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Off the plan property to come with a warning

Off the plan property developers have seen their fair share of controversy over the years, with some questioning how ethical it is to market and sell apartments (and to a lesser extent houses), that are yet to be built.

If you’ve been following my blog’s you’ll know that I have been very much against investing in off the plan projects, with many people getting caught out by these deals and often losing tens if not hundreds thousands of dollars in the process.

Now, according to a report in The Age, Consumer Affairs Victoria have weighed in on the debate and are planning on changing legislation this year to make a “warning notice” a compulsory feature on the front page of all new off the plan contracts.

This move has come off the back of fresh concerns regarding complicated contracts that clearly favour developers and comments from a senior Melbourne developer who has warned that not all projects currently being sold off-the-plan in Melbourne will actually eventuate.

This alarming revelation follows research from Oliver Hume that shows construction is yet to commence on a third of high rise apartment projects that have been marketed in Melbourne for over 6 months.

The Age reports that one “disillusioned first home buyer” had his bond refunded on a $285,000 one bed apartment in inner Melbourne after construction had still failed to start after 17 months of waiting. He said the developer cancelled his contract via a “sunset clause” that he was completely unaware of.

“I have now come 17 months down the track and am starting afresh again but property prices in that area have gone up to $340,000 to $350,000 for a one-bedroom – so it is out of my reach,” said the 35 year old.

He cautions anyone considering entering into an off the plan contract to have it thoroughly assessed by an independent lawyer – not one recommended by the selling developer or agent.

Developers clearly have the upper hand when it comes to off the plan projects, with the ability to cancel projects a year or two after sales had already been made, if delays were caused by planning permit application hold ups or a lack of funding. They then have the opportunity to reconfigure and relaunch the development down the track, when property prices have risen, thereby making a greater profit.

Never mind the home buyers and investors who’ve had their hands (and finances) tied for more than a year with nothing to show for it at the end.

A spokesman for Consumer Affairs Victoria said the new warning notice to appear on the front page of all off-the-plan contracts would inform the buyer that:

  • The deposit is negotiable.
  • There may be a long time between signing the contract and the sale being completed.
  • The value of the property may change during that time.

Additionally, all off-the-plan deposits will have the backing of a ”statutory guarantee fund”.

Opposition planning spokesman Brian Tee said of the recent off the plan issues, “I am very concerned that hundreds of Victorians are at risk right now. The government must act quickly before others lose out. This is urgent.”

I have always been of the opinion that off the plan sales are dangerous, representing speculative investments at best. I have never and would never recommend them to clients, as they are simply fraught with far too many dangers, including the potential for huge financial losses.

The price of these properties is “loaded” with developer costs, including their clever marketing campaigns, and they can only be built profitably (for the developer) if the purchase price is higher than the current market.

Just ask those investors who were caught out about eight years ago, when the thousands of apartments that had been sold off the plan came on line in Melbourne and had been de-valued by the enormous saturation of stock that hit the market all at once. Not to mention the fact that they could barely give them away to tenants who were spoilt for choice.

And the same is happening around Australia today with many buyers who purchased off the plan being bitterly disappointed in the end values on completion.

On the other hand…Australand property developer Rob Pradolin defended off-the-plan sales, saying, ”There are thousands and thousands of people who save a lot of money with off-the-plan sales.”

But he conceded that not all off-the-plan sales currently being sold would be delivered. In December, he predicted 30 to 40% of apartment projects being advertised for Melbourne would not go ahead.

While supposed savings from off the plan purchases might seem enticing, it’s critical that any home buyer or investor weighs up the potential pros and cons of any property purchase. After all, it’s perhaps the biggest investment you’ll ever make so it pays to get it right!

You can read an interesting commentary about off the plan purchases by George Raptis by clicking here.

Source: The Age



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


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