Purchasing a property not yet finished, and based solely on drawings or plans is called “buying off-the-plan”. When buying off-the-plan, there’s no finished product for you to inspect, and you’re only required to make a minimum deposit with settlement due upon completion of construction.
Many articles have been written about buying properties off-the-plan. Many are critical of this approach to buying, and conclude the numbers simply don’t add up. However, as with all investments, there are pros and cons which warrant a balanced analysis based on your own personal circumstances.
Developers sell off-the-plan as this is usually a requirement for them to secure upfront construction financing from a lender. A certain percentage of the development usually has to be pre-sold prior to the release of funds by the bank. Buyers would pay a deposit to secure the property, with the balance payable upon settlement.
Below are some of the pros and cons of buying off-the-plan in NSW.
Brand new. Everybody likes the feeling of ‘newness’ – be it new cars or new houses.
Developer discounts. Developers may sell some units at a discount if they need to meet sales targets to get the construction underway.
Extended settlement period. With delivery usually over a year or two away, it gives you time to sell your place or to obtain financing (or even to increase your income before financing needed).
Stamp duty concessions/grants. Over the last few years, various concessions on stamp duty and/or grants have been offered in NSW such as for retirees and first homebuyers.
Customisation. It is often possible to provide input on final design if a property is purchased before construction (e.g. to merge two apartments into one large one or to choose certain fittings and fixtures).
Warranty periods. All builders are required to provide 7 year warranty on building structure (in addition to a preliminary period covering finishes defects). However, note home warranty insurance (with a third party insurer) is only required to be taken out by builders on residential projects valued over $12,000. Larger developments (buildings of more than three stories) are exempt and the purchaser must rely solely on the builders’ warranty. Clearly this presents a significantly greater risk to buyers. The certificate of insurance, when issued, must be attached to the contract of sale.
Lifestyle. Newer units are built to reflect today’s tastes and preferences such as open plan living areas, larger balconies and amenities such as pool, gym and concierge services.
Potential for capital gains before settlement. Many investors are speculators and love to bank on off-the-plan properties going up in price before the property is even finished. Beware however, the reverse is also possible.
Leveraged investment. The down payment is usually low for the construction period (i.e. it can be a leveraged investment without the need for bank financing).
Final product is unknown. Buying something on paper without having seen the item is a significant risk. The finished product may not live up to your expectations (e.g. aspect, quality, etc.)
Premium price for newness. Just like cars, brand new properties have a certain premium. This is partly due to the newness factor, but also due to Australia’s Foreign Investment Review Board (FIRB) regulation which stipulates that foreigners can only buy brand new properties and not second hand ones. There is a larger consumer base for new properties (as foreigners can also buy) and consequently new prices are higher than in the secondary market. When this property is later sold, it cannot be sold to foreigners (lowered demand possibly leading to a lowered price).
Lower land to asset ratio. New homes and units alike are usually built at much higher density than those built 25+ years ago. Since land value is the primary influence on capital gains for property, it is not uncommon for capital gains associated with a new property investment to be lower.
Developer bankruptcy risk. There is always a risk that the developer goes bankrupt before completion (with loss of deposit if the legal structure is not sound) or during the warranty period.
Expected financing may not be available in the future. While Banks may be lending on attractive terms today, and while the buyer may have the capacity to borrow the required amount at the time of purchase, this may be very different in the future when the financing is actually needed. At settlement, when the property is completed, banks may not be willing to lend the same amount (LVR), the valuation may be lower than the purchase price, or the buyer’s income and circumstances may have changed. In all these cases, the buyer would need to come up with a larger down payment than expected. In addition, the interest rates at time of settlement may be very different from those prevalent at the time of purchase.
Lower capital growth can be expected (at least in the early years) as depreciation is high. The new property will depreciate significantly in the first few years as it goes from new to second-hand – just like a car when you drive it off the dealership.
Defects can be extensive. There is often a 1-5 year period in which building defects materialise and become visible. In the best case scenario, a very good builder will address these with minimal inconvenience and hassle. A bad builder however, may not fix the defects properly. In which case extensive time and cost is required to address the defects through negotiation, mediation and possibly even court.
Henny Stier is a Licensed Real Estate Agent and the Director of one of Sydney’s oldest and most trusted property Buyers Agency – OH Property Group. A respected property expert, Henny specialises in the search, analysis, appraisal, negotiation, bidding and purchase of properties across all price ranges throughout Sydney.