Off the plan purchase is all in the developers favour.

Would I buy property off the plan?  not in a million years!  That’s not to say that  lot’s of people are not happy with their off the plan purchase, but in my 12 years experience as a mortgage broker I have seen plenty of people get badly burnt and due to the very short notice to settle in most contracts the final process can be chaotic and therefore stressful.

Most recently this has been in the news as developers have deliberately stalled completion in order to invoice sunset clauses that allow them to cancel contracts ,  refund deposits paid and then resell the properties at as much 50% higher than the original contract price.  The NSW Supreme Court has just found that the developer is completely within his rights ….

Most people want a loan approval 6 to 12 months or even 3 years into the future and the truth is that approval is virtually worthless until the construction is fully completed and can be valued. A lot can happen in that time – off the plan finance

  • the GFC saw massive changes in lender’s policy and pre-approvals were torn up with unhappy abandon.  Lenders can and do change their policy and a pre-approval does not quarantine you from those changes,
  • credit legislation has severely affected a range of borrowers ability to obtain finance for investment – loans that used to be common are now unobtainable – so unforeseen changes can and do impact
  • government incentives come and go – NSW recently hurt their off the plan investors to the tune of about $20,000,
  • developers go broke or get into financial difficulty – your deposit will go with them,
  • developers/builders change things, even critical things like floor space,
  • you might change your job or start a new career – this can be crucial if it happens within 6 months of settlement,
  • you might get married or take holiday, using savings earmarked for settlement,
  • you might buy another property or a car or go guarantor – any of these can affect your loan chances.

Consider what are the benefits – you get a reduction in stamp duty –  you are told that you are buying below the final value however, that is something very difficult to substantiate and if it is true there is nothing to stop the developer manipulating the sunset clause in order to cancel your contract.  Don’t be misled this is at best a gamble.

In my current clients contract the design includes “pool, gymnasium and steam rooms” but all subject to development consent. It is so easy for the developer to deliberately submit plans that will not be approved.  It will be for the courts to decide if the failure to provide these, pretty key features constitutes a fair reason for the purchaser to rescind the contract.  The contract attempts to exclude the recission on these items and the courts will decide if that is fair and reasonable – either way the costs will be substantial.

So when it comes to developers/promoters don’t believe anything they tell you about what percentage of the apartments are already sold.  Even if it is true it is quite possible that the first say ten percent are sold by special arrangement quietly through buyers agents and investment groups at massive discounts just in order to appease the developers funder, we are regularly approached by developers offering fat commission payments  ( up to 10%)  for leads.

Check the contract, they are always heavily in the developers favour – such as notice to complete, it is not unusual for clients to call me asking can we arrange funds available in seven or ten days. The answer is always no!    I would not sign a contract unless the developers estimated end value is guaranteed to come up to market valuation and with a no-loss get out clause if it fails.

If the market turns down or a glut as is approaching in Melbourne then as construction comes to an end there is a panic by buyers whose situation may have changed and they are madly trying to off load their contract.  Or there may be as yet unsold units which the developer will heavily discount just to clear the books – these push final valuations down and can start a spiral of sales as more buyers are forced into unexpected equity calls.  A few years ago this spiral happened in Melbourne’s Southbank and for a while it was almost impossible to get finance at any LVR above 60% – which simply compounded the spiral.  As a result lenders are often still very hesitant to fund CBD or high density / high rise and even where they will, the insurers won’t insure and so maximum lending is 80% LVR

When you buy off the plan you are buying new and shiny and there is a premium in terms of the appeal for owners and for investors through higher depreciation.  However in most off the plan developments there are other developments in the same area and so as these come off the plan they will be newer and shinier and as a result the marketability  will reduce.  It is not uncommon for off the plan units to fall in value for the first two or three years so do not expect a quick capital gain – no matter what the developer claimed.

Do your homework :

  1. Check current comparable unit prices in the same area and look at the historical the trends, if there are no comparable data then that is not necessarily a good thing as you don’t want the  best unit in the worst suburb.  In ten years time it might be a fashionable suburb but can you afford to wait – in the meantime your rents or sales will be moderated by the median for the rest of the area.
  2. Check current rental prices on comparable property your rental yield is important not only to cash flow but future value as well.
  3. What else is being built in the area of similar style and price.  Consider if this may create a glut eg: Sunshine Coast or Gold Coast 2010/12 – if your development is unique – is that a positive or could it be too tightly focused on a single market eg: holiday renters.
  4. If this is a larger development then remember that when completed there will be a lot competition to attract renters which may push yields down.
  5. How financially stable is the builder / developer – do they have a good track record and sound financial arrangements.  Developers go under and the guy that takes over may not be as reputable as the one you started with.
  6. Get some contractual assurance that the property will value as predicted with either compensation or no-cost get out clause.
  7. Make sure contract allows for no-cost rescission (get out clause)  if the specifications change.  It is not unusual for what may appear small changes in layout to greatly impact your ability to finance eg: making the balcony or car park slightly bigger at the expense of internal floor space.  A developer may offer a second car park as a fob – but this won’t change lenders attitudes if the internal floor space is below policy.  If your loan is knocked back due to the valuer’s report highlighting this then you do not have sufficient time to seek alternative finance.  Do not skimp on the completion inspection make certain the floor space is acceptable under your loan approval. Fifty square metres is the magic measure although some (not all) approvals will go down to 40 square metres. Below 40 square metres you are in trouble.

Finally talk to your mortgage broker at least 3 months before completion – you need as much time as you can get just in case that indicative loan approval you have in your pocket isn’t worth a stamp.  You don’t want to be scraping around for a new home loan approval with only 21 days before settlement is due – some developers can be very ruthless.