Off-the plan property is a rather popular property stock with many investors and first-home buyers opting to get in on the builds.
Property economist and Principal of Suburbanite, Anna Porter, claims with off the plan properties the risks outweigh the opportunity every single time.
Porter says there’s a lot of risk when investing off the plan.
“Risk with off-the plan property is huge as there’s uncertainty around lending and changes can occur without any notice. If you buy a property off the plan today and it needs to be built chances are it won’t settle for one to two years,” says Porter.
“The settlement risk is that lenders won’t give you your final approval for the loan until 90 days out of settlement. So, if your financial circumstances have changed, the lending policy changes or the market itself changes you may not be able to secure that loan prior to settlement,”
“We see it all the time, quite regularly actually. The buyer then has to walk away from their ten percent deposit or try and get the money some other way.”
This can be a costly mistake if you can’t settle on an off-the plan property you committed to.
“The other risk we see is that when new properties are being designed there’s often a lot of other property being built that looks similar and the areas can get over developed and over supplied with the same sort of product,” says Porter.
“So, if you have a think today you might be buying an off the plan two-bedroom unit and by the time its finished there’s not only that building finished by tonnes of others finished around it and you could be one of 200, 300, 400, 500, 2 bedroom units going to the market for rent,”
“This puts downward pressure on your rental returns as an investor or you might be one of many going to the market for sale and if buyers have a lot of options that are very similar, buyers aren’t going to pay premium prices which is actually pulling back your value just by the oversupply factor alone.”
A hot topic in the media currently is that of building defects. Porter suggests this is also a huge risk for off-the plan property
“You really don’t know the quality of the building if it hasn’t been built yet. We’re seeing now with the Mascot Towers and a number of other buildings which are really bringing it to the forefront of the conversation that building defects are a costly and real thing,” says Porter.
“A number of years ago the government didn’t have a lot of regulatory control over the warranty developers had to offer. We knew back then that there would be some fall out as it meant developers could really relax the standards knowing they won’t be accountable for this and we’re starting to see the fallout.”
Right now, it is in the spotlight and building defects are coming in focus but it’s been an issue for many decades.
“I’ve seen all too many unit blocks with water defect problems and even a good developer with a good track record could end up with one bad tradie on site or one bad water proofer, one bad plumber that unravels the whole thing for them and they don’t realise the work has been done at a lower standard and then this is the development that everything goes wrong on,” warns Porter.
“Unfortunately, the line for the reputation of the developer isn’t what it used to be as they have to rely on the trades to get the job done,” she continues.
Porter strongly recommends against off the plan property. Instead, investors are urged to buy established stock.
“With established stock, you can get a pest and building report done, people have lived in it already so you know if the water proofing works or not, you can see how the market is performing based on what’s already there and what’s established so there’s no guessing games on what the future might hold for the area,” says Porter.
Ms Porter also issues a caution to investors on an unknown fact that even though some people may go into an off the plan purchase where the developer might offer no deposit or only five percent deposit, they’ll find in the contract, that if you default on that purchase they will come after you for the full balance of ten percent because that’s their legal entitlement.
“So, watch the fine print in the contract and don’t think that just because you’re not paying a full deposit that you won’t be liable if you don’t settle when it is time,” says Porter.
“It’s not just the deposit they can also then pursue for any costs associated to re-sell it which are their marketing fees, legal fees, additional interests, additional costs such as if they can’t sell if for the same value you would have paid for it they can pursue you for the difference.”
A mistake with off the plan property can be an incredibly costly mistake.