Is it safe to buy off the plan? What you need to know to mitigate risk – Part 1

For many property investors, buying off the plan is one of the most easily accessible and affordable options for getting a foot on the property investment ladder.

Unfortunately, oversupply issues and criticism over the quality of some developments are rife in the current marketplace. It’s not surprising that investing in property off the plan has developed a reputation for being high risk.

So, is it safe to buy off the plan? It certainly requires another layer of due diligence. But with education, thorough risk mitigation, attention to detail and professional advice, it can be a rewarding investment strategy.  Here’s why:

What are the benefits of buying off the plan?

· Low cost entry point – You’re able to secure the property with just a deposit and finance pre-approval. The balance isn’t required until settlement giving you plenty of time to prepare.   

· Lock in the price – Secure the property with just a deposit and benefit from the capital gains during the construction period in a rising market. (Of course, the opposite is also true – the market could fall leaving you at a loss – so this is where market research comes in).

· Stamp duty exemption or reduction in some states – Depending on the state, type of property and value, you may be eligible for a stamp duty exemption or discount.

· Maximise depreciation tax and minimise maintenance – Because the property is brand new, you’ll be able to take full advantage of depreciation tax, and will have minimal maintenance costs – all helping to boost returns.

While this all sounds pretty good, it counts for nothing if you don’t do thorough due diligence.

How can you mitigate risk?

So how can investors take advantage of the benefits of buying off the plan and avoid getting themselves into trouble?

The due diligence process for buying off the plan is different and more involved than that of an established property.

These are the questions you need to be asking:

1. Is the developer reputable?

Market risk aside (because that is a factor in any investment), off the plan is considered a risky strategy by many investors primarily because there’s nothing built yet. You are investing in a promise – that is, that the developer will deliver what they say they will deliver.

What you need to know about the developer and sale contract:

· The quantity, design and quality of their previous projects

· The quality of the floor plans, fittings, finishings, appliances, and parking options (will they appeal to prospective tenants?)

· If the specifications of all the above are clear in the sale contract and the process for rectifying defects is clear.

· Whether there are options for customising floor plans and fittings. Depending on the rental market in the area, this may help you add value and attract higher quality tenants.

· Whether the architect, and the construction company undertaking the build, have sound reputations.

· The workmanship and products will be of high quality with suitable warranties.

· The developer can demonstrate solid financial strength and a track record in delivering on schedule.

 

Don’t be afraid to ask them directly for this information. Just make sure you also do your own research – online, by visiting previous developments, and talking to the residents – to substantiate their claims.

Usually, you will inspect the property prior to settlement to advise if there are any issues with the quality and discrepancies between what was promised and what was delivered.

2. What insurance does the developer have in place?

The developer is legally obliged to have home warranty insurance in place although there maybe some exemptions to this depending on the state and building type. For example, buildings over three storeys maybe exempt, and single level stratas may be exempt if construction hasn’t started.

If a home warranty certificate isn’t attached to the contract, ask the developer why and consult your lawyer.

3. What rights do I have if the developer doesn’t meet its contractual obligations?

Sometimes the finished product will not match your original expectations. It’s important to understand your rights and the rights of the developer, and ensure these are clearly stipulated in the contract.

Issues that may arise:

· The specifications of the completed apartment are different from the contract/display unit. Bear in mind that the plans you sign off on may not have been council-approved yet and the developer will retain the right in the contract to make modifications to complete the project. The specifics of the developer’s rights should be detailed in the contract and any modifications made should not impact the value of the property.

In the event that changes do impact on the quality and value of the property, make sure the contract allows you to withdraw from the purchase and obtain a refund on your deposit. You can ask for these conditions to be added to the contract if they aren’t in there.

· The project’s completion date is delayed. The contract should state when the project is due for completion. It will also give the developer some flexibility – typically another year – if things aren’t running on schedule. If the developer fails to meet this extended timeframe, then it should state in the contract that you are entitled to a full refund of your deposit.

· The project collapses. In the unfortunate event that a project collapses, you need to make sure you will get your deposit back. Deposits should be held in a trust account which guarantees its security if things go pear-shaped for the developer. It’s also worth checking who gets the interest earned on your deposit while it’s in the trust account – you may be entitled to a 50% share. It’s something worth negotiating for during the sale process.

Part 2 of this blog, out next week, will look at off the plan financing and assessing the market.

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