Buying Off The Plan – What Every Property Investor Needs to Know

Are you considering buying an off the plan investment property?

Please think again and turn the other way!

There are just too many risks involved in this sector of the market.

However if you open any weekend newspaper you’ll still see a large number of proposed new apartment projects being marketed before building has even been commenced and it must make you wonder – why on earth would anybody buy a property that hasn’t been built yet?

Yet plenty of people are still tempted and still do buy off the plan.

While it’s rarely been a good investment strategy, this is now the most risky investment strategy in the current market and one to be avoided.

I know some investors are tempted to buying off the plan properties being enticed by the advertising hype of stamp duty savings, depreciation allowances and so called “cheap” prices.

Others hope that by getting in today and settling on their properties in a few years time the value of the property will have increased and they will have turned a relatively small deposit into a substantial profit, all while avoiding those nasty holding costs.

What are these new risks to off the plan properties?

While there are already major risks associated with this type of investment due to a number of factors, including oversupply, the introduction of Labor’s proposed tax reforms if they win this year’s federal election will compound them.

According to Doron Peleg CEO of Riskwise, should the ALP policy be implemented there will be reduced demand to purchase rental properties due to the creation of primary and secondary markets, and this will cause new dwelling prices to decline in many regions.

Peleg says that the second owner won’t receive the same tax benefits of depreciation etc as the primary owner when they buy a property.

They will not be able to claim negative gearing against their wages and the capital gains tax discount will be cut in half.

Therefore, the vendor will have to drop the value of the property because the benefits to the buyer are lower, and it is therefore not as attractive to potential buyers.

So, when a market is already weak, for example off-the-plan units in an over-supplied area, as we see in capital cities around the country, this will contribute further to the price reductions.

Add to this the recent Opal Tower disaster in NSW which has dampened investor confidence in the new apartment market and falling apartment values and you can start to see what I’m getting at.

So does buying off the plan ever make good investment sense?

The answer is usually no.  offplan

While a few investors have made money buying off the plan, the road is littered with much more who have regretted their purchase.

Frequently they’ve found the value of their property on completion is considerably less than they paid.

There are many other issues with buying off the plan, but before I explore them let’s first understand why projects are marketed this way.

While developers know they can get a better price for a completed property that buyers can see and touch and feel, today the lenders who are going to fund construction of the project insist a substantial proportion of units be pre-sold to ensure the viability of the project is underwritten.

Obviously, the banks expect the developer to make a reasonable profit margin – and so they should.

This is built into the final price as is the substantial marketing budgets which cover the cost of those full-page ads in the papers and expensive glossy brochures produced for the project. 

property investors

Add to this the generous selling commissions given to project marketers and incentives offered to financial planners and you can understand why the initial selling cost is inflated.

Remember, there is no such thing as a “free lunch.” 

If 10 -15 per cent of the project’s budgeted selling price is spent on marketing and selling costs, then the buyer must pay for this.

As the completion date for many high-rise inner city projects may be a few years away the inflated price can be buried in advertising hype such as “buy at today’s prices” and settle in two years.

The developers are counting on the fact that the longer the settlement period, the less chance you have of knowing if the final price will represent good value for money.

Looking back, many investors who have bought off the plan over the last decade found that the price they paid was way too high and on completion, their properties were valued at considerably less than their purchase price.

Here’s a few reasons I would steer clear of buying off the plan:

1. Too many fingers in the pie

I’ve seen far too many off-the-plan properties with large commissions built in for middlemen, marketing budgets and sales people, meaning the investor pays well over its true underlying value.

Don’t be lulled into a false sense of security just because you’ve been told a number of pre-sales have already occurred.

You’re likely to find many are at inflated prices to overseas buyers who are unable to buy established properties, have little knowledge of the local markets and have unique motivations for buying property in Australia such as a desire to emigrate in the future or place their money in a more stable country.

2. The banks won’t buy it!

Given that most loan approvals are only current for three months, obtaining a formal pre-approval for an off the plan purchase is a waste of time.

The problem is, currently we have 4 big banks in Australia and they each have a policy restricting their exposure to any one building; most won’t lend to more than 15% of the properties in a large complex. Hands of businessman

This means that if there are 100 apartments in the building and you are the 16th person to approach the bank when the building is completed, they may decline your application and you’ll have to go chasing finance elsewhere.

And if they do lend for your purchase you may find because of the inner city postcode of your new high-rise purchase, they will lend at lower loan to value ratios, meaning you need a bigger deposit.

By the way… some investors who buy off the plan won’t be able to settle and will need to sell their property at whatever price they can achieve.

Unfortunately, that’s what the banks will value your property at – the going selling price on completion – not what you paid for it.

Combine this with a lower loan to value ratio and you’re likely to need an even bigger deposit than you initially thought.

Now the following graphic from Corelogic should be enough to put you off buying off the plan.

It shows the huge percentage of properties bought off the plan where, on completion, the valuation is lower than the contract price:

off the plan doesn't value up

3. Low land to asset ratio

Remember that old investment rule; land appreciates while buildings depreciate?

If you go by the book, you should aim for the highest land to asset ratio possible and aim to get as much valuable land under your apartment as you can.

However the developer wants the opposite and squeezes as many apartments on the site as they possibly can.

So essentially, the interests of the developer and you – the investor – are in direct opposition.

4. Investor imbalance

Most off the plan developments are sold to investors.

This means you end up with a building occupied by far more tenants than homeowners.

Fact is owner-occupiers tend to be far more careful when it comes to maintaining the building and enhancing the development’s long-term capital value.

By the way…it’s not much fun going to a body corporate meeting full of investors who are not keen on spending (or simply don’t have) money to maintain the building.

5. Too many too soon

Currently there is a significant oversupply of new apartments in some of our capital cities CBD’s and this glut of properties driving down prices poses a problem for investors relying on the value of their property to increase by the time it reaches completion.

According to research from Knight Frank, there are 26,680 apartments currently under construction or on the drawing board in Sydney47954781_l

Now that’s going to change the supply and demand ratio!

In Melbourne there are around 12,600 new apartments coming out of the ground and the REIWA recently warned that there is an oversupply looming in Perth

Of course you’ll  be competing with all the other investors who are trying to rent out their new investments.

So an over supply of properties for sale and for rent means your investment will lack scarcity value, one of the factors that I look for to help increase the value of my properties.

And things will get worse…

With many investors unable to settle on their off the plan purchases because the banks have tightened their lending criteria – and this doesn’t just apply to foreign investors, locals are having real trouble too – there will be a glut of unsold properties hitting the market as developers try an unload their stock.

6. Developer dilemmas in off plan purchases

Did you know that many of the off the plan projects currently being marketed won’t get out of the ground? world city map tablet

Sure you’ll get your deposit back, but it means you’ve lost precious time with your money not working in the market.

On the flipside, when the developer completes the project don’t be surprised if they have made some amendments to the floor plans or substituted different finishes or fittings.

While they have the right to do so in the contract, you’ll usually find they changes are in their favour and not yours.

7. Rental guarantees are not as solid as you might think

Often developers will offer a rental guarantee to entice investors who might be more focused on their cash flow and worried about vacancies.

The problem is you pay for these rental guarantees in the purchase price, which is another cost that inflates the apartment’s already premium price.

And once the guarantee expires, the rental income reverts back to the going market rate which is usually lower than that offered in the guarantee.

What lessons can we learn from this?

Some of these problems could be avoided by buying from developers with a good track record and buying in buildings in prime locations, as there always seems to be a bigger demand for units in these buildings. apartment-idea-develop-build-city-move-plan-city-building-inspect-urban

Also while buying off the plan has the potential for capital growth, if you bought a completed property it should also grow over the same 12 to 18 months you were waiting for your off the plan purchase to settle.

With a two or more year time-frame for the completion of most high-rise projects, it is very difficult to predict what the future will hold so I feel you should receive a sizeable discount for all the uncertainty of buying off the plan.

There is uncertainty about what the property markets will be like on completion, what will the interest rate be then, will the standard of finish be as good as in the display unit or will the developer have cut corners and what will be built in the future alongside, behind, or in front of the project.

What appears to be a great view today may be totally blocked out in two years’ time.

To cover all these uncertainties, surely you should be buying at a substantial discount, but in reality you are usually paying a premium – therefore giving your developer your first couple of years’ capital growth (and he doesn’t deserve it).

What’s the alternative to buying off the plan?

I prefer buying established apartments and to ensure I buy a property that will outperform the market averages I use a  6 Stranded Strategic Approach. I buy:

  1.  A property that will appeal to owner occupiers (because they’re the ones that push up property values.)strategy-design
  2. Below its intrinsic value – that’s why I avoid new and off the plan properties, which come at a premium price.
  3. In an area that has a long history of strong capital growth and which will continue to outperform the averages.
  4. I only buy properties with a substantial land to asset ratio
  5. I look for a property with a twist – something unique, special, different or scarce about the property, and finally
  6. A property where I can manufacture capital growth through refurbishment, renovations or redevelopment.

By using a strategic approach I minimise my risks and maximise my upside.

Each strand represents a way of making money from property and combining all five is a powerful way of putting the odds in my favour. If one strand lets me down, I have three or four others supporting my property’s performance.

Here’s what you can do about this…

If you want to take advantage of the opportunities our growing property markets will offer you now is a good time to consider your options.  

what properties are investment grade

If you’re looking for independent advice, no one can help you quite like the independent property investment strategists at Metropole.

Remember the multi award winning team of property investment strategists at Metropole have no properties to sell, so their advice is unbiased.

Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.

Please click here to organise a time for a chat Or call us on 1300 20 30 30.

You may want us to formulate a Strategic Property Plan for you.


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'Buying Off The Plan – What Every Property Investor Needs to Know' have 30 comments

  1. Avatar

    April 21, 2019 Ian Jones

    Hi Michael…are you still bagging the Sunshine Coast as we approach the second half of 2019?


    • Michael Yardney

      April 21, 2019 Michael Yardney

      Ian – I don’t thin I’ve ever “bagged” the Sunshine Coast.
      I have always liked the area and enjoyed holidaying there. Sure it has experienced capital growth recently, but by strategy has always been to avoid the more volatile markets and “hot spots” and rather invest in our 3 big capital cities where there is significant economic growth and multiple pillars supporting capital growth. Why fight the big trends?


  2. Avatar

    April 4, 2019 Julie

    Hi Michael
    Thank you for your insights and your podcasts, I’ve been learning a lot from them.

    I just had a question, what advice would you give to someone who has signed an off-the-plan contract but is trying to find a way out before settlement? In hindsight, if I knew what I knew today after months and months researching into and learning from experts like yourself about property investment, I wouldn’t have signed that contract.

    Thanks Michael.


    • Michael Yardney

      April 5, 2019 Michael Yardney

      Julie – I hope you used your own solicitor to prepare the contract and not the developer’s one. If so, since it is a legal matter ask for their help


  3. Avatar

    December 8, 2018 Roy


    I am considering to start my property investment.
    Someone is offering me Aspire Apartment in Melbourne CBD (off plan)
    Do you think it is a good time to buy as the price may go down due to recent market situation?


    • Michael Yardney

      December 8, 2018 Michael Yardney

      Roy – The person offering you an off the plan apartment is a salesperson – so they are not really offering you something – they are selling you something. Mothing has changed – in fact they’ve become much worse since this article was written. Please DO NOT buy off the plan


  4. Avatar

    October 20, 2018 Stuart

    I am interested in purchasing land in a development, which has title due in June 2019.

    The gent has informed me I have ot pay a commission on off the plan properties at a standard $7,000 plus GST.
    Is this normal on land sales.

    Over the years I have done a few strata developments, buying old houses on bigger block and had a spec house built. I have done quite well on these, and was interested in this block on for four units with on the sixth release of a popular suburb.


    • Michael Yardney

      October 20, 2018 Michael Yardney

      Stuart – sorry I don’t understand – what type of commission – commission to whom?


  5. Avatar

    March 17, 2018 Jordan


    Great article! One reoccurring theme seems to be IF YOU ARE GOING TO BUY, by all rights it should be at a substantial discount to mitigate risk. Is there a rule of thumb for the discount? I assume the maths would be inline with how bonds and annuities are calculated; the discount rate or future value of money.

    As an aside, there is heavy marketing going on for Melbourne’s South Bank. Off the plan single units start about $490K and go up. Trouble is, as of current research, the median 10 year sales price on such units is $391K; in other words, the asking price is at a premium of about $100K to the 10-year average.


    • Michael Yardney

      March 17, 2018 Michael Yardney

      Jordan – while buying at a discount would minimise your one off loss for overcapitalising, the bottom line is these apartments still make bad investment – many will see NO capital growth or rental growth for 5 to 10 years – steer clear of them


  6. Avatar

    September 9, 2017 Paul Dawson

    We purchased a house off a bid developer in sydney a few years ago.
    The developer says they used a builder after due dilligence .
    We asked questions about the constructionbat the nice sales office with all their gleaming model.,what are the materials used in construction e.g.walls doors etc,
    This proved to much for the sales people and said refer to the contract ,knowing if you were to awkward in asking sensible questions there was always a foreign investor with a chq book standing behind you with NO questions.
    Anyhow the very inpressive brochoures showed what looked like concrete or brick rendered walls wood trim .
    When the house was finishr the render was styene panels lightly rendered and wood was fake wood cheap internal doors etc etc
    “The contracts said the developer reserves the right to change specs within paramiters”


    • Michael Yardney

      September 9, 2017 Michael Yardney

      You’re right Paul – the contract of sale is written to favour the developer – not you the buyer. Just another reason NOT to buy off the plan


  7. Avatar

    March 26, 2017 Dev

    Thank you for the insight Mike, Is there some sort of register where the Banks list their take up preference for each development coming on to the market.


    • Michael Yardney

      March 26, 2017 Michael Yardney

      No there isn’t. It’s internal information that they keep to themselves. And it seems to keep changing


  8. Avatar

    February 13, 2017 Peter

    A bit one sided…it would have been better to write about the pros and cons. For example the pros – don’t get into a bidding war where you could end up paying over 10-20% of the quoted price. There are always ways to neg. price. Buying a property provides no assurance on your neighbours whether you buy off the plan or once built. For some buying off the plan is the only way they can get into the market. etc etc


    • Michael Yardney

      February 13, 2017 Michael Yardney

      Peter – thanks for your thoughts. In my mind the purpose of buying property as an investment is to make money.
      The statistics clearly show the resultsfor MOST of those who’ve bought off the plan are terrible.
      SUre it may be the only way to get into the property market, but sometimes the right thing to do is NOTHING, rather than the wrong thing


  9. Avatar

    November 3, 2016 katie

    Hi Michael,
    Thank you for a useful article.
    We are considering foregoing the FTHB grant and buying established if it really could be a huge wrong move in regards to an investment (and the first in the view to building a portfolio).
    Currently doing a lot of research as (hopefully soon to be!) first time investors, we’re keen to use the $20k QLD FTHB grant and as another comment mentioned earlier, looking more to houses/townhouses in suburbs (northern Bris/Sunshine coast) rather than CBD apartment blocks. We are looking for strong rental yield (after the required 6 months owner occupancy) but also plan to hold the property long term. I have heard many shocking stories of ‘off the plan’ but of course we are restricted to new build – as reno is a little too overwhelming for us with no background in property (Yet! – positivity abound!).
    So my Q is – would you advise going established without the FTHB grant over buying off the plan for a suburban house and land?
    Many thanks, Katie


    • Michael Yardney

      November 3, 2016 Michael Yardney

      Definitely, definitely avoid buying off the plan – in Brisbane 42% of off the plan properties value below contract price at settlement – so you lose money
      If you’re looking at buying an investment, the FHB grant is always available to you in the future – it’s for your first “home” not proeprty.
      And avoid the Sunshine coast


  10. Avatar

    October 31, 2016 Alan chang

    What choice do FIRB purchasers have besides buying new off the plan apartments or houses? Do you have any advice for foreign investors who would like to invest in Aussie properties?
    I would avoid CBD units at all cost.


    • Michael Yardney

      October 31, 2016 Michael Yardney

      Alan while restricted to new or off the plan properties, there are still some great opportunities in new but small boutique blocks or new duplex developments


  11. Avatar

    May 6, 2016 Dominic Wild

    Is it still possible to sign an off-the-plan contract and find there is a clause, which allows the price to increase on completion but with no mention of the opposite? The Victorian consumer body attaches riders to off-the-plan contracts to indicate they are not “fixed price contracts”. Is this also common here in WA? If so, does it require a lawyer to have a look at the contract?

    Dominic Wild


    • Michael Yardney

      May 6, 2016 Michael Yardney

      Dominic – please be careful – it’s not the right time to buy off the plan. head the warning of all the experts and don’t listen to sales people.

      With regards to your question – you should always have a solicitor check the contract – but yours – one YOU pay for – not theirs


  12. Avatar

    December 18, 2015 Glenn

    Michael, most off the plan apartment projects forecast the project cost and completion timeframe to attract Investors. Is there any evidence on how well projects perform in these areas in Australia? Do you have any advice on what budget and timeframe contingency Investors should plan for?


    • Michael Yardney

      December 18, 2015 Michael Yardney

      As I’ve suggested I’d avoid these investments – and this is even more important now than when i wrote this.
      No I have no data on what you requested


  13. Avatar

    March 13, 2015 Mike

    Michael, this article focuses solely on apartments purchased off the plan. There are many opportunities to buy semi-detached or terrace style property off the plan in middle and outer areas of metro cities, that carry far less risk than CBD apartments. In fact, you can purchase property at a small discount, with likely capital appreciation, in a good suburb and get a new home or investment property in 18 months or less. These smaller developments usually have local agents and low marketing cost so there is no massive mark up for middle men. This is where you can get in front as a buyer. Well, that’s my experience and view. Thanks for helping buyers be aware and making informed decisions.


  14. Avatar

    March 11, 2015 Hamih

    Hi Michael
    Looking at this issue from a developer’s perspective – what if one is developin three towhouses and bank finance is contingent upon say selling one of them off the plan?

    I can see that from the bank’s perspective it means they will get some of the loan repaid at the end and therefore reduce the overall loan to value ratio at completion (noting that repaying part of the loan reduces the numerator and selling one of the three townhouses reduces the denominator, so the ratio might not reduce as much as you think).

    What is your advice to a developer who has to use this strategy in order to get the development off the ground? Market to an overseas investor who is only able to buy a new property under the Foreign Investment Review Board rules?


    • Michael Yardney

      March 11, 2015 Michael Yardney

      I depends on your initial intent for the development. If you are developing to trade as a profit (very hard today) then you maximise your profits and sell to whoever will pay you the most. Unfortunately with a 3 townhouse development like yours it’s hard to justify the cost of a marketing campaign that will attract overseas investors. That leaves you with the local market (particularly owner occuipers) and they’re not as keen to buy off the plan


      • Avatar

        March 11, 2015 Hamish

        Thanks Michael. Makes sense – and yes as per your other Warren Buffet article today, we are looking at holding this over the long term and would very much prefer not to have to pre-sell.


  15. Avatar

    January 20, 2015 Masud

    Hi Michael,
    It’s a very good piece of writing! and convincing too!


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