The Property Hunt is a tough journey to be on in the current market in many areas of Australia. This may lead you to consider alternatives like an “off the plan purchase”.
Our very own directors have bought several properties ‘Off the Plan’ and have encountered their own struggles along the way. This is a relatively high-risk strategy that is also one that can offer significant potential benefits also. Kirsty describes a bit of their purchasing stories in relation to some off the plan properties below.
The first purchases we made with the help of our mortgage broker at the time. Andrew and I bought two villas in an almost completed complex. The developer had run out of money before completion, and the complex was in a sticky position. It had gone into receivership and the sale of properties looked to be of great value. However, there were definite risks and unknown aspects due to the purchase terms and history of this complex.
There can be the risk that a builder goes bankrupt before off the plan properties are completed. This is a rare, but real risk with off the plan purchases. We had been looking to buy an owner-occupied property and were looking in the usual places (Real Estate.com.au and Domain). Andrew saw a banner ad for the complex which was in our local area. We checked it out as we did not even know it existed. As we attended the open homes, the precarious situation with this development was revealed. This came about as the developer had incurred substantial overheads with drainage and excavation costs. They were well beyond what he had budgeted for as it was being built into a steep hill.
We did our due diligence and ended up buying the first property. We had amazing river and ocean views from our modern villa. We loved it and we also felt that the prices on offer (compared to the local market) were relatively cheap. A few months went by and there were still a few properties available to buy. They were set amongst the mangroves on the lower level closer to the river, and they had a total tree-house sense. We purchased the further investment property- as we lived in the first one. These opportunities don’t always come around, but for us it made sense having been in the market for a property. Keeping your eye on all facets of the property market is very important to be able to purchase with confidence.
One thing to note is that the lenders can have limits on the number of properties they will hold in any one complex. Your mortgage broker will be able to help with this information before committing to a certain lender or property. Further, these particular villas were very unique to the local area. This led valuers to have difficulty in providing comparable sales, which reduced the lenders appetite for the properties. The lenders prefer properties that have a well-established value, by being able to properly compare them to other sales within a reasonable area. Unique properties can create difficulties in this regard.
We followed the real estate agent that sold us those first two properties. We ended up selling both of the villas for a good profit within 2 years. As a result, we were keen to consider further ‘off the plan’ properties through her. When she let us know of another complex that was going to be offered in one of our ideal areas, we were keen to move on it. We agreed to purchase an off the plan apartment as soon as they were offered. We selected a ground floor apartment that had a private courtyard. We were going to rent it out, and we thought this was a very sensible price point for our purposes. You are normally required to pay 10% deposit when you sign the Contract, and the Contract can not be conditional on Finance, so you must go unconditional on your purchase well before any lender will give you an unconditional offer of finance.
The developer, in most cases, will require a 10% deposit very early in the process. This generally is used to help build the development, so you won’t have access to or the capacity to change your mind without losing your deposit. A good aspect of buying off the plan is you’ll have 1-2 years to prepare yourself financially. However, you also need to be more confident that you will be able to get your finance approved when the time comes.
Buying off the plan can be exciting, but there are more factors out of your control. These can potentially turn that excitement into a major property headache. One of these is the possibility of the builder not proceeding or completing the property. This can result in the development never getting finished (meaning you may lose 1-2 years) when you could have put that money towards other investments.
In some cases, the builder might not even give your deposit back if the property is not completed. That is why it’s important to check these clauses in your contract with a conveyancer. You should also do some background research on the builder and go for off the plan developments that are constructed by established companies with good reputations.
There’s one thing you can be sure of when it comes to a developer – they want to sell. Banks won’t approve the finance for their development until they have sold a certain number of the properties available. In the early stages, developers are eager to get as many contracts sold as possible, so there may be a bit of room for haggling. Another reason you’ll find off the plan properties at lower prices is because buyers are more willing to pay more for properties they can see in person. Also, fewer buyers can make the upfront deposit payment, take the risks on property values, and also work with the time delays for completion. This can put you in a strong buying position with less competition from other buyers.
We were confident in the builder for this complex, and also that the area we were buying in had a potential strong upside in terms of value. Some older apartments in the area were starting to be redeveloped, and we were of the opinion this would work in our favour. Whilst our 10% deposit (in this case 54k) was tied up for 18 months, our belief came to fruition with property values increasing in the suburb. Less than 18 months after completion, we again decided to sell the property, resulting in another good profit. I really enjoy the simplicity of these purchases as the improved values require next to no effort. It is more about having a bit of confidence that the likely property value will have increased well once it is completed.
Further, make sure you consider the ongoing costs like the strata fees. While a development with a big pool, gym and lifts may seem appealing, the maintenance of these amenities will lift up the cost of your strata fees per quarter. Often, these costs are disclosed for a new complex, however they often increase significantly in the first year or two once the real costs are more solid. This property had the strata fees increase quite a bit making it a less attractive property to keep long term.
Andrew and I thought about the benefits of keeping or selling property #2 as values had really sky rocketed. We were considering if the value of that property would continue to increase or if they had maxed out. After looking at other areas to perhaps cash in our profit and buy again, we found another ‘off the plan’ property in the same area that really caught our interest. We thought this new property had much more potential for growth and so we sold property#2 and put down the deposit for a third purchase. The location of the new purchase was beach front. It was a unique property, for all the right reasons. We were confident it had much more capacity for increased value than what may occur if we kept Property #2.
This off the plan purchase is now busy being built. Personally, we like unique properties in the great locations. It means there is nothing else like it, and values can increase significantly due to a reduced availability of comparable properties. We knew this site well and we love it. It is not quite in the Bondi Beach category, but it is an iconic location that we are very excited about. Whilst the completion of this project is going to be some time away, it was another opportunity to back ourselves in our ‘off the plan’ property adventures.
When you buy a property ‘off the plan’, it can end up having a lower value than the agreed purchase price. On the flipside, the property could be valued higher, which, in some cases, people can sell (or resell) their property before settlement and thus can make a profit before taking ownership. The property we are buying here has a clause in the Contract that stops us from being able to re-sell it before it is completed.
Lenders will NOT give unconditional finance approval until the property has been registered. This does not happen until approximately a month before the property needs to be completely paid for. One large risk that can come into play is that when the property is valued (once the property becomes registered), the valuer may not see the price paid for the property as being correct. They may consider it valued lower, and if this is the case, you would need to put in more money than you planned on.
When buying off the plan, you can’t physically see what you’re purchasing which means you might not receive what you had originally seen in the display, or what you were promised. Often, when developers run into financial issues they can reconfigure the property to save money on things like finishes. It is a risk in that the finer points won’t be what is promised on paper. For this purchase, we knew of a similar quality complex built by the developer in another location. Our confidence is high as the developers are also keeping a property in the development for themselves to live in.
Owning a property from day one with the fresh smell of carpet and the shiny new bathroom taps can be such an exciting experience. In many cases, the location of the property can also bring great benefits – such as exceptional views, facilities and being close to transport, schools and shopping centres. It is important to look for areas where good infrastructure is in place, which often means likely good capital growth (or increased values) for the location. Being close to water is also an additional desirable location for many. Many developers who plan these sites have already done their due diligence in researching the location as being positive for the aforementioned factors and this saves you the client, this task.
We bought this current property thinking it would be as an investment. We are now actually dreaming of living in it (for at least a year which also brings some tax benefits but that is another story). There can be many considerations in relation to tax benefits and depreciation depending on if you live in the property or rent it out. While the risks are much greater, the benefits of a well chosen off the plan purchase can be simple. We were nicely surprised after paying our last deposit, to realise that we want to live in this property for at least a while. It will be such an iconic property, and a beautiful residence to enjoy and appreciate as one of our ‘homes’. We expect that this will be a special one for the history books.
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