Hi,
Does anyone have ay insights into buying off the plan? I understand it can save you money on the purchase price and also tax deductions, but people in the past have warned me against it.
I have had an investment opportunity present itself, in a suburb that I am interested in investing in, and it ticks all the boxes e.g. 2 bedrooms, 2 bathrooms, car space, reasonable stratas, close to transport, hospital, employment etc.
However, I've heard horror stories in the past about buying off the plan so feel a bit sceptical. Any advice is welcome, thanks.
Buying off the plan is rarely a good idea.
You generally pay a premium for them. For that reason, valuations can come in low – and if you don't have a large deposit you may find yourself in a position where you can't obtain finance meaning you'll forfeit your deposit (and possibly more).
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Off the plan has it's risks, all be it small. Buying from the right developer, buying at the right time in the market cycle for that area are both key. We have a rule that if a developer is discounting on the sale price then we stay away. As soon as the sale prices are dropped or discounted for some buyers, the valuations at settlement a put under (a lot) pressure for the other buyers, that's not a good thing.
The main point is that you are buying new, and that is a good thing for someone keen to build a high growth portfolio. The risks with NEW are manageable and mostly known vs. those of OLD which have many unknowns, and can’t be fully known prior to taking ownership.
OLD vs. NEW? This a decision each investor needs to consider based on their own tolerance for risk and how they see the upside.
Pros:
Old Property
• Possible to add value by renovating.
• Lower purchase price for OLD compared to NEW of the same size, location, etc.
New Property
• Rent demand for NEW property is far greater. NEW is more likely to have less vacancy and usually attracts a better standard of tenant.
• NEW is more sort-after by tenants. On a square meter by square meter comparison, NEW rents for more.
• Depreciation credits for NEW far outweighs the price premium NEW has over OLD.
• Low repairs and maintenance expenses and predicable for the first 10 years.
• NEW property attracts better tenant due to the higher rent than the OLD property.
• Lower stamp duty on NEW House & Land investments.
Cons:
Old Property
• OLD has many potential unknown maintenance issues. Extensive due diligence and building reports are required prior to purchase.
• With apartments special levies can be sprung on owners without any notice. Major repairs may have potentially been overlooked and not yet recorded at body corporate meetings. Once a special levy is called, owners have no option, but to pay the levy as directed.
• No building depreciation (Div 43) for property built prior to 18/7/1985.
• OLD properties rent for less, and tend to have a higher vacancy rate than NEW.
New Property
• 3% – 5% more expensive than an OLD comparable.
• With apartments there can be many similar properties available for rent at the same time upon completion.
Modernity Investing
Email MeJamie M wrote:Buying off the plan is rarely a good idea.You generally pay a premium for them. For that reason, valuations can come in low – and if you don't have a large deposit you may find yourself in a position where you can't obtain finance meaning you'll forfeit your deposit (and possibly more).
Cheers
Jamie
Valuations are the biggest issue with buying off the plan. In a booming economy where the market is going gangbusters you won't lose out and shouldn't have any issues, but when the market is topsy turvy your predicted "great buy" can in fact turn sour.
Then you have the issue of where you are at financially closer to settlement which can be years down the track. If you say lose your job and are out of work at that time, you won't find a lender to take you on for the loan and therefore would forfeit your deposit and maybe more costs depending on the situation.
These are risks the OP needs to contemplate before diving in.
Cheers
Tom
Make sure you compare the product with similar places in the same area. What is a similar place, say 5 years old, selling for in the same area?
Remember strata for OTP is an estimate. How accurate it is is anyones guess. My guess would be that it is conservative.
There's no yes or no answer about whether a certain OTP is good or bad but head the warnings. Google "off the plan". There is a mountain of info.
It's not the Breakfast Point ones is it? Strata there in the existing ones are out there.
Seen it go both ways.
You will need to have a contingincey plan in place if the val comes in lower than the purchase price which is common.
A 10-20% buffer for such an event is highly recomended.
Colin Rice | CDR Finance
http://cdrfinance.com.au/
Email Me | Phone MePerth Based Mortgage Broker - Investment Property Finance Specialist | E: [email protected]
All the above
The problem with OTP is market volatility. It's estimated that 30% – 90% of individual OTP project sales are being fueled by Chinese buyers. What's hot today may be stone cold dead by the time you take possession. If that Chinese money dries up or even slows by a small margin the market could go soft fairly quickly.
Hello cbarry, I would agree with the above comments. I personally do see risk in investing off the plan more so that purchasing existing property however I feel that risk can be mitigated providing you understand about the process of investing of the plan and have both a plan and safety nets in place. It is a very good wealth making tool for some people and can be disaster for others. Firstly know that the price at time of contact (compared to market) may differ from the price (compared to market) at the time you pay for it. Therefore you must be comfortable that the price will still be fair in years to come. Know that each contract with have what is called a sunset date, it is the date in which the development must be completed by (although it can be extended under certain circumstances) know that often the developers expectations for completion and actual date of completion often varies, so plan for the latest time possible i.e. end of sunset clause. Know that you will be obligated to settle within 14 days of completion so you must be able to fund the purchase or be able to obtain finance, you must be sure of this, if you are remotely unstable or dont have good financial backing this risk may be to great. That said while it is rare and might be rejected there is no reason that you cant ensure your contract includes a clause that says something like 'subject to available finance that is accepted to the purchaser' (seek legal advice for clauses). There are several clauses that can be included to 'give you an out' if needed including 'subject to valuation'. Now it might not be accepted by the seller but as you would be a rare case chances are they'd go with it, if not if may be too great a risk for you. Another area to look at is the amount of deposit you would be paying, if you are paying 10% then its a bit to wake away from if you default (again talk to solicitor, a developer can sue you for defaulting and it can cost a lot although this is relatively rare as they usually prefer to get on will selling for profit) If you are paying $1,000 deposit pfft. MY NO 1 PIECE OF ADVICE IS TALK WITH A SOLICITOR EXPERIENCED IN OFF THE PLAN SALES not just to review the contract for you but to provide you with advice in which to reduce your risk. DO NOT see a conveyancer.
I agree with the above comments: Comparing off-the-plan apartments (on differing sites or with differing developers) is a very, very difficult task to carry out from scratch.
As an example of two buildings on the market now:
The same developer- two projects, 1200 meters apart, between the two there is a per-square-meter cost price difference of over $1250m2. Within one of the buildings, you can have a $1000 per-square-meter cost price difference between (a like) apartments on different floors, that's before you start to compare 1, 2 & 3 bedroom, 1 or 2 bathroom, car space or no car space, balcony or no balcony, north facing or south facing, single aspect or dual aspect, city views or water views etc….
It just takes a lot of work to figure this all this out, in our office Dave works on this fulltime. Dave will normally get the full development documentation at least 3-4 months before the property is due to be released to the market, from there it will take a few days of number crunching to work out the best value units on the site. Currently this is a 36 item check list. Then by the time the development is released for sale we will have reserved a number of apartments.
Therefore before we start to buy into an area, there will be over one years research clocked up, including 2, 3 or 4 on the ground inspections in the area, visiting a number of completed projects by that same developer, etc.
In my experience:
Based on our clients settling between 10-20 purchases per month, providing the quality is good, we seldom have valuation issues. That said; I would never recommend any client into an off-the-plan apartment with over 80% Loan to Value Ratio debt on their portfolio, it's not worth the risk for all the reason stated by others above.
I do however, find that clients like to "talk up" how much cash/equity they have available, so getting to the bottom of the real story is very important too.
There is no substitute for a proper due diligence process and maintaining conservative Loan to Value Ratios
Modernity Investing
Email MeAs already stated. Try assess comparable sales, comparable rental return vs what you have been told it will yield and make sure they marry up.
Look at other OTP projects in the area and determine approx settlement point; Sth Yarra had 2-3 major high rise OTP apartments settle very close together flooding rental market with new stock and in turn leaving many investors with an empty wallet and vacant property each week.
Only 1 person has to pull the pin and sell there property due to the hurt factor and that sets the pace for what your property is valued at.
Added the weight of OTP purchases generally being unconditional and the developer factoring in capital growth over the build time, not to mention the backend commission that the developer palms off to the agents for a sale being added to purchase price.
My advice would be to stay well away unless you have a significant buffer to cover any short fall in the val not measuring up. If you are forced to pay more than a property is worth you are effectively backing yourself into a corner for future purchases..
Too many variables and downside to this strategy- we know first hand, we sacrificed $25k grand in deposits.
Tread with caution….
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