Off the Plan Properties… Is this for you?

Off the plan property purchases – buying something that you cannot see and touch yet. Do you know why you are doing it? Nice launches? Persuasive marketeers? Or are there real incentives like stamp duty rebates, attractive launch prices, hot locations, or is it within your own comfort level of purchase? Whatever it is, do know your motivation for purchasing off the plan properties. I have done it, and will still do it if the property fits purpose and plan.

Off the plan property launches are common.

It is an important practice for developers because in many cases, project development funding kicks in with the requirement for pre-sales. Even without this imposition by project development funders, developers will aim to complete selling most of the units before the project actually completes so that settlement of sold units takes place promptly. Any unsold units, potentially mean that funders/lenders are not repaid and there is an opportunity cost to the developer having to continually pay interest or to find alternative funding.

To the purchasers, do not buy impulsively, especially at launches where often sweet offers are presented. Know the location, the specifications, pricing, sunset clause, incentives, current market comparable prices and the developers in question. Usually bigger projects require stronger developers. To many extents, the architects, builders engaged and other relevant professionals are all important variables in the development equation.

Off the Plan Properties: The No & Why

These are some common issues that act as roadblocks to purchasing of such off the plan properties:

(1) Inflated pricing: most developers will take into account the value of the property projected at completion. More often than not, it means that the purchaser is not buying the property at current market prices. If the market is buoyant, there is a likelihood that the market price at completion is higher than the purchase price or at least equal. If the market is stagnant, then the purchaser is buying at the settlement market price which could be higher than the market price then;

(2) Inability to meet valuation: this is particularly relevant for bigger projects. It is not uncommon to hear that at settlement, the property cannot meet valuation, by about 10%. Sometimes, this is clouded with the story that the lenders offer to fund about 10% less. Especially for overseas purchasers, it is important to know that the price you are paying is the same as what a local purchasers pay. Reason is that local agents will want to see settlement prices meet valuation; well at least for marketers who are concerned about future funding. Which is why local and overseas selling price ideally be the same. Sometimes property valuation will not meet current market valuation due to changes in economic factors, market sentiments, tightening of lending guidelines and other unforeseen circumstances.

(3) Difficulty in getting funding/loans: For local purchasers buying into bigger projects (particularly apartment projects), the four major Australian banks has a lending exposure cap ratio of x% (15%?) in any one project. This means that if you happen to apply with that lender exceeding the cap, y0ur application may not be approved or you may be offered a lower loan to valuation ratio. Other lenders may impose different restrictions on different properties e.g. height of project, postcodes and so on. For overseas buyers, it is good to know current options for funding although this does not guarantee future approvals. For off the plan properties, pre-approval loans are not granted.

(4) Risks of developers not moving the projects. This is a real issue, as in a soft or stagnant market, if the developers are unable to get project funding or in unforeseen circumstances, the project cannot proceed i.e. construction won’t happen, then the purchasers may not be able to get a refund of their 10% (paid into solicitor’s trust account) until a lagged time so long as this is within the ‘sunset clause.’ The sunset clause is a statement in the contract of sale that effectively puts a time limit on the contract’s validity.

Off the Plan Properties: The Yes & Why

Off the plan purchases are still popular and viable. Do it with open eyes, understanding the risk involved and if you are comfortable with the risk of buying something that you cannot see.

There are still many good reasons to be purchasing off the plan:

(1) Ability to select the unit, facing, facade that you like;

(2) Have the timing to plan your funds. Usually there is a 10% payment at contract stage, and in the context of Australia, this is paid into a solicitor’s trust fund, meaning the developers will not be able to access the funds for construction or project use. Balance 90% (via loan and cash) is due only at settlement;

(3) Any regulatory incentives e.g. stamp duty rebates or other concessions. Particularly in house and land contracts, if a buyer signs a contract before construction begins, stamp duty will only apply to the land value, not on the entire ‘House and Land’ completed property value. In some cities in Australia such as Perth and Gold Coast, stamp duty concessions apply on certain properties;

(4) Any developer rebates eg interests on deposit, free blinds/curtains, cooler units etc. Argument is that these are incentives that are factored into the pricing already. Put it this way, any of such not offered will allow more contingency for the developer and some incentives need to be negotiated on case to case basis;

(5) Have the opportunity to offer inputs into the property’s design (especially in house & land and townhouse projects). In apartment projects, the ability to choose colour schemes or if you can convert two apartments into one, interior design and related works;

(6) Fixed price contracts. In off the plan purchases, the price is locked in at contract. While there have been instances that at settlement, contract prices cannot meet valuation, the reverse is also true. There are properties that has higher market value than contract prices, although in practice this will not be reflected in loan documents, as loan valuation will not exceed contract price.

There are pros and cons of purchasing off the plan properties. Critics have even commented that what if one loses job a few months before the off the plan property completes? How is he/she going to settle? That is like saying that what if you have an existing mortgage, and one loses job, how do you continue paying the mortgage? Or that if you have just signed a House and Land contract and unexpected unemployment occurs, what do you do?

Life inevitably has uncertainties. If tomorrow is bleak, then everyone will load up on insurance. But even that is an uncertainty, because after loading up on the insurance and if life is kind, then even the premiums might not be sustainable.

It is often about balance. What you believe you are comfortable doing, based on your current life situation, your plans for the future and the positive hope of achieving it.

Off the plan property purchasers, ‘caveat emptor’ i.e. ‘let the buyer be aware’, but it is also for the hopeful purchasers/investors who make financial plans and be good stewards of their finances.

Think and decide…