Considering buying an off the plan property? Read this first
Off the plan properties are becoming increasingly attractive for property investors and home buyers, and in a property market that’s heating up, it makes sense. Buy now, for today’s prices, and have a home later that’s worth more than you paid for it. If everything goes well, it can be a dream. However, if you scrimp on your research, choose the wrong development or developer, then you could be in for a nasty shock.
In this Property Observer exclusive, we asked a number of property experts, including those directly involved in development, to provide their opinion about whether off the plan can be a good investment.
Opinions were strongly split; some noted that off the plan is ‘rarely’ a good investment, with others saying that if you buy wisely you will reap the returns.
“When investors buy property off the plan they are essentially buying sight unseen. So the first rule should always be to ensure the developer and builder are reputable with a track record of delivering quality buildings as specified and on time,” said John Carfi, chief executive officer of Mirvac.
Meanwhile, Todd Hunter from buyer's agency wHeregroup notes that you may be paying top dollar for a developer who is paying for a marketing company, GST and a number of other aspects before factoring in their own margin.
Our other experts spoke of needing a ‘long-term’ view, and the fact that with current grants the properties can be good for first home buyers, as well as the associated risks.
Monique Sasson, from Wakelin Property Advisory has been forthright about her belief that the majority of off the plan investments don’t work due to the lack of scarcity value.
However, she notes that there are always exceptions.
“There are always two or three examples that break the rule to prove the rule, but they do tend to be geared towards owner occupiers, many of them are seven figures, rather than what I would consider to be the garden variety investment apartment at a more affordable level for most investors.
“I'm really talking about something between $500,000 and $700,000. Whereas these ones that may have started out as off the plan would have started out as $700,000 or $800,000 investments when they were sold but they'd now be worth well and truly in excess of $1,000,000 and sometimes even $2,000,000,” she told Property Observer.
If you’re determined to buy off the plan, then there are a number of things you can do to prepare yourself and mitigate against any risk.
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How you can mitigate risk
Never treat any aspect of the marketing material as gospel.
If you are being given a price for the apartment, triple check the inclusions – ensure these are noted specifically on the contract. Be wary of ‘estimates’. If you have been provided an estimated rental return and capital growth, find out what this is based on.
Rental returns should be based on other comparative rentals currently tenanted in the area. Ensure you check the vacancy rate. Call some local property managers and ask them what sort of demand there is for you sort of property and how much they would put the weekly rent at for prospective tenants.
Capital growth prospects should not necessarily be based on past growth. Trends can change at any time, and if you’re being provided some assumption of growth in the area, be ready to ask for the research that went into this forecast. Ask other experts about their forecasts.
Similarly, compare everything provided in the marketing material against the contract. Double check the inclusions, floor plans, delivery date and anything else you believe you are entitled to.
If there is a discrepancy in any of the material, you’ll want to be taking a close look at what you’re potentially going to buy.
Have your own team
Do not rely on the experts provided to you by any development company or one-stop shop. Ensure you seek out independent accounting and legal advice. Use these experts to put any of the claims of the developer to the test, and to help you with double checking the marketing material.
You’ll also want to ask your accountant or solicitor of anything that stands out to them as unusual, or to flag any common problems with you.
Research:
The area
Researching the area in which you’re buying should be standard for any home buyer or investor. There are many fundamentals and aspects to check first (you can see a number of our research guides here to get you started).
Prices can certainly drop in suburbs and you’ll want to ensure that you’re not overpaying to begin with. You'll want to esnure that the outlook is fairly comfortable for the future prospects, particularly as you are not going to get your hands on the property for some time.
Most crucially for those looking to buy off the plan is to find out what other developments are coming online in the area, particularly those that can substantially change what you are looking at now. Will something build out the view that you’re paying a premium for (or is there the capacity in the future)?
You will also want to find out the local opinion about the development. If there has been unrest from residents for the development, something regularly seen in the more tightly held areas of Melbourne, the stigma of the new building may be hard to shake off in the future.
The developer
Treat your discussions and research about the developer as a job interview. Ask for examples of previously successful projects and remember to check that they’ve come in on time, in budget and within expectation of previous owner occupiers.
Ensure they have completed similar projects before, and, if possible, visit the development to see how closely it stacks up against their marketing material.
You’ll want to check their insurances, and run checks through Fair Trading to find out about any cases against them. We also recommend a thorough Google search to find out what is being said about them online.
Ask the developer:
- How long have you been working in the industry and what have your other projects been?
- What development updates should I be expecting, and who can I contact during the construction?
- Can I speak to some of your previous clients?
- What sort of buyers have purchased the rest of the building?
- What interest are you receiving on this building?
- How long did it take to get development approval?
- Can I see your balance sheet?
The development
Opportunity cost is a hugely important aspect to bear in mind, particularly when your capital is held up as you wait for construction to complete. Have a look at the lead time on these developments.
Be wary of any changes to the initial plans and of any differences to the show home and material you’ve been presented. What ‘wriggle room’ is there for this specific development, and in the contract, for you to be provided a different apartment? Never settle on the verbal agreement, and get everything in writing.
The contract is going to be one of the main pieces of paperwork that will look after you, should you have to take further action down the track. You will also want to find out if there is the ability to make changes in consultation with the developer if you are unhappy.
Fair Trading recommends the following questions should be asked (and checked against the contract):
Can I make changes to the finishes in the kitchen and bathroom?
Can I select appliances such as stoves and dishwashers and items such as floor and wall tiles?
Can I visit the site during construction?
If the building is finished earlier than expected, has finance been suitably arranged?
What are my rights if construction is delayed?
Is my deposit secure if the building doesn't proceed?
Can I on-sell during the construction period?
Source: Fair Trading New South Wales
RealestateVIEW recommends the following checks and balances:
- Take note of the completion date
- Are there penalties if you withdraw from the contract?
- Can you visit the site during construction?
- What happens if the developer runs into financial problems, and what happens to your deposit?
Source: RealestateVIEW
Read more over page: Free resources and useful information
Free resources and useful information
Finally, there's plenty of free information available online that will assist you in ensuring you choose wisely. Be wary of any information that simplifies the process or suggests it can be done cheaply or easily.
On Property Observer we have the following available for anyone looking to buy off the plan:
An eBook, with 14 tips for buying off the plan
Fair Trading also has a number of useful documents, such as this PDF with a two-page guideline to your off the plan basics
YOU MAY ALSO WANT TO READ:
The risks of off the plan buying should not be underestimated
Ask Margaret: Should I buy off the plan or an existing property?
The three risks buyers take when they buy off the plan, and how to avoid them
