Buying Off The Plan Risks
Buying apartments off the plan has many benefits compared to buying an existing property, but there are some potential risks you should consider.
Buying Off The Plan Apartments – Risks, Considerations
When buying a property, one of the important considerations you will need to make is, should I buy an established apartment or off the plan?
Whilst the excitement of being the first person to live in the unit, and the flexibility to choose your floor plan and colour schemes may be appealing, there are also some common pitfalls that you need to be aware of if you intend to buy off the plan.
Important off the plan risks you will need to consider:
Falling Property Market
There is a risk that you may pay too much for a property if the market falls between the exchange of contracts and building completion. If this does occur you may find it difficult to secure finance for the full amount.
As many builders do not allow you to see the property until construction has completed, there is a risk that what you envision is not what you will receive. The quality of work may also not meet your standards.
Rising Interest Rates
Interest rates could increase before you settle on the property which is problematic if you wanted to fix the term of the loan at the current interest rate.
Many buyers fear the developer could go into liquidation before the project is completed. You need to ask what the options are if this occurs; will you get your money back and what guarantees do you have?
Ensure you have a Solicitor or Conveyancer check the terms of the contract to ensure you are protected should this occur.
Other Disadvantages When Buying Off The Plan
- You can’t move in immediately, you may have to wait a couple of years for it to be built.
- You can’t physically walk through the property you are buying.
- The market could drop. If there is a recession some off-the-plan buyers may have difficulty getting finance because valuations came in lower than the agreed purchase price.
- Expected capital growth doesn’t eventuate.
- You can’t get a feel for exactly what it is like. Will neighbours be staring out their window at you while you sit in your lounge? You won’t know until you move in.
- The finished product may differ to what you anticipated.
- The project may not proceed. Some developments don’t go ahead. You could spend years for that decision to be made and have your deposit and future living plans tied up.
- It might not be as big or look as nice as you thought. All you have to judge the future look on is display suites and artist’s impressions.
- Your situation could change and you are still financially obliged to settle. What if you lose your job, have a child, marry or divorce, will that change your needs?
Buying Off The Plan Benefits
Buying off-the-plan can be a savvy move particularly if the property market is on the rise. You only need to put down a deposit to secure today’s price, it doesn’t matter if the market value has jumped by settlement time, you don’t have to pay more.
Today’s Off The Plan Price For Tomorrow’s Equity
An off the plan purchase means you can lock in the ownership of a property, without having to settle for an extended period of time. It may be one or two years before settlement, so capital growth can often make your initial deposit more valuable in the meantime.
The risk here is that the value may decrease in this time, so it is important to be sure about the area, not just the property. If you intend to hold the property long term, value fluctuations in the immediate future may not overly concern you.
Stamp Duty Savings As Government Incentives
State governments (in certain states) offer bonuses and reductions in stamp duty for buying off the plan which can save you thousands of dollars as most provide stamp duty concessions for brand new properties, as they attempt to stimulate their economies through construction.
One of the well known and biggest reasons for buying off-the-plan property is the potential for huge stamp duty savings, says Darryl Simms, author and founder of Latte Property.
You could potentially save over $20,000 on a $600,000 purchase if you purchase a new off-the-plan property instead of an established property. When you’re a first timer, any savings are very welcome.
Time On Buyers Side
Getting in early allows you to choose your purchase from a range of properties within the development. You can grab the one with the best view, or that’s furthest from a busy street. You don’t usually have multiple options within the one specific location when buying an established property.
Buying off-the-plan is one of the easiest ways to get into the property market, securing a high value asset for a low initial capital outlay and lock in the best price as the first properties released usually go for the cheapest, because the developers need fast early sales.
Once the developers meet their financial requirements, they often up the purchase price on the remaining properties to make up for lost profits.
While a deposit is made to secure the property, you only need a 10% deposit, the balance doesn’t need to be paid until the property has been built (at settlement once construction is complete) which might take two years or longer.
The long settlement period means you have some breathing room to take care of the investment, or to organise to move house if you intend to be an owner-occupier.
You may use the time to save money (particularly if construction hasn’t started yet) and reduce the amount of finance you will need to borrow. Also provides you with time to organise your finances and if required sell your existing home without the need for bridging finance.
You have longer to shop around for the mortgage that suits you best, and it can be more affordable if you buy very early in the process as developers are often keen to secure sales for the project to go ahead.
Savvy buyers use this time to save towards moving costs, furniture, and the home. With more savings to put towards your new property you will be able to borrow less and therefore your loan repayments will be much lower,” Simms adds.
Increase In Property Value and Potential Capital Gains
If the market experiences growth, the property you purchase off the plan today may increase in value when you settle years later hence the potential capital gains.
Buying off-the-plan allows you to buy at today’s price. In a rising market, this can mean you own a property worth more than you paid for it by the time the deal settles after construction.
However buyers should view this as a nice little bonus, not the reason for buying off-the-plan, Simms cautions.
This can be good if the value has increased and it can be bad if the value has dropped, agrees Chris Owen, Principal of property maintenance and finance company DRG Property.
Depreciation Benefits Mean Tax Advantages
If purchasing for investment purposes, you may be able to claim depreciation on your tax for items like fixtures and fittings. It is important to consult your Accountant to find out if you are eligible.
If you’re buying off-the-plan as an investment and plan to lease your new home to renters, you may be eligible for 1000s of dollars worth of tax deductions, Simms says.
Get a full depreciation schedule from a quantity surveyor once your property settles. This will assist at tax time when claiming deductions for your new asset’s brand new fittings and fixtures.
Increased depreciation means your holding costs will be much lower as the tax man is covering a bigger portion of your investment property expenses.
Newly built properties in Australia come with a 7 year builders guarantee which means structural or interior building faults must be repaired by the builder.
Repair Cost Savings
It goes without saying that a brand new home, if well built, will not need the ongoing maintenance that an older property often needs.
Lower Power Bills
Changes to the Australian Building Code mean new properties must meet stringent energy efficiency requirements, explains Simms.
Your off-the-plan home should be fitted with some of the most power-saving appliances and gas/water/electricity systems on the market, which is a blessing for owner occupants and future tenants alike.