Off The Plan | Pros and Cons

Off The Plan | Pros and Cons

With Australia’s Capital Cities brimming with new product, you’d be lying if you said you hadn’t considered Off The Plan. But what are the pros and cons?

Off The Plan purchases are a very tricky topic. There are some people out there (particularly Sales People), who swear by Off The Plan (OTP) purchases as a sure fire win in the property market.

On the flip side, there are countless media articles that depict OTP purchases as the worst thing in the world, and developers as the devil incarnate.

But should you entertain the idea? What are the actual benefits?

Pros

Tax – There are some great tax benefits to buying an OTP property. As an investment, you can claim depreciation on your tax for fittings and fixtures. As always consult your trusted advisor and accountant to confirm that the property you are looking to buy, qualifies for this.

Price Locked – You may be paying current market price for a property, but this price is locked at the point you sign and exchange on the contract.

Potential Increase – Buy now, be rewarded later* (conditions apply). In the event the market rises, because you have a locked price (see previous point), you reap the rewards of market value growth, when you settle in the future.

Builders Guarantee – Contrary to popular belief, the government has many laws protecting you from botchy OTP purchases. One is namely the 7 year builders guarantee – this means that any structural or interior building faults must be remedied by the builder.

Choice – You don’t have to settle for the only unit available, you have prime pick of several. This means you don’t necesarily have to settle for just what’s left (if you are in there early).

Time – You’ve got all the time in the world (mostly). With a long settlement, this allows you to amass further dollars to contribute to a larger deposit, thus lowering the amount borrowed, or putting away money to help supplement any changes in rental return, repairs or potential rainy days.

Cons

Price Locked – The classic OTP double edged sword. Yes, the price may be fixed. But in the event the market changes for the worst, you settle on an asset that is already in negative equity – i.e. worth LESS than what you paid for.

Change in Market/Economic Climate – 2 years ago the market was going great, industries and local economy doing fantastic. Now? Everything could change by the time you own the home. Interest rates, market drivers and more. Thankfully, in most cases, developments are only approved in areas driven by several different factors, infrastructure, multiple industries, however even one change or factor removed can hurt.

Bankruptcy – If you end up buying in a development, and the developer goes bankrupt, are you safe? Will you get your money back?

Looked better in the picture… – Sometimes, there is the risk that the product you end up owning, looked much better in the concept images. The end product may be underwhelming, and the quality of work may not be of a high standard.

Supply – With so many developments in certain areas, you run the risk of buying a property with limited demand. Same Supply and Demand laws apply. Perhaps there is a strong demand for 2 bed units in a certain area, is there the same demand for 500 2 bed units?

How to Prepare

Do some stringent due diligence research on the project, and speak with your trusted professional advisors. There are a number of ways to safeguard yourself against a bad OTP investment.

  • Know the location, get eyes on the physical land the complex will be built on.
  • Analyse the market, know the conditions, and see where your target demographic fits in.
  • Consult your professional trusted advisors. These include Financial Planners, Accountants, Buyers Agents etc.
  • Find out what you are paying for. Do you get all the items in the display suite or CGI imaging? Consult the agent, and confirm with the contract.
  • Understand the contract, and get a fine tooth comb and a great solicitor. Understand the stipulations in the contract, know what you are up against. Developers aren’t necessarily out to screw you over, but always check to make sure.
  • Get pre-approved, not because you need a loan, but make sure you know how much you can borrow.
  • Where does your deposit go? Is it held in a trust? Or is it released.
  • Get to know the conditions post settlement. Is there a mandatory 90-day defect period?
  • Research the Developer, find out what they have developed in the past, find out the time-frame, current and future projects, as well as delivery quality. Know them in-depth
  • Know the builder/project management team. Find out what the particular builder has done in the past, along with the Project Management Team. Often, the developer does not dictate the quality, but rather the teams Managing the projects, or the builder themselves. Understand who may be undertaking these facets of the development.
  • Safe guard your numbers. If the rental expectation is between $450-$550, I don’t care if you have the best unit, act like you have the worst, and prepare for a $450 per week rental return. Same goes for time frame. If they say it will be complete in 18 months, expect 24 months. Worst case scenario planning, means a happier settlement for you when you own it.
  • Expect the worst market when you go out to rent it for the first time. You will be one of many apartments/properties on the market for rent. Don’t expect it rented out with hours.
  • Strata Fees (if applicable) – plan for them to double within a year. This means less headaches if you are aware that they always incrementally increase.
  • Understand what the Sunset Date means. Ask your solicitor. Don’t misinterpret it or you’ll end up buying where you were lied to, or not at all.

Remember, the most important advice to remember is that every development is different, every person and situation is different. What works for you, does not work necessarily for your friends. Understand the strategy you are building, and work to the strengths of that. Consult your professional and trusted advisers, and work with fact, not emotion.

Author

Michael Turner is a Property Development and Analytics Specialist operating in Sydney’s Growth Centres and corridors. He is a Director of YPI, along with several roles at property development firms and agencies. He can often be heard on various radio mediums talking about Football and Property. You can find him on Twitter @mturnerypi or email him directly at m.turner@youngpropertyinvestor.com

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