Is buying off the plan a good idea?
“If it wasn’t for Murphy’s Law, buying off the plan would always be the way to go, but the reality is that many things can go wrong in buying a property that doesn’t exist yet.”
Buying off the plan involves putting a deposit down on a property that is still to be completed. The buyer agrees to a price in today’s terms, and settlement occurs once the home has been completed.
From the vendor’s perspective this is advantageous, reducing the risk he/she is taking, as the vendor has buyers even before the property exists.
For the buyer there can be benefits too.
Since the property is priced in today’s terms, but settlement is delayed till completion, there is potential for good capital returns. This occurs if house prices increase whilst the property is being built.
The delayed settlement also means that the buyer has extra time to save before the payment is due. As a result the purchaser may need to borrow less and so a smaller amount of interest is accrued.
For investors, many off the plan unit developers will guarantee rental returns. This involves the vendor guaranteeing a rental yield for a certain time frame. However these benefits under Murphy’s Law can also be turned into potential pitfalls.
Good rental returns have the potential to expire with the contract. This is especially the case if other investors’ contracts fall due at the same time. As a result a stampede of rental properties within your block may come onto the market, forcing you to competitively price your unit to attract tenants.
The other point to make about leasing your property is that you’ve paid a premium for the “newness”, so why pay for this extra and then allow a tenant enjoy it?
Then there’s the flip side of capital growth, which is the potential for negative growth. If prices drop after you’ve signed the contract, you’re still locked into paying the amount previously agreed, not what the unit is currently valued at.
And what if the apartment is not what you quite expected? Although a display version will give you a guide to the final unit, aspects such as the view can’t be known until completion and will often be a gamble.
This leads us to the next point — pricing. Say for instance it is expected that your apartment will have a view. How do you determine the quality of the view before the apartment is built and therefore how much this adds to the unit’s value?
Equally, a premium is a paid for the unit’s mint condition, making it difficult to price both off the plan and newly completed units. As a result there is a high potential to pay too much for these types of properties.
If the newness factor is something you can’t live without, there is a solution.
Just as you save thousands by purchasing a twelve month old car, why not use the same logic in property investment? By being the second owner of a new property, you are letting the first owner soak up the premium, yet still get to enjoy the unit’s newness. Plus, homesales.com.au has many “as new” properties listed.
In summary, off the plan purchases can potentially have a number of advantages, but in general this type of property investment carries a higher risk, both for investors and owner occupiers.
Story Provided by John Lindeman
Residex Head of Research
For the latest news on the residential property
market, in depth commentary and up to date figures and statistics, join
40,000 other subscribers to the free Residex newsletter by clicking here
