Is it worth the risk?
Buy now without putting any money down, profit later… So goes the pitch for buying real estate “Off the Plan”
Putting your name down against an apartment or townhouse in a yet to be built development can be one way to profit in the property market. The major enticement for buying off the plan is that you secure a property at todays price (sometimes with no deposit) and wait for market growth whilst the property is being built.
As the market rises above your purchase price, the profit is yours.
The sales person will often provide charts, projections and promises of how the forthcoming development will perform as an investment.
The reason that buying off the plan is so popular is that some people have and will continue to profit handsomely from this investment strategy.
There are some issues to consider prior to entering into such an investment.
Casinos are profitable. They are profitable in spite of the fact that some people occasionally win. Indeed it is the fact that a few win that attracts the many that ultimately lose.
It is the temptation of a potential easy profit that keeps casinos revenue ticking over. And so it is with buying off the plan. Many people who thought they were going to profit actually end up with a loss.
As a major development comes close to completion, it is common to see a number of the properties put to the market at once. Many of the investors (speculators) are attempting to exit for a quick profit. The market is flooded with near identical stock at the one point in time, driving prices down.
If you do plan to purchase off the plan, it is wise to hold the property for at least two years after completion. This ensures that you are not trying to sell out when there is fierce seller competition. The larger the development, the more people there will be trying to exit on completion and vice versa.
Buying from a reputable developer is paramount when buying off the plan. The big question is what guarantee do you have that the finished product will be of the same standard as the display unit? What avenues of appeal do you have under the contract if the property has defects or you are unhappy with the standard of build?
Making a profit as a developer is tough work. If the market conditions are unfavourable, costs need to be cut to ensure profitability. It is best to research the developer before you buy. Being part of a class action against a developer in five years time is not much fun.
A trick of the trade is for the developer to sell a few properties within the development to associates, family and friends at an inflated price, to create an apparent market price. These paper trades are then used as the basis of value for the unsuspecting Mum and Dad investors that come along. In assessing the merit of a property off the plan, consider whether the value of subject property stacks up in the broader market. If your sole valuation method is based around sales in the one complex, you may have walked into the developer’s web.
Flagship developments will always aim to set new benchmarks in the market place. It is up to the individual buyer to determine where fair value ends and marketing hype begins. In fairness, developers have a difficult time making a profit. Many magnificent world class residential towers have been built only to send the developer broke in the process. It is sad when a quality developer loses their entire wealth putting a world class project to the market.
In the case of off the plan development and selling, it is not just a case of buyer beware, it is also seller beware.
Ensure that everyone you take advice from is independent of the developer. No matter how innocent a professional referral from the sales person or developer may or may not be, always use independent financial advisors, valuers, mortgage brokers and solicitors. The sales person is paid a lucrative commission by the developer, therefore they are not independent either. The salespersons advice and reasoning could well be sound, but you must have it verified by an independent person.
Many people are attracted to buying off the plan because they don’t have to pay for the property today. That’s fine, so long as you could afford the property today. In theory, if you were unable to pay the mortgage today on an off the plan purchase, do not buy the property. Prior to buying, do all your sums on your existing circumstances. Don’t factor in pay rises or selling certain assets at certain prices to fund the purchase.
Empty nesters can find an off the plan purchase appealing. They can secure their next residence today and sell in a leisurely time frame. Off the plan purchase for an empty nester makes sense because they are less likely to attempt to profit on settlement with all the other speculators whom are trying to sell out.
Funding the purchase is the major consideration for empty nesters when buying off the plan. If settlement occurs in two or three years time, you cannot sell your main residence today to lock in at current market prices because you will be left homeless in the interim.
On paper, the plan is to sell the primary residence as completion and settlement nears on the off the plan purchase. In the few years between the purchase of the property and the forthcoming sale of the primary residence, the market may have moved. If the market has risen, you win. If the market has dropped, you have lost.
Locking into a purchase at today’s price and selling another property tomorrow at unknown price is a risk that must be considered.
When it comes to buying off the plan, tomorrow does come. And it catches many people by surprise.
If the off the plan property purchase being considered were completed, how would the price compare with other similar properties currently on the market. Are you paying a premium price? If so, it’s important to identify what features you are paying a premium for and decide if it is worth it.
Buying off the plan and successfully making a profit is possible, but it takes good luck and/or professional expertise to do so. If you lack professional expertise, consider buying existing bricks and mortar rather than an apartment in a model on the showroom floor. It’s safer.