PROS AND CONS OF BUYING OFF THE PLAN

Many people are hesitant to “buy off the plan” because of the negative associations with this term. However, this reputation may not be really deserved. The decision whether to buy off the plan depends on personal finances, and whether you want to take a risk which may deliver fantastic returns but could just as well be a disaster.

Essentially, there are two key risks associated with buying off the plan. First, is the risk that the end product may not be high-quality and may not match your expectations. This is something that can manage by hiring a good conveyancer as well as making sure to buy from a reputable building company. We are not going to talk about this article, but rather focus on managing the second main risk of buying off the plan, that is the value of the property may change between when you sign the contract and the settlement. This could be either a good thing or a bad thing: as the value may have gone up or down.

What does “buying off the plan” means?

Essentially, it means that you are shown a property, whether a unit, commercial property, housing development, or something else that is yet to built. The timeline for construction may be 6, 12 or 18 months or more. You will receive information from the agent or developer about expected fees, yields, depreciation and other features, and will be asked to put down a deposit which secures the property at a certain price. You do not need to pay the balance until the property is built. From the developer’s perspective, this arrangement is highly advantageous as it helps them to secure investment or financing for the development. A bank is more likely to issue financing for a project which already has commitments on a certain numbers of units. Furthermore, the more units which have been pre-committed, the better the terms of the loan.

How can I maximize this result?

If you want to be on the right side of property value exchanges, firstly you need to do due diligence. This means researching into the market, its cycles, how comparable properties are performing in the area, and so on.

It is also important not to overcommit. You should always keep the worst case scenario in mind: that the property’s value falls by 10% for example, and make sure you are covered in case this happens. Be sure to have the funds or equity available to cover this if necessary. On the other hand, if the value of the property goes up by 20 or 30%, you’ll be laughing!

What are the risks of buying off the plan?

As mentioned, one of the key risks is that the value of the property may change between contract signing and settlement. In worst cases, this could mean that your bank won’t authorize your loan for the full amount because they value the property at less than the agreed purchase price. In this situation you may be forced to make up the difference from your savings or equity, because you have already committed to pay this amount to the developer.

 Why this happens?

There can be two reasons this situation may eventuate: either market changes, or faults by property valuers. In the latter case, the property valuer has simply made a bad call. The bank may be overly conservative in their valuation because they are cautious to protect their investment, or the developer may be overly optimistic on their assessment. This can particularly happen if there are not many similar properties in the area to draw comparative figures , which can make the bank’s valuers cautiously undervalue the property.

Additionally, although the property market is not often violate, it can be difficult to predict property prices in the long term. This means if you are buying 12-8 months or more in advance, the price may change in this time, and sometimes even for the worse.

Benefits of buying off the plan.

On the flipside, this means that property values can go up, too. With some research (and some luck) you can feel the benefits of a rise in property price, and made a capital gain with little deposit and no interest, which is a pretty rare achievements!

We’re always hearing about the latest “property hotspot”. This is the newest hot suburb that everyone is saying you should invest in, and seems much better than any other are. It seems like if you miss out in investing here you will be doomed to a life of poverty and become a pariah among your property investor friends! However, the reality behind property hotspots is quite different. The truth is, by the time it becomes known as a ‘hotspot’ and is mentioned in the newspaper or on TV current affairs shows, it is probably not a real hotspot anymore. Getting involved at this point doesn’t do you favors, as prices are now peak because everyone is interested in the area.

Worse still, in some cases, rent have actually stagnated even though property prices have stagnated. This means you could pay top dollar for a property without being able to recover your investment through rental income. You could increase rents, but this will likely price your property out of the local rental market.

Other factors to be cautious of include if the ‘hotspot’ has a lot of older properties which may be too valuable to knock down, but need a lot of money to bring to the standard needed to attract good tenants or resell for a decent price. Also be conscious of being drawn into an area where properties is simply out of your price range. A property hotspot may not be the right spot for you.

There are some great opportunities which will allow you to get in on the ground floor and develop the value of your portfolio. But identifying the best opportunities ahead of everyone else means you need to know what the perfect property investment for you is. This will depend on your investment strategy: renovate and flip or long term holder for example. Also what kind of property or type of tenant are you looking for? Knowing yourself as an investor will help you rise about the trends to identify the best opportunities.

* This article was also published at Investors Advisors website.