Considering purchasing your next home off-the-plan? Lower prices, high rental yields, fewer ongoing costs – there are plenty of good reasons why. But there is also an enormous downside.
Property economist and Suburbanite principal Anna Porter warns Aussies against it, arguing that the “huge” risks outweigh the opportunity every time thanks to lending uncertainty and changes that can occur anytime, and without any notice.
“If you buy a property off the plan today and it needs to be built chances are it won’t settle for one to two years,” she said.
There are three risks Australians should be wary of, according to the property economist:
1. You might not secure the loan
The risk is that lenders won’t provide final approval for the loan until 90 days out of the settlement.
So if our financial circumstances have changed, the lending policy changes, or the market itself changes, you might not be able to secure the loan before settlement.
And it’s something she sees quite regularly: buyers have to walk away from their 10 per cent deposit, or find some other way to wrangle the money.
So if it’s an off-the-plan property you’ve committed to but can’t settle on, it can cost you big-time, Porter said.
2. Other similar properties are being built around it
What’s the surrounding market like?
New properties are often being built in areas where similar properties are being built, meaning the area becomes over-developed and over-supplied with the same product, she pointed out.
So if you buy a two-bedroom unit off-the-plan today, there could be hundreds and hundreds of two-bedroom units going to the market for rent by the time it’s finished being built.
“This puts downward pressure on your rental returns as an investor,” Porter argued.
“Or you might be one of many going to the market for sale, and if buyers have a lot of options that are very similar, [they] aren’t going to pay premium prices which is actually pulling back your value just by the oversupply factor alone.”
3. The quality of new apartments is questionable
Put simply, you just won’t know the quality of the apartment until it’s been built.
In a damning report released in June, research from Deakin University revealed that 85 per cent of apartment buildings across Australia have some kind of structural defect.
Sydneysiders have copped the worst of it recently, with Mascot Tower residents forced to evacuate from their homes in June after cracks appeared in the walls, echoing a similar scenario experienced by Sydney Olympic Park-based Opal Tower residents on Christmas Eve last year.
Citing these examples, Porter said these buildings were “really bringing it to the forefront of the conversation that building defects are a costly and real thing”.
Years ago, the government didn’t have much regulatory control over the warranty that developers had to offer, meaning developers could relax standards as they saw fit, knowing they did not need to be accountable for it.
“We’re starting to see the fallout.”
While building defects are now in the media spotlight, the property economist argued these structural and building defects had been an issue for decades.
“I’ve seen all too many unit blocks with water defect problems,” she said.
“Even a good developer with a good track record could end up with one bad tradie on site, one bad water proofer, [or] one bad plumber that unravels the whole thing for them and they don’t realise the work has been done at a lower standard.”
“And then this is the development that everything goes wrong on,” Porter warned.
What can property investors do?
Property investors are urged to look at finished apartment buildings instead, where you’ll be able to have much more data and information on your hands: you can get a pest and building report done, others may have already lived there so you can find out if the waterproofing works or not, and you can get an accurate gauge of the market.
If you’ve got your heart set on an off-the-plan property, just be careful of the fine print, Porter cautioned.
Some people might go into a purchase where the developer has offered no deposit or only a five per cent deposit, but a closer look at the contract actually reveals that defaulting on that purchase will see buyers chased for the full balance of ten per cent as it’s the developer’s legal entitlement.
“It’s not just the deposit; they can also then pursue for any costs associated to re-sell it, which are their marketing fees, legal fees, additional interests, and additional costs,” Porter said.
For example, if they can’t sell it for the same value you purchased it for, they can actually pursue you for the difference, she warned.
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