Is buying off the plan a good property strategy?
Buying a property off the plan means it is under construction or not built yet. Why do people do this and what should you consider before doing so? Let’s find out. It’s vital to consider several factors before you sign a contract to buy a property off the plan.
What is an ‘off the plan’ purchase?
It’s when a buyer signs a contract with a developer to buy a property at an agreed price at a future date. That’s when the property is completed, usually in one to two years.
- The contract is subject to the developer receiving government approvals and meeting conditions.
- The property could be vacant land, a house-and-land package, or strata property. Units, townhouses and high-rise apartments are some examples of strata properties.
- The buyer pays a deposit now, and the rest is due at settlement months or years later.
Why do people buy off the plan?
In terms of demand, the main intent of buyers is to secure a property at a lower price or dream location. In 2021 there is also high demand from first-time buyers, downsizers, and people who have profited from the mining boom.
High demand is also determined by low interest rates and high post-COVID interest. COVID has triggered many to evaluate what’s important in life. For many that comes with a lifestyle change.
Buyers hope that their property will increase in value by the time it is completed. Savings could come from changing market conditions, stamp duty rebates, or government grants. Many local or overseas buyers do this for investment purposes, or if they do not qualify to buy established properties.
Other benefits of buying off the plan include:
- Not being rushed to sell their previous or existing home.
- Having more time and incentive to save up or secure financing.
- The flexibility to customise indoor and outdoor finishes.
In terms of supply, developers promote off-the-plan sales to get money rolling in early. They may offer discounts to meet sales targets or to commence construction. In some cases, their financiers need evidence that many units have been pre-sold. This provides confidence that the project is viable and worth underwriting.
Risks of buying off the plan
Sometimes, inexperienced buyers buy off the plan for the wrong reasons. They may have FOMO – fear of missing out. Or were convinced by spruikers at a ‘wealth creation’ seminar that doing so will give them everything they want in life.
Overseas buyers may unwittingly pay too much buying off the plan. They could be unfamiliar with the local property market, but still want to buy for migration or investment purposes.
There is no guarantee of growth in the property market. This is evident in Australia in recent years. A sizable percentage of properties have been valued at 10 to 15 per cent lower at the time of settlement. 60 per cent in Sydney, 52.9 per cent in Melbourne, 43.1 per cent in Queensland. Western Australia did a little better at 22.5 per cent.
Rental guarantees are not guaranteed either, as they expire. They also inflate purchase prices in the first place.
Intent and reality may not match.
- Is the intent to rent out apartments? Profit may be eroded by high owner’s corporation levies for strata properties.
- Is the intent to own and occupy a strata property for lifestyle and convenience? Others may not share your intent. A glut of investors may mean less diligent building maintenance. This can affect the property’s long-term capital value.
Other risks of buying off the plan include:
- Development failing to proceed as planned.
- Property slump driving down property value and increasing risk of negative equity.
- Long opportunity cost – The money put into the off-the-plan property may be tied up for two years or more and unavailable for other investments.
- Unacceptable construction quality and remediation costs. Developer variations may benefit them more than buyers.
- Harder or unable to get financing for long-term pre-approval, or for strata properties below a certain size.
- Risk of default if buyer no longer qualifies to obtain financing at settlement time. This could be due to changes in lender policy, interest rates, or buyer circumstances.
What should savvy buyers do?
Before buying off the plan:
- Research the property market well, especially areas with a strong history of capital growth.
- Look for property that appeals more to owner-occupiers than investors.
- Get independent expert advice from legal, financial, property investment and conveyancing professionals.
- Remember that land appreciates while buildings depreciate, so choose the property with a high land-to-asset ratio.
When shortlisting a property to buy off the plan:
- Check the developer’s track record and reputation.
- For subdivisions, ensure the development has received conditional approval from the Western Australian Planning Commission.
- Check if the property has any unique attractions as this provides good resale value. Don’t buy a property that looks similar to a lot of others in the same development, and other developments in the same neighbourhood.
- Ensure that your contract clearly states a condition requiring the deposit to be held in a trust account (by a real estate agent conveyancer or solicitor) and not to be used by the developer until settlement.
- Ensure you are protected in case of developer bankruptcy or other reasons for incompletion.
How KDD conveyancers can help
Take advantage of our 30+ years’ experience in Perth’s property market to avoid potential costly pitfalls. We can provide expert advice by reviewing your contract (which are often more than 100 pages long) and explaining the impact that each section has on you as the buyer. This helps you make an educated and informed decision on whether to sign the contract.
Let our experienced property conveyancing practitioners at KDD Conveyancing Perth assist you. Our friendly and knowledgeable conveyancers know the settlement process well in Western Australia. Contact KDD on (08) 9296 8717 or by email today.