Off-the-plan Properties – Pros and Cons
What does off-the-plan mean?
Buying off-the-plan effectively means that you are signing the purchase agreement for a property before it is built. Off-the-plan buyers usually consist of speculative investors who seek to benefit from on-selling it at a price that is higher than what they initially paid.
Entering into such a market is undoubtedly fraught with risk and events ranging from construction delays to economic decline could severely setback your investment. This article aims to break down the pros and cons of buying property off-the-plan and more importantly, give a few important tips for those looking to head down this path
Firstly, buying off-the-plan properties is much more affordable when compared to buying existing properties. This is because developers usually offer lower prices and other financial incentives in order to secure their project early on. Furthermore, it offers a greater degree of flexibility. Entering into a purchase agreement only requires a deposit. You will have until the project completion date to save up the remaining balance.
Buying off-the-plan property also allows for personal customisation especially if you enter into the purchase agreement very early on in the development. For example, you may have a say in floor plan or perhaps the type of finishing. Of course, this is contingent on the contract and thus it is critical that you thoroughly read and understand it.
Furthermore, as aforementioned, you may have the benefit of market fluctuations – when prices rise. Of course, this could work both ways and you may suffer a loss. With prudence and diligence however, you could minimise these risks.
One of the main risks associated with buying properties off-the-plan is that developers may under-deliver. There are many cases where the final piece differs from expectations. For example, the floor plan may not have turned out as agreed, the room dimensions may be smaller than expected or worse, the building material may be subpar, just to name a few.
Sometimes, developers may fail to deliver altogether for example by going over the maximum construction duration specified in the Sunset Clause. The Sunset clause is a protection mechanism in the agreement which allows the buyer to retrieve their deposit and walk away if builders go over the maximum allowable time for construction. Whilst money is not technically lost in this sense, the money could have earned dividends and interest had it been invested elsewhere during that time.
Furthermore, whilst lenders may offer conditional approval, they typically would not lend until the construction is fully complete and they have performed an evaluation of the completed property as well as your financial situation. Thus during the intervening period from signing to completion, you would be subject to economic risks that affects your ability service loans.
Finally, there is the risk that the property value upon completion has declined below what you paid for. In Sydney, Melbourne and Perth, off-the-plan investors have recently suffered substantial losses as a result of record supply of new apartments and tightened monetary policies. CoreLogic research shows that 14% of apartment off-the-plan resales are at a loss, which is an increase from 11% in the past 18 months.
What to look out for as an off-the-plan investor?
Hence, in light of the above risks, it is important to be prudent and knowledgeable. Being able to understand and extrapolate economic trends is critical as is understand your contractual rights. Here are some important questions to consider:
- Can I make changes to the finishes? (Kitchen and bathroom)
- Can I select fixed appliances such as stoves and dishwashers?
- Can I visit the site during construction?
- Am I able to meet the financial arrangements if the project gets finished earlier or later than expected?
- If the construction is delayed or the design of the building is altered, what are my rights?
- Is my deposit secure if the construction does not go ahead?
- Can I on-sell the property to someone else before the construction finishes?
- Can the developer make changes to the property? Do they need my consent?
- What is the supply-demand of houses? Is there an oversupply and low demand?
- Has the capacity of buyers to access capital changed?
- Is the economy about to undergo a recession as per the economic cycle?
- What are the current fiscal policies?
- Are there any changes to population and demographic?