They come on to the market with lots of impressive brochures and promises, but the benefits of buying a long term off-the-plan property development do not always outweigh the risks.
There’s a simple rule of thumb with buying long term properties off the plan – avoid the temptation. A lot of investors understandably find the prospect of potentially high returns from such a development appealing. Plus, you usually only need a relatively small deposit, you can choose one of the best apartments in the block, and there is a chance the property will have appreciated in value by the time construction has been completed.
However, the risks significantly outweigh the possible benefits. For starters, there is the obvious danger that a developer may go bust before a project is finished, robbing investors of their deposits. Yet this is rare and it’s only a minor consideration compared with the bigger issue: financing.
Since the global financial crisis, all banks have imposed a rule whereby they will only provide formal approval up to six months from completion for off-the-plan purchases. This means you cannot gain financing approval until close to the completion of the property. So while you are committed to the purchase, there is no guarantee your finance will get the green light. Given that many developments may take two to three years to finish, this financing uncertainty can leave investors very exposed. So much can change from the time when a buyer commits to an off-the-plan deal to when they actually need the money. They may have lost their job, interest rates could have risen, and the market may have taken a tumble. All these factors could lead to banks knocking back finance.
Also, suppose the bank’s valuer is conservative and undervalues the finished unit by 10 per cent to 20 per cent. If you can’t get finance and default, you could be sued for the difference that you owe and lose your deposit as well. Such a scenario could put you into bankruptcy.
Purchasing a property that has been completed, or at most is six months from completion, is a far safer and smarter option. One of the benefits is having surety around financing. This means you can safely opt for a much higher level of gearing – enabling you to maximise available cash and equity in other properties. With financing settled, banks can’t take a property off you as long as you meet the loan repayments.
All of this means you can often own more than twice as much completed property than off the plan, with a lot less risk. Far more property with far less risk simply means there is no comparison – complete, or near complete within six months, is a far better strategy than off the plan.
Unfortunately, in most cases, property investment marketers do not explain the very real off-the-plan dangers. So be very wary if a property advisor is pitching such a property deal. In fact, walk away and find a better advisor.
Author: Richard Sheppard This article was first written for the August 2014 edition of Peninsula Living Magazine.