Here’s what should you do if your off-the-plan unit loses value before it’s finished

Alarm bells are ringing for those who bought an off the plan apartment a few years ago.

House Price PaperMany investors who bought an apartment off the plan are finding themselves in financial strife as on completion their apartment is now valued considerably below their contract price.

Here’s what the figures could look like:

When you bought the apartment a few years ago when the Melbourne and Sydney property markets were booming you signed a contract for $700,000 and paid the developer a 10% deposit, or $70,000.

You hoped that over the next few years the property market continued to rise and that on completion your property would have been worth more (after all that’s what the property marketer told you) and the bank would lend you 90% of your contract price.

Fast forward to today and on completion, your new apartment is now valued at $660,000.

If you’re lucky your bank will agree to lend you 90% of the property’s current value, or $594,000, meaning you’ll have to find an extra $36,000 to pay the developer.

But it gets worse

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

property investors
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, often 80%, meaning you need a bigger deposit.

In February this year CoreLogic reported that 45% of new apartments in Sydney that settled had valuations below their off-the-plan purchase price, up from 18% one year ago.

In Melbourne, the figure was even higher at 46%, double the level reported in February 2018.

This means some investors who bought off the plan just won’t able to settle and will need to sell their property at whatever price they can achieve.

property-mistake-bad-size-invest-trap-houseUnfortunately, that’s what the banks will value your property at – the current 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.

This scary hypothetical scenario is becoming increasingly common.

What do you do if you’re stuck with an off the plan apartment that has fallen in value?

Finder.com.au suggests the following.

1. Talk to your lawyer

You should also talk to your conveyancer or solicitor, who would have helped you with the initial contract and likely understands your legal options better than you do.

Talk to them before making any decisions.

Remember if you walk away from your contract you could not only lose your deposit, but you could be up for any subsequent loss the developer makes on selling your property.

2. Come up with extra cash

If you’re keen to keep the property and avoid legal problems, then you’ll need to come up with extra cash.

Buyers can try to bridge their funding gap by:

  • Cash MoneyUsing cash to cover the extra.If you’ve continued saving money since purchasing the property you may need to use some of this money now.
  • Borrowing more money.You could approach your lender and see if it’s willing to lend you more. This will depend largely on your financial position (income, expenses and debts) plus the current value of the property.
  • Approaching another lender.If your current lender re-values your property and refuses to finance you then you need to find another lender. This is the kind of situation where a mortgage broker can help.
  • Adding someone to the property title.This might not be possible depending on the law in your state, but you could add another person to the property title and get them to help financially.
  • Getting help.You could also try borrowing money from a family member if that is an option.

3. Selling up

You may also be able to on-sell the property prior to settlement, allowing you to find another buyer and recoup some of your losses.

Buy Sell Invest HomeThis will depend on the specifics of your contract and the law in your state or territory.

In my mind, for many investors the best decision would be to crystallise their loss by selling up and purchasing an investment grade property instead.

Unfortunately it is common for investors to make mistakes, it’s part of the learning journey we all have to take.

Off the plan apartments have always made terrible investments.

A recent study by BIS Oxford Economics  showed:

  • Since 2011 – Melbourne: 66% of buyers  (2 out of 3 buyers) of off the plan properties  in Melbourne have had no capital growth or still have negative equity in their properties today
  • Since 2011 – Brisbane : 48 % of buyers  (1 out of 2 buyers) of off the plan properties  in Brisbane have had No capital growth or still have negative equity in their properties today
  • Since 2015 – Sydney: 23% of buyers  ( one out of four buyers) of off the plan properties  in Sydney have had No capital growth or still have negative equity in their properties today

So what steps should you take next? 

Independent professional advice and careful consideration is as important as ever in navigating Australia’s varied market conditions.

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.

fact: our markets are on the move

 

 

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About

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 his opinions are regularly featured in the media. Visit Metropole.com.au


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