The most risky way to buy?

12/03/2012


Question: All I hear about buying properties off-the-plan are horror stories. People tell me it’s the most risky way to buy and that I’d have to be mad as a hatter to do it. I’d believe them except that some of the offers on off-the-plan properties look rather compelling. Do you think there are any cases where off-the-plan properties are good investments?   

Answer: Buying off-the-plan is when the house or apartment has not been built yet, or is currently under construction. In my investing career, I have purchased several properties off-the-plan that have been very successful each time. While there are many benefits to following this buying strategy, there are some risks too. 

Benefits

  • Lower or alternative deposits – meaning you can use a lower cash deposit, a bank guarantee or a deposit bond  
  • Maximum tax advantages  
  • Stamp duty savings in some states  
  • Redesign possibilities  
  • Long settlement, which allows potential for capital growth  
  • If settlement is longer than 12 months, then often a revaluation at the current market price can allow 100% finance.
  • Opportunity to on sell the property prior to settlement 

Risks

  • Project may not proceed at all
  • The finished product may not be what you expected
  • Expected capital growth may not eventuate, or may fall
  • Developer may go into liquidation, which stalls the project and ties up your deposit 

To protect myself from a developer going into liquidation, I never authorise a developer to use my deposit for the construction. I prefer to have the deposit sitting in the solicitor’s trust account; this way, I have more chance of getting it back should things go wrong. 

Also, as an investor I always have my solicitor review the contract. However, I have found that sometimes he/she can miss things, so as a rule I generally review my own contracts in addition to the solicitor doing so. 

The items that I may expect to see as part of the contract for purchasing off-the-plan include floor plans, building plans, site plans and electrical plans. 

Also, a detailed outline of fixtures and fittings – including the standard of quality – should be included. Some areas to watch out for are: 

  • Kitchen cupboard construction
  • Exhaust fans in kitchen and bathrooms
  • Heating and cooling
  • Floor coverings – type and quality
  • Wall finishes – type and quality
  • Window dressings
  • Garage door – remote or manual
  • Letter box
  • Clothes line
  • Appliances (white or stainless steel) model, standard or its equivalent
  • Fly screens
  • Security doors
  • Lighting and electrical layouts
  • Extent of garden beds and lawns 

I once had an experience whereby a contract for an off-the-plan property I purchased in NSW had a list of inclusions that included a dishwasher, under-sink water filter and power points in the kitchen. 

Being from Melbourne, I flew up to Sydney for the final inspection before settlement, and we noticed that these items were missing, but I didn’t have the contract with me to confirm. When I raised this with the builder at the time, he refused to correct any of the above, claiming they were not part of the contract. 

Upon returning home I double checked the contract, which stipulated that these items were included. Therefore, the builder was legally obliged to provide these. My lesson here was to always take the contract with me during final inspection prior to settlement, and to double check that all the inclusions are actually in the property. 

  • Answer provided by Helen Collier-Kogtevs, director of Real Wealth Australia (realwealthaustralia.com.au)

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Comments
  • Ben Turner says on 31/07/2012 02:01:31 PM

    Off the plan is only good in a rising market, I wouldnt bother with it in most capital cities at the moment

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