Is it safe to buy off the plan? What you need to know to mitigate risk – Part 2
My blog last week looked at what you need to know about the developer and contract of sale when considering an off the plan property investment.
So what about financing an off the plan property? And how do you mitigate market risk?
1. What happens if I can’t get finance when I’m required to settle?
This is where many investors get caught out with buying off the plan. Once you have entered into the contract, you are required to settle by the agreed date. If you can’t fulfill this commitment you may be forced to sell (potentially at a price lower than the original contract price) and could risk being sued by the developer.
Make sure you’re fully aware of the following before signing on the dotted line.
- Obtaining pre-approval can be challenging. Loan pre-approval from your lender will be required for you to complete the contract of sale with the balance due at settlement. Banks are conservative and won’t lend for something that doesn’t yet exist. They are typically only willing to expose themselves to a certain number of off the plan developments so this can restrict your ability to get pre-approval from certain banks. Because the property doesn’t yet exist, obtaining pre-approval can be challenging when it comes to buying off the plan.
- Your pre-approval may not stand until settlement. The banks will usually impose additional conditions on off the plan pre-approvals because of the ‘unknowns’. These include market movements, interest rates, your personal financial situation etc – all of which can change in the time it takes for the project to reach completion.
The bank may impose a time limit on the validity of your pre-approval and will conduct another review of your financial position when the actual loan is required. When they do lend, which will be close to completion date, finance will be based on the value of the property at completion, usually at a loan to value ratio of 80% – 90%. This means if the market has dropped and the value of the property is less than it was when you signed the contract, you will need to find other ways to fund the shortfall – unless you’re able to obtain a better valuation from another bank.A shortfall situation can usually be avoided with careful market research but it’s still wise to be prepared. Aim to have l0% of the property’s value on hand (in cash or equity) by settlement so that you are not caught short in the event of a market fall.
2. Is there going to be demand for my property when construction is complete?
Market research when buying off the plan follows the same principles as any other property investment. It is absolutely an essential step in the buying process to ensure you’re not going to be left with a property you can’t rent out or a loan that’s greater than the value of the property.
Assess the supply pipeline in the area and the drivers of population growth, and then determine whether an undersupply or oversupply is likely. Two key areas to investigate:
- What else is being built in the area? Look at other developments under construction or in planning and compare location, developers, price, quality etc. Investigate the quantity of development and what impact this supply pipeline will have on future demand.
- Who makes up the rental market and will your property be appealing? Understand who makes up the rental market in the area and make sure your property (both in terms of quality and location) will be desirable to this demographic. Professionals, students and empty nesters – the three main groups that make up apartment dwellers will all have different requirements and expectations.
3. Is the property a fair price?
Based on the above research, do you feel the developer is asking a fair price for the property? Prices for off the plan apartments can be over inflated.
Don’t be afraid to open negotiations and back up them up with market data and comparisons with similar properties.
You may not be able to get them to move much on the price but asking for furnishing and appliance upgrades and packages, a share of the interest earned on your deposit or a rental guarantee on completion are a few ways that you could sweeten your deal.
Don’t discount off the plan investments, just be smart!
Get a lawyer experienced in off the plan contracts to review yours in detail. Off the plan contracts will always, unsurprisingly, favour the developer.
Be absolutely informed about what you’re getting into. If you feel 100% confident about the quality of the build, market demand and your ability to cope if things go pear-shaped, then there’s no reason to avoid buying off the plan!
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