Home Real Estate What are the risks of buying off the plan?

What are the risks of buying off the plan?

"It's the biggest segment of the market that loses money on re-sale"

Azal Khan

Digital Journalist, Your Money

The appeal of a brand new home is obvious, but there is a great deal of risk attached to off the plan purchases.

It’s those buyers who have been bitten the hardest by price fluctuations in the past year.

Good Deeds principal and buyer’s agent Veronica Morgan says she would rarely ever consider buying property off the plan.

“You can’t do all your due diligence. it’s not possible to do all your due diligence on a new property because it has no history,” Morgan said.

You might assume that everything would be in top shape given it’s a new property. But Morgan says it’s not always the case and the reality is there is a high incidence of defects with brand new builds.

“In apartments and house and land packages where things have been built very quickly, and particularly in high-rise apartments and multi dwelling construction, water is always a problem.

“Water always leaks somewhere.

“Whether it’s the bathroom, balcony, pool on the roof or the roof itself. Water usually creates a problem in a very high proportion of these properties and you usually don’t know until it starts raining.”

Morgan says the complex contracts are often heavily in the developer’s favour.

“These big developers have got a lot of money to employ the best lawyers in town. These lawyers will put together an iron clad contract that does not favour the buyer in any way.”

There are still many people who buy off the plan, so what are the benefits?

“A lot of the benefits are marketed heavily by the developers. but they are not real benefits for owners.

“You might think negative gearing is a benefit. The reality is that negative gearing is only useful if you’re going to make capital gain on a property.

“And what do you need in order to make capital gain? You need scarcity and a lack of supply. That’s two things that’s usually a big problem in brand new.

If you still want to buy off the plan, the best strategy is to buy a property in a unique development that is targeting owner occupiers who can afford to buy a high-end apartment, or a newly built Torrens title house in a prime location.

“There are some smaller developers typically who really do focus on buying land in high demand, blue chip areas and doing quality developments. These things do exist but its the exception rather than the rule,” Morgan said.

The biggest risk is the fact there is no secondary market for off the plan apartments, Morgan says.

If you have to sell it, it’s most likely that many other buyers will be in the same boat, creating a glut.

“The reality is there is a lot of data that demonstrates very clearly that off the plan brand new apartments is the biggest segment of the market that loses money on resale.”

Buyers have to keep in mind that off the plan purchases assume your situation will remain unchanged between purchase and completion. But banks can change their rules and you may no longer be able to get finance. Market changes can result in bank valuations lower than the initial contract price.

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