After hearing about a friend getting rich from buy off-the-plan, an investor decides to follow the same path. However, when the investor arrives at the settlement date, it becomes apparent that the bank can’t lend the amount requested because they have valued the property at less than was agreed to pay the developer.
There are two reasons why this happens, says Owen Davis, Principal of DFG Property. They include property valuers and property markets.
“It’s the job of the bank’s valuer to protect the bank from bad lending decisions, so they are a bit more conservative than a more optimistic developer,” says Davis.
“When it’s a large development, or there hasn’t been a lot of comparable sales in the area to get a guide, a bank’s valuer may err on the side of caution and inadvertently ‘undervalue’ a property.
“Property markets can turn in 3-6 months, and when buying off the plan, you’re often expected to agree to a price 12-18 months in advance, sometimes longer.”
Yet despite the risks, they are not something that appears to be deterring investors.
As Your Investment Property reported recently
, BIS Shrapnel predicts that high levels of off-the-plan sales in the next year to two years will continue, and drive further rises in new inner Sydney apartment completions to an historic peak by 2017.
In Melbourne, there were 10,950 apartments built in 2013-14, 10,100 will be finished this year and another 10,000 the year after.
"If the value goes up by 20 or 30%, then the biggest concern you'll have is how to spend the money and whether you should console the devloper who wished he'd priced higher," says Davis.
Davis offers the following advice for investors weighing up whether or not to buy off-the-plan.
Do your research
Take into account where the market is in its cycle, have a look at how comparable properties in the area have changed in value, or if it’s a unique development in the area. Look for similar scenarios in other locations.
Most importantly, don’t overcommit
If the worst happens and the value of the property falls by say 10%, would you have the available equity, or surplus funds to cover the shortfall?
Can you afford to buy in this suburb? Find out how much you can borrow
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