Why Off the Plan Property is Risky in 2017

Property Builders

Buying off the plan property can be an appealing option to property investors and homeowners alike, who wish to own a new home and to benefit from stamp duty discounts. But despite these benefits, off the plan property purchases come with some serious risks.

As conveyancers, we’ve seen the negative side of buying off the plan play out in myriad ways. For instance, the developer may be unable to deliver the terms of the contract, which leaves the buyer with several problems. Or, property values may fall between purchasing and settling, leaving you as the buyer in a position where you need to come up with more cash to settle the deal.

Furthermore, with tens of thousands of new apartments being constructed Australia-wide in 2017, oversupply is a looming issue.

If you are planning to buy off the plan property this year, make sure you know of the following potential pitfalls:

Construction delays

Though property developers provide an estimate of when the property will be completed, finishing behind schedule is a possibility. The uncertainty of apartment completion can be very frustrating for buyers who have already deposited 5-10% of the developer’s asking price for the property.

At best, delays may be an inconvenience. At worst, buyers might be left homeless for some time if their lease expires in the month that the off the plan property is supposed to be finished. To gauge the risk of delay in the property you’re buying, ask the developer about their track record for delivering projects on time in the past.

Different than expected

One thing to consider about off the plan properties is that you never know what the final product will look like. There is always a possibility that the finished product may turn out differently from the original plan, or differently to what you expected.

In some cases, the fixtures and fittings may not match the original specifications. But there are also instances in which the floor plan and balconies have actually been different from the ones stated in the contract. Units may even turn out smaller than expected.

In such cases of “material alteration”, we would advise buyers that they have the right to renegotiate the price, but this process can be stressful and time-consuming. Furthermore, not all alterations can be construed as “material” as developers will normally reserve certain rights to amend the plans and specifications for off the plan developments. The best risk mitigation strategy in this regard is to stay in close contact with your developer, and if you see any red flags – such as the measurements and the area of the floor plan being substantially different to what was promised – raise the issue with them as soon as possible.

Slow price appreciation

Experts have been warning that an apartment glut will eventuate this year, which is a cause for concern for off the plan buyers, as it could lower the resale value of your property. According to a recent report, 60% of units purchased off the plan in inner Melbourne since 2011 have made a loss or broke once resold.

Adding to this risk for investors is the fact that BIS Shrapnel is warning that gross yields may fall under 4%, once rental returns slip due to an apartment oversupply. Brisbane and Melbourne are both experiencing a property glut at present, and National Australia Bank forecasts apartment sale prices to stay flat or fall in all capital cities in the short term looking forward.
To mitigate this risk, property investors are advised to buy in a location with a small number of apartment buildings, as it helps to ensure a scarcity value.

Financial risks

When buying off the plan, it is impossible to know the final apartment value for the property, even with careful planning and forecasting. Buyers must take the word of the developer and trust it – which can prove to be financially fatal.

In cases where the property is valued at a lower price than the price you agreed to pay, as a buyer, you must make up the difference financially by providing a larger deposit. We have seen clients in this type of situation before as conveyancers and it can be extremely stressful for buyers in this situation.

With many uncertainties in the current property market, not to mention the changing landscape for the mortgage industry, buyers should think doubly hard when buying an off the plan property. As conveyancers, we are available to help you navigate the complicated terms and conditions that may apply with an off the plan purchase. Please contact our friendly team today on 1300 932 738 or you can also contact us online here.

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