Four key questions for buying property off the plan

It’s no surprise the idea of buying a property off the plan is appealing to many – getting access to a brand new property, often coupled with a glossy marketing brochure and appealing artist illustration showing you enjoying a latte at the brand new café down the street.

When you’re trying to get into the property market, there is so much noise about the best way to invest, how you can get ahead (not to mention the next ‘build passive income fast!’ scheme), but if you get it wrong with your property investment it’s something that can cost you a packet and hold you back financially for years.

But how do you know if buying a property off the plan is the right strategy for you, and how do you tell a good purchase from bad?

With the property markets in most Australian capital cities showing clear signs of cooling, and the fact that oversupply is becoming an issue along our east coast, you’d think the development of new properties might be slowing down in line with this trend. However evidence on commencements (i.e. how many new properties/apartments are being built) are reaching record levels.

Statistics released recently predict the number of new properties being built in 2015 will hit 219,000, up from the recent average of 155,000. But does this mean there are opportunities, or more risks?

To make sure you’re making the right call on any property investment and give you confidence in your strategy, in particular an off the plan purchase, you need to understand the investment fundamentals. It may sound simple, but if you understand benefits and risks of your off the plan purchase, you’ll be well placed to make the right call.

The benefits

• You often have the ability to lock in the purchase price today. This means the value may increase during the time the property is being built and you can benefit as a result.
• You get a brand new property. This often means lower ongoing maintenance costs in the first few years, which can boost your return. Having a new property can also provide tax benefits.
• You may receive access to benefits like the first home owners grant in some states. This can help with your deposit or just some extra cash for furniture!
• Because the purchase is often delayed, you can have extra time to save. This can boost your cashflow after your purchase is complete and mean you have more money to spend on your renovations (or next holiday).

The risks

• Because the property isn’t built at the time of purchase, you can’t physically inspect the property. This means the final result can be different to what you were expecting, and not as you ideally want.
• Properties fall in value between the time you purchase and the time the property completes. This can leave you facing a loss, by as long as you’re smart about how you bought shouldn’t be a huge issue.
• Off the plan properties are commonly located outside of the CBD type areas that are expecting strong population growth in the future. This can mean the property may not increase as much in value as similar properties closer to the CBD.
• Your property developer goes bust. If this happens, you can face extended delays, and in some cases lose money. You need to make sure the company building your property is reputable and financially stable.
• Mortgage risk. Because of the delay between purchase and settlement, you often cannot get your loan approved at the time of purchase and have this approval last until your property is built. This means that if the banks change their lending criteria (as is happening in the current environment), or if your financial/employment situation changes you can end up committed to a purchase you cannot fund. In the worst cases this can mean you lose your deposit so a very important risk to manage. Another big risk with your mortgage is that interest rates increase between the time you agree to buy the property and the time your property is built, which can throw out your numbers and mean your costs can significantly increase. In the current low interest rate environment this is another important risk to be aware of.
• Valuation risk. Again because you sign a contract prior to the property being built and loan settling, it’s possible at the time of completion that the value the property can be below what you are contracted to pay. A common reason for this is sales commission (more below).
• Property risk. When purchasing off the plan, you’re likely to encounter many people with a vested interest in you buying the property. This can be anyone from your mortgage broker who will get paid a commission on your loan, to the buyers agent who found the property for you and receives a sales commission of $10,000-$50,000 on your purchase, to the developers themselves that want to clear stock so they can profit from the development. This can cause a big conflict between the people telling you that you should buy and those that stand to make the most money from your investment. To reduce this risk, make sure you understand how everyone involved in your purchase is getting paid – and then have a good think about the potential for this to influence the advice they are giving you!

As you can see from the points above, there are a lot of things you need to consider when buying off the plan. But, thankfully with some research and armed with some smart questions and good advisers it’s definitely possible to make the right decision.

To make sure you don’t get stung if you do buy off the plan, you need to understand the benefits above and how they can work for you. Then, you need to fully understand (or get good advice on) the risks above so you can reduce or eliminate them where possible – this is probably the most important step you need to take. You don’t need to manage the upside (because this will take care of itself), but if you can reduce or eliminate downside risks, you’re going to be well placed to get the benefits you want out of your investment.

If you’re getting advice, it’s also important you get clear on who stands to profit from your purchase, and then think about this when you’re receiving advice. Professional advisers aren’t going to do a whole bunch of work for you for free, so if they’re not charging you a fee directly, you need to know they are getting paid from another source, like a sales commission or profit from a related company.

When you purchase any property, whether it’s off the plan or an established property, sitting down with a good adviser that can talk you through all these issues is something that can save you from making the wrong decision. When it comes to property, you’re looking at a large investment and one that’s difficult and expensive (fees, stamp duty, tax) to change in the future. You need to be across these issues from the start, so you don’t make a mistake that’s going to hold you back from getting the financial outcomes you want.