There’s no secret off-the-plan units are being sold left right and centre. It’s also no secret, many of these, especially in pockets like the Brisbane CBD will lose significant value by the time they are completed due to an oversupply issue in that market sector.

Buyers are left with the choice of either swallowing the loss or get running for the hills.

Anna Porter, property commentator, valuer and Suburbanite CEO, warns this is an interesting dilemma and one set to shake up the property market over the next few years.

“Within a 7-10km of the Brisbane CBD, units are being completed with values down by as much as 10-20% on what they were purchased for 12-18 months ago. The buyers are entering off-the-plan contracts with the hope the market will increase and get their money working for them before settlement. We hear of the success stories from years gone by throughout Sydney and Melbourne metro, where people have made hundreds of thousands of dollars between exchange and settlement. But we rarely hear of the scenarios where it has all gone wrong and people have lost their deposits. This happens all too often, but is rarely spoken about,” warns Porter.

“Someone who purchased an off-the-plan unit for $600,000 would probably fetch around $500,000 in the oversupplied sectors by the time it is completed.  Same goes for the rent which would also be down by as much as 30% in some of the oversupplied markets of Brisbane, and soon to follow are Melbourne, Sydney and south east QLD with these markets starting to turn a corner.”

This is the problem for investors who wish to sell in the short-term or rent out their property as they’re faced with the stark reality of a real loss of dollar value.

So, do you take the hit and hold a declining asset, dispose of the property before settlement and crystallise the loss, or do you walk away from your deposit of 10% – all of which are fairly undesirable options for the average property buyer.

“This is one of the hardest decision to make,” says Porter. “We have seen buyers grappling with this over the past 5-10 years in the oversupplied Melbourne market, Perth over the past 3-4 years and Brisbane units, Mackay units, as well as house and land packages throughout NSW hunter valley region, and many more pockets throughout the country that are susceptible to softening conditions.”

Anna says you should arm yourself with 5 ‘must ask’ questions before making a decision, perhaps even sit with your accountant or financial planner to answer them openly and honestly.

Here are Porter’s top 5 questions for every potential buyer to ask;

1. What will fundamentally change (if anything) in that market to help it recover and increase in value again?

2. Is oversupply still on the horizon, threatening to continue to suppress values and rental returns?

3.  If you’re an investor and the property were vacant for 3-4 months can you afford to hold it? Because the vacancy will also set in with the oversupply issues.

4. What is the opportunity cost? Can you utilise your money elsewhere that will achieve a better return for you that will outstrip the loss you might take to get out? Perhaps a better investment property, a home in a growing market, or some other asset class.

5. (Most importantly) What is your overarching goal from the property? If it is somewhere to live and you are going to be there for 10+ years then it won’t be as critical. But if you are looking to invest for capital returns and wealth building it could be a long hard road to get there if the market is facing long term oversupply issues.

“Usually the best scenario is if you can on-sell the property before settlement before the oversupply becomes too crippling. But many developers won’t allow this in their contracts of sale as they want to be sure that you don’t undercut them on price, making it harder for them to keep values up on the remaining properties they are trying to sell. So, when you enter an off the plan contract, ensure that you have the capacity to on-sell before settlement if you can”, says Porter.

“My best advice is to be very cautious when buying off the plan, as there is a lot of hidden risk. Make sure you get quality legal advice and understand that the market may not always go up in value, so be prepared for the worst,” concludes Porter.