Between them, our capital cities of Brisbane, Melbourne and Sydney stand to add tens of thousands of apartments to their city skylines over the next few years.
This heightened level of construction activity is leading many property analysts and experts to warn of an impending unit oversupply.
At the same time the world of finance has changed and this recently caused Michael Yardney to warn that there is a ticking time bomb waiting for off the plan purchasers.
Not only will some under capitalised investors lose their deposits, but it will put some property developers under severe financial strain.
How this will play out in each market is yet to be seen, however, with so many investors and homeowners purchasing property off the plan, I feel it’s prudent to remind people of some the fundamental truths of acquiring real estate assets in this fashion.
They include, in no particular order:
1. Developers need you more than you need them.
In most cases, developers must have a large percentage of properties within their project pre-sold off the plan in order for them to qualify for finance and commence construction.
This puts them – and your investment dollars – in a potentially precarious financial position, for up to several years.
It’s good to remeber:
- The deposit you pay is negotiable.
- There may be a long time between signing the contract and the development being completed than initially suggested.
- The value of the property may change during that time.
2. The bigger the project, the longer the settlement period.
Your property deposit (and in the eyes of the banks, your investment capital) could be tied up in an off the plan project for up to three years before the property is settled – and during that time, you run the risk of the entire project falling over.
What is the opportunity cost of your investment dollars during this period?
3. Developer incentives can be a red flag.
Because the market is currently so competitive, developers are offering up all sorts of incentives and deals to entice property shoppers into buying purchasing off the plan.
Sometimes these are legitimate signs of a competitive market; other times, they’re an indication that the property stock isn’t great stock and needs several ‘carrots’ attached in order to attract interest.
4. Rental guarantees are a red flag.
If a rental guarantee is offered – especially if it runs for an extended period – you need to ask yourself why the developer feels the need to place such an extravagant safety need under the property?
If there is genuine rental market demand for that property type, then surely renting via the open market will be sufficient?
5. You will lock in tomorrow’s prices, today – whether positive or negative.
One of the main selling points that off the plan marketers use to lure in buyers is the perceived opportunity of locking in a property at today’s price, but settling it in one to three years’ time.
The anticipated outcome is that the property will be worth more by the time it settles, allowing you to borrow more against the new market value.
This is only true if moved in an upward direction by the time the project is completed and that also assumes you’re not paying a premium for your property today (and in most cases you are!)
How will you cope if the market moves in the wrong direction?
6. Pre-approval means nothing when buying off the plan.
Do you know long a standard pre-approval is valid for? It’s generally around 90 days.
When you consider that an off the plan property won’t settle for at least 12 months (and up to three years), you can see how little weight a pre-approval carries when buying off the plan.
Off the plan purchases may seem like a sound investment strategy, but from my experience, those investors who have serious success with these types of purchases are few and far between.
All this means that…
Because of all the uncertainty you should be paying a discount on today’s market price to buy an off the plan property, but in general you’re paying a premium.
In my mind you’re more likely to have investment success buying an established property in a small, boutique-style development apartments or townhouses.
And remember, any property that is marketed with a suite of promising extras added to the deal should be reviewed with caution.
Ultimately, the rule of property investing success that I live by is this: if it sounds too good to be true, it probably is.
You may also want to read:
- What every property invetsor needs to know about buying off the plan
- A ticking time bomb for off the plan property investors