Off-the-plan properties are often seen as the riskier investment, and for good reasons. Unlike established properties where what you see is what you get, with off the plan, what you see in the glossy brochures may not necessarily be what you’ll end up with when the builder hands you the key to your apartment.
But despite some risks, buying off the plan offers a number of advantages including potential capital gains between signing the contract and settlement. If the project is located in a growth area, you could rack up good growth within a short period of time.
So, how do you avoid the inherent risk of buying off the plan?
Check the contract carefully
Undestand the inclusions, fittings, fixtures, and build materials you will be receiving. The more items that feature in a property’s inclusions list, the less you will need to arrange/ fund once the property is settled. Full turnkey off-the-plans are fantastic because they leave the investor with almost nothing to install before tenants can begin living there.
Understand the sunset clause – how long will you be waiting? This could be anything from 18 to 60 months. If the development does not proceed how long is your money tied up? Are both the developer and the purchaser allowed to walk awayat the end of the clause or just the developer?
Check penalty interest for late settlement of the property.
Minimise and manage deposit
In some cases the developer will accept a deposit bond or bank guarantee so you are not required to exchange an actual cash deposit. This allows you to have your money working elsewhere (eg paying down bad debts, or sitting in an offset account against your PPOR mortgage).
Alternatively, if the developer has met their pre-sale requirements they may accept a 5% deposit.
If you do pay a cash deposit and you have a long sunset clause, check to see if the deposit monies are going to be invested. If so, are they passing on a percentage of the interest earned?
Minimise ongoing cash input
Some developers offer no progress payments which can be of great benefit to the strategic investor.
Putting the construction finance back on vendor greatly improves personal cash flow until you are ready to settle. Instead of chipping in progress payments towards the build (which are not tax deductible) you can have this money working in other productive areas, or in the case of owner occupiers there is no need to pay rent and partial mortgage. It also lessens your risk as there is only a deposit that has been tied up in the venture.
Research the developer
Check out the developer. Are they properly funded? Will the property definitely be built? If not, how long are you tied to the contract by way of the sunset clause?
How long has the developer been in the industry and is it their core business or just a hobby?
Research the builder
How long have they been building? How many properties do they build each year? Check they have the correct builders’ insurances in place.
You may also want to check out some of their previous projects to get an idea of craftsmanship and style. The more tangible examples of the future build, the better. Things like previous developments and current under-construction jobs are very good examples of how investors can gain peace of mind over their purchase.
Take a look through a property similar to the one you are buying, and not a flashy 'specked up' display unit. Marketing renders and pretty brochures are nice, but they are sometimes not a true reflection of what you will get.
Stage of construction
Understand exactly where the building is up to at the point of purchase (eg. dirt, slab, frame, fix, etc). This way you can determine exactly how much stamp duty you will be paying (Victoria only).
Ideally, off-the-plan purchases have their contracts signed before the slab is poured. Check owner’s corporation details
Check on any outgoings, rates and owners’ corporation fees that will be applicable upon settlement. At point of purchase the owners’ corporation may not yet be established, but there should be an estimate available.
What exactly will the arrangement cover (eg. maintenance staff, grounds upkeep, insurance, individual building insurance)?
Indicative depreciation schedule
See if you can get a copy of the depreciation schedule estimate – to glean a more accurate understanding of the tax benefits available. This is a handy source of information, particularly if you are comparing the net investment benefits of apartments versus townhouse versus house-and-land options.
Peace of mind post settlement is important, particularly when dealing with a brand-new dwelling.
Check the warranties and building assurances are satisfactory before signing contracts, because repairs can be expensive if the builder doesn’t get things correct.
Valuation and pricing
When establishing value, take a look around and do some price analysis. When doing so, don’t just look at the 'sticker price' as this can quite often be misleading. Make sure you are comparing 'apples with apples', eg. fitting, fixtures, finish, size, location.
How did the agent establish the price? Was it a professional valuer’s opinion or the vendor’s opinion? These two can vary considerably and can be really important as you make your biggest gains when you buy.
Exclusive leasing periods
Some contracts contain a hidden 'exclusive leasing authority' binding you to a certain agency for a given period. It could also dictate the amount of rent you are able to ask. There are a number of positives and negatives to having a development controlled in this manner.
Before you sign, make sure that you fully understand your rights and obligations under the agreement.
Beware of rental guarantees, especially if they are contained within the contract. If it is known there is a rent guarantee attached to the purchase, then valuers will almost always discount the value of the property. At settlement time this can cause you some big issues if you need to 'top up' the loans either from cash savings, additional refinance funds or, ever worse, compromise your deposit if you fail to settle.
David Brewster is managing director with Buy Property Direct
This feature is from the September issue of Your Investment Property Magazine. Download the issue to read more.