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Buying off the plan - tricks and traps

John McGrath
Tuesday, November 10, 2009

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The essence of property is that it’s a ‘real’ and tangible asset made up of soil, bricks and mortar. The exception to this is buying off the plan, where a developer offers an apartment or house for sale before the building has been completed.

I don’t want to scare you away from buying off the plan, but it isn’t as straight forward as buying an established property so you need to keep your wits about you.

The reason many developers sell off the plan is so they can secure finance upfront. Often a lender won’t provide funds to a developer until they’ve exchanged a certain number of contracts on a proposed apartment block.

The advantages of buying off the plan are:

  • Developers often sell off the plan at a discount.
  • You pay a deposit to secure the property but you don’t settle until it’s been built.
  • The extended settlement period gives you ample time to sell your existing property and get the best loan deal.
  • If the market is rising, you can make a capital gain with little outlay as the value of your property will grow while it’s being built.

The potential pitfalls of buying off the plan are:

  • Delays in completion.
  • The property might turn out differently to what you had imagined.
  • Interest rates could rise before you settle.
  • The builder and/or developer could go bust before you settle – you may have to shell out more money to get your home finished.
  • The quality of construction and finishes might be less than you’d hoped for.

Things to consider when buying off the plan

Typically, the construction period for developments ranges between 18 months and up to three years. The property is valued at today’s dollars, so in a rising market, people who buy an apartment off the plan for $400,000 may find it’s worth $480,000 when they settle two years later. Of course, the opposite is also true. The market may fall or by the time you move in or there may be an oversupply diluting demand and depressing prices.

Buying off the plan is definitely a science in itself. When selecting an apartment, you need to be able to interpret the floor plan. Developers usually price apartments based on a square metre (sqm) rate. There are different rates for different views, aspects and locations but usually apartments grouped close together will have a similar sqm rate.

When you’re comparing two apartments, you need to look beyond the price and size and assess which has the best floor plan. A 60 sqm apartment might be a better buy than a 70 sqm apartment if the smaller apartment has a more liveable layout and no wasted space. From an investor’s point of view, these two apartments would probably get the same rent, so the smaller one has a better return on investment.

Always carry out the following checks before signing on the dotted line:

  • Check out the display unit in detail.
  • Review the contract carefully, especially with regard to: Finishes and fittings – are substitutions permitted? Can the apartment be on sold before completion? Completion date delays – do you have any ‘get out’ clauses if it’s not finished on time? Defects identified post-completion – will the builder rectify these?
  • Check the layout of the building from the plans – where is your apartment in relation to views, common areas and lifts?
  • Visit the site and check the location and aspect.
  • Check out other developments the builder and developer have done – inspect them if possible and talk to the strata manager about any problems with the building.

Again, I don’t want to appear as though I’m advising against buying off the plan. The quality of new apartments today is far superior to that of yesteryear. Most of them are architect-designed and feature all the desirable modern day elements that many established apartments simply do not have, such as open plan living spaces and alfresco entertaining areas. But do tread carefully when buying off the plan, and as with all investments, if it doesn’t feel right, err on the side of caution.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published: Tuesday, November 10, 2009

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