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.

Now I know some investors are thinking, I’ll put a small amount down as a deposit today and settle in a few years time when all this Coronavirus “stuff” is overturning a relatively small deposit into a substantial profit, all while avoiding those nasty holding costs.

Other 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.

But while buying Off The Plan has rarely been a good investment strategy, this is the most risky investment strategy in the current market and one to be avoided.

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 changes to our attitudes of how we may live post COVID-19 means fewer people will be keen to live squashed in with hundreds of other residents in poor quality apartments in Lego Land Towers.

This includes both owner occupiers and tenants.

This means vacancy rates will be higher in this type of building (they already are) and some current owner investors are going to need to sell up.

This is a poor recipe for rental and capital growth.

Add to this the recent concerns about the well-publicised structural integrity issues in Opal Towers and many other buildings 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.


NOW READ: Some high rise apartments will be the slums of the future


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

The answer is usually no.  Buying Off The Plan

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. 

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 sold 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.

Many of these apartments have been sold to naive investors by introducers.

These range from project marketers to sales people disguised as mentors at “free” seminars, to mortgage brokers, financial planners and accountants who are paid “kick-backs” often in the range of  8% of the purchase price.

You’re also likely to find many of these properties have been purchased at inflated prices by 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.

Of course valuers are familiar with these practices and that’s why, on completion, most off the plan properties value in at considerably less than the contract price.

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. No scarcity

This is an important factor limiting resale value as these properties have little owner-occupier appeal.

Not only will most of the new apartment blocks have many similar dwellings (in size, layout and style); chances are there will be many similar apartment blocks in the surrounding neighbourhood.

5. 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.

6. 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 47954781_ldown prices poses a problem for investors relying on the value of their property to increase by the time it reaches completion.

An oversupply 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.

Of course, the various landlords will be in competition with each other for tenants and I’ve seen this quickly turn into a race to the bottom.

Sure many aspiring investors think: “Oh, but the developer is giving us a rental guarantee”.

This means just means that the developer is nominating a (likely inflated) rental promise and matching any differential for a year or two and in the meantime inflating the price you pay to cover his risk.

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.

7. 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.

You see…developers generally insert a clause in an off-the-plan sales contract that allows them to vary the property within a certain percentage if they chose to do so, and without the buyer having any recourse.

8. 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.

9. Excessive Owners Corporation fees

Generally owner’s corporation levies are high in these buildings diminishing your rental yields.

And don’t necessarily believe the fees quotes by the project marketer as these are usually unknown and often underestimated at the time of sale.

Remember many of these buildings require expensive upkeep of their lifts,  grounds, gardens, pools and gyms.

Then give it a few years the ongoing maintenance costs start creeping in with the need upgrading, painting and replacing of items.

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.

Now is the time to take action and set yourself for the opportunities that will present themselves as the market moves on

If you’re wondering what will happen to property in 2020–2021 you are not alone.

You can trust the team at Metropole to provide you with direction, guidance and results.

In challenging times like we are currently experiencing you need an advisor who takes a holistic approach to your wealth creation and that’s what you exactly what you get from the multi-award-winning team at Metropole.

If you’re looking at buying your next home or investment property here’s 4 ways we can help you:

  1. Strategic property advice. – Allow us to build a Strategic Property Plan for you and your family.  Planning is bringing the future into the present so you can do something about it now!  This will give you direction, results and more certainty. Click here to learn more Metropole
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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media. Visit Metropole.com.au


'Buying Off The Plan – What Every Property Investor Needs to Know' have 38 comments

    Avatar

    August 18, 2020 sravan kumar

    Hi Michael,
    Thank you For All. You’re Doing A Great Job. Thank you For Sharing Valuable Information.

    Reply

    Avatar

    June 15, 2020 Jon

    Hi Micahel,
    Any thoughts about buying a house and land in an area in the final stage of development, i.e. most houses in the area already built and being lived in?

    Thanks

    Reply

      Michael Yardney

      June 15, 2020 Michael Yardney

      Jon. – most commentators agree that the house and land package market is going to suffer in the next little while.

      It will underperform, so if you’re looking to buy a home that’s very different to buying an investment. They have never been good investments and I definitely would steer clear of them

      Reply

    Avatar

    May 21, 2020 MICHAEL CORRELL

    I don’t usually consider paying off the plan as seeing is believing.

    Reply

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    May 20, 2020 Mike

    Hi Michael. In this article you primarily talk about apartments. What is you feeling on buying off-the-plan townhouses?

    Reply

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    June 19, 2019 Nily

    Hi Michael,
    Thanks for above writing. Helped me to have a better understanding.
    What’s your advice for people that don’t have enough saving to buy an apartment in Sydney currently but they can save 10-12% in next 12months? Go for off the plan or wait and save more?

    Reply

      Michael Yardney

      June 19, 2019 Michael Yardney

      The answer is simple – DON’T BUY OFF THE PLAN!!!!!
      If you can’t buy – the right thing to do is nothing rather than the wrong thing

      Reply

    Avatar

    April 21, 2019 Ian Jones

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

    Reply

      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?

      Reply

    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.

    Reply

      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

      Reply

    Avatar

    December 8, 2018 Roy

    Hi,

    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?

    Reply

      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

      Reply

    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.

    Reply

      Michael Yardney

      October 20, 2018 Michael Yardney

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

      Reply

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    March 17, 2018 Jordan

    Hello

    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.

    Reply

      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

      Reply

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    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”

    Reply

      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

      Reply

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    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.

    Reply

      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

      Reply

    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

    Reply

      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

      Reply

    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

    Reply

      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

      Reply

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    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.

    Reply

      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

      Reply

    Avatar

    May 6, 2016 Dominic Wild

    Hi,
    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?

    Regards
    Dominic Wild

    Reply

      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

      Reply

    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?

    Reply

      Michael Yardney

      December 18, 2015 Michael Yardney

      Glenn
      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

      Reply

    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.

    Reply

    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?

    Reply

      Michael Yardney

      March 11, 2015 Michael Yardney

      Hamish
      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

      Reply

        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.

        Reply

    Avatar

    January 20, 2015 Masud

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

    Reply


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