may plateau or even fall after the commitment is made, making the property worth less at settlement than is being paid (and this is actually very common)

• If the property is worth more than is being paid, there is often a clause deep in the contract allowing the developer to pull out for any reason, but no such clause for the buyer, whose commitment is irreversible

• On delivery, the property is often quite different in appearance than it appeared in the brochures – developers can make changes of up to 10% without voiding the contract.  You cannot be assured of exactly what you are getting.

• Though the lender may approve a loan to buy the property, on completion of the building they will reassess the borrower and value the property.  If the buyer’s financial circumstances have changed they may no longer qualify for the loan, and if the valuation is less than purchase price the buyer may not be able to borrow enough to proceed.  They will not, however, be able to get out of the contact and will be sued by the developer to complete.

There are many more drawbacks than this, and a few positives, but as far as investing goes, off the plan can be a poor choice.

While I expect that Doonside will grow at slightly above average, you’ve already established that these off the plan properties are well above current market value, up to 25%.  The market will need to grow by at last that amount in the coming two to three years for you to at least be even, and even then it will be a wasted exercise, as you are tying your money up and there should be some upside to that.

If you would like to buy in Doonside, check out what else is available first in an already established, possibly near new property.  That way, by the time these off the plan properties are completed, you may well have a few existing properties already under your belt and growing!

Kind regards,

Margaret

She is the founder of Destiny.

Have a property question? Ask Margaret!