Investors warned against lure of buying off-the-plan property

Investors warned against lure of buying off-the-plan property

So here we are.  Interest rates are at record lows and we have an oversupply of off-the-plan developments in key capital cities such as Sydney, Melbourne and Brisbane.  It’s a combination fraught for danger for overly ambitious and inexperienced property investors. 

As I have said before with any off-the-plan property purchases, investors need to understand that they are buying a speculative investment that carries with it associated risks. The problem is most don’t see it that way. It stands to reason that anything that you buy with a delayed settlement is a risk and the longer the settlement the greater that risk becomes.

You’re punting on the fact that the market will go up. If it goes down and it’s worth less at completion than the price you paid, then, when you go to finance that property at settlement you’re in negative equity.  If you end up in this situation it’s much harder to get the finance and if you can’t secure it then you will lose your 10% deposit.

On top of this you need to be aware that if the developer then on-sells the property for less, they could also sue you for the difference for non-performance.  Off-the-plan contracts also heavily favour the developer and most include shrinkage clauses, sunset clauses, like for like clauses and many others that keep you tied to purchasing the property even though they can have a detrimental impact on the end value of the apartment.

That’s why I tend to recommend to investors that they’re better off buying established real estate as it offers a much lower overall risk. Established real estate is usually in a better location and provides a more secure investment opportunity when compared to off-the-plan property. You’re less likely to be competing with cashed up foreign buyers who don’t understand current market values and often overpay. In addition, you can rent out established property immediately after purchase and receive a return on your money straight away rather than hoping to secure a return in a year or two. 

Often off-the-plan properties, especially those built over the last decade, have been designed more as investment products for developers who want to sell quickly with a high margin rather than a quality product built to a high standard.   In comparison, I find apartments that were built in the 60s to 90s are generally in better locations and have more focus on space and outlook.

Categories: Investment Property