How you're going to get scammed in the property market.

For hundreds of years people have needed a place to live. I don't have a crystal ball but I predict it's going to stay that way long into the future. This means there are still dwellings all across the globe that are occupied. But, let's be real they weren't their first inhabitants. Growing populations also means we will always need to construct new dwellings.

At a basic level you could categorise property into two types;

• Established or 'second-hand' properties. Think federation style homes or terraces in the cities.
• Newly built or 'off-the-plan' properties. Think high rise apartment blocks or large housing estates built on re-zoned agricultural land.

You may have overheard heard this term 'off-the-plan' from a friend or relative. At a family gathering or at lunch in work. Hopefully the words 'I bought' don't precede the term. If they do, say a prayer for this poor individual and wish them good luck. They'll need it.

Sooooo, 'off-the-plan'?

'Of-the-plan' is buying a property before it's constructed. You're basing your buying decision 'off-the-plan' presented to you of the proposed development. You sign a contract to buy the property when the construction has finished.

There's no physical property for you to inspect, but lots of shiny brochures. Also the smooth talking salesperson acting as a 'mentor' is worth mentioning. You'll be shown the drawings and designs, you'll also hear a lot of promises.

You'll usually pay about 10% as a deposit and the rest upon completion of the project.

Interest rates are rising, fear is spreading. This is the perfect opportunity to be ensnared into these projects. Many novice investors may think it logical to pay a small deposit now. Then make a tidy profit upon settlement in a year or two when the economy has 'normalised'.

This is a common tactic for these property 'mentors'. They may entice you with high quality image renders or stamp duty reductions. Perhaps the depreciation benefits or 'cheap prices'. Some of these may be true but they definitely won't tell you any of the possible downsides to the 'off-the-plan' investing.

Buying off the plan is one of the riskiest investments you can consider.

What secrets are they keeping from us?

Most of the time 'off-the-plan' developments are a large block of apartments. Developers need the banks funds just like the average investors. They too need to prove the viability of their finances and the prosperity of the development. To do this the developer will pre-sell a lot of the units, many to newbie investors.

Remember all those lovely brochures, rendered images and designs I mentioned earlier? Well that's how they get these newbie investors to buy 'off-the-plan'. Now they can prove interest in the development to the bank. But all that marketing didn't come cheap, it's factored into your final price.

Already you're paying for hidden extras. And that's just the tip of the ice berg!

1 - Too many middle men

As I alluded to above, your final price will have a large marketing budget hidden in your final price. Forget he kickback to the third party who brought it to your attention. Or the commission for the charming property 'mentor' who enticed you into buying it. I'm guessing you seen them at property seminar or on their youtube channel.

That's a lot of hidden costs for you to be paying. And there's a very solid chance you'll be overpaying as a result.

Remember, it's not about price it's about value! A property may be expensive but that's doesn't always translate to it being valuable. The market doesn't care what price you paid, the most valuable assets will naturally rise to the top. If a developer has to spend 10-15% of the budget on marketing, it's probably not good value for money.

2 - Settlement can be years away

While this is actually one of the main draws that the developers marketing team will use to try and FOMO you into putting a deposit down. They'll tell you to buy 'at todays prices' then in a few years time settle when the market is in an upturn.

I actually think this is a negative. High rise, high density apartment block developments in the inner city suburbs can take years to complete. With that length of time it's extremely hard to estimate if the final price is good value of not.

Along the way the developer can also make minor adjustments to the plan. Change some fixtures and fittings for similar ones or reconfigure the floor plan. These changes can be due to problems that arose during development. Problems happen in all industries including construction. But because you bought a non-existent property these changes can happen.

3 - The banks won't risk it

Because the settlement period can be years there's not much point getting pre approved by banks when you pay your initial deposit. This is because a pre approval only lasts about 3 months.

Banks also have certain post codes of certain inner suburbs in the cities marked as high risk. This is due to the quantity of apartments built in that area. Usually the banks need a lower loan-to-value ratio for these types of properties. Meaning you'll probably need a larger deposit than when you signed the contract with the developer.

But just think about the fact that the banks assess these types of developments as higher than normal risk. That in itself should be enough to tell you that this is investment is risky. The banks are your #1 method of due diligence. With all their resources and funding that they can put into research, if they think it's risky then it probably is.

4 - Low Land Value

As the old investment rule goes - Land appreciates while building depreciate.

You should be following this rule, plain and simple. To do so you should be looking to buy an asset with high land value. You should be looking at properties in established and affluent suburbs. The land in these areas is usually very valuable thus the property on them will also be.

Large, high density apartment blocks break this rule. The developer wishes to maximise their return. They do so by cramming as many apartments as legally possible into the block. This massively minimises the portion of land you own that the block sits on.

If there are 200 apartments on a block at 10,000 sqm. That means you only own about 50 sqm. That's not a whole lot of land.

The charming salesperson may talk a good game about how much you'll enjoy the tax deductions. But they may, yet, skim over how little land the unit represents.

5 - Too many investors.

Many of the 'of-the-plan' sales go to investors. This creates an imbalance between owner occupiers and investors.

Not just in apartments but at a suburbs and street level you want there to be more owner occupiers than investors. The more owner occupiers there in an area the less rental supply is available. This will make your property more appealing to tenants.

Having a large number of rental units in the one block can make tenanting your property more challenging due to the supply of apartments.

Also owner occupiers tend to look after and maintain their property better than investors or tenants. This can give the complex/street a better look and feel for any prospective tenants.

Is it worth it?

In short, no!

As I said there are too many risks involved with it. I wouldn't recommend it but I do know that some people have returned a good investment from them. They are the exception rather than the norm.

Let me know if you have any success stories from 'off-the-plan' properties or if you have bought one yourself.

I hope all of this helped and if you'd like to know more about my business shoot me a DM on LinkedIn or email me at [email protected]

If you're not yet ready but want to to up your property knowledge, I send out one powerful property tip every Saturday. You can join at https://propertyacademywithandy.beehiiv.com/