6 Cons To Buying Off-The-Plan

Hay guys and gals! How y’all doin!

The year keeps on rumbling on doesn’t it, we are almost a third of the way through, how are you going with your goals and plans for this year?

If you’re like me – who hasn’t ticked anything off yet, don’t fret! Still plenty of time to get started, but get started you must.

Following on from the post last time (here) about buying real estate off-the-plan (new build whether apartment or house), I received quite a number of messages regarding people’s stories of their successes and failures of purchasing off-the-plan.

Suffice to say, although some people have done quite well with this strategy, for the most part, the feedback hasn’t been positive.

Why is that?

Well, here’s the 6 cons that I think are the reasons why buying off-the-plan can come unstuck.

Cons:

She needs premium dude, PREMIUM!

Remember when I said in the previous post my parents were adamant on buying new because of that “new” feeling?

Ha! There’s no free lunch in life – even feelings cost money these days!

A brand spanking new property will most often have the “new” premium reflected in the price, similar to a new smartphone or a new car.

That “new” premium for a property means you’re paying for the privilege of being the first owner, of using the new features, of paying the developer his margin.

Watch out for that premium!

How can you be certain?

Oooo, whenever something is created from scratch, there’s always an element of uncertainty until the product is finished.

Sure you can review the architectural drawings, pick the colours, fixtures, fittings and materials as much as you want.

But until the property is actually complete, you can’t physically walk, touch or see what you’re buying.

So hold your breath and hope beyond hope that what you purchased is what is built.

So often the case there are a couple of unexpected surprises in the final product – whether it’s a different finish or misplaced fixtures, make sure that what was included in the contract, is what’s provided in the end.

*arrange an inspection of the property before settlement occurs to avoid any nasty surprises, don’t settle until those surprises are ironed out!

High strata fees.

Hey you know who pays for that new gym, big pool, communal BBQ areas and shiny lifts?

That’s right – you do.

New off-the-plan builds have great amenities for everyone to use.

But just like the government, a levy (strata) is imposed on the owners for the ongoing upkeep, maintenance and use of these facilities.

Newly built properties tend to have a higher strata levy imposed, because there are more facilities, hence higher maintenance ongoing.

The issue being of course, that when you exchange contracts prior to construction – you have no idea of how much the strata will cost, only a general figure.

However strata fees tend to increase with time – make sure to expect this when budgeting cash flow.

Builder goes Kaput!

This happen again and again.

The number of times the builder or developer goes bankrupt.

It is an absolute nightmare and often makes the news headlines (see here, here and here).

The reason bankruptcy occurs is mostly due to cash-flow. A development takes a long, long time to complete and is cash intensive – the people behind the scenes usually have to juggle their cash flows to ensure there is a profit at the end of the build.

Just like the previous point regarding uncertainty, make sure that you thoroughly check out the developer and builder, review their past and current projects, read online forums for their track record, even visit their recently completed developments to see the work quality yourself.

Make sure you understand what happens in the event of bankruptcy PRIOR to signing any legal documentation, this way you’ll protect yourself and your loved ones and (hopefully) avoid a catastrophe.

Financing Issues.

This one is a fairly common occurrence when it comes time to apply for a loan from your lender.

Sometimes your financial circumstances may have changed from when you put the deposit down to when the building has finished construction.

Other times it may because the overall market has plunged during the build (see here).

Or perhaps interest rates may have gone up, or maybe the valuation doesn’t stack up, or the lender has maxed out its development exposure (sometimes a lender may have a maximum say 25% exposure to a certain project, this is so they diversify their risk).

Whatever the reason, the myriad of financing issues which can occur with off-the-plan purchases means you need to fully understand your position wayyyyy ahead of time.

Always ensure there is a sufficient cash buffer to shore up any financing shortfall if you can as it may be as varied as having to tip in more cash to paying a higher rate of interest. 

Over-supply.

If you drive around the cities in Australia in the last couple of years you will be noticing a building boom.

Whether it is inner-city apartments or new suburbs out on the fringes, construction is everywhere.

However with this increase in activity, the risk of certain pockets being over-supplied is very real.

Whether for owner-occupied or investment purposes, the value of real estate comes down to demand vs supply (earlier post here).

Be careful when purchasing into a development that it doesn’t turn out to be the same as thousands of others in a Legoland.

This is because without some sort of differentiation, the valuation of your property is tied into the valuation of countless others.

If there’s a fire sale in one of the properties next door to yours – it’ll drag your value down with it.

Just another reason to make sure you research well beforehand!

So what next?

Between the previous post and this one – I’ve labelled out 6 pros and 6 cons with purchasing off-the-plan.

There’s no right or wrong answer, buying off-the-plan has worked well for some people but not for plenty of others.

With any investment decision, it all comes down to research, research and research.

But if you ask me, personally the risks of buying off-the-plan isn’t my cup of tea.

Prefer Green Tea Matcha instead thanks. 

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P.S. Again with the disclaimers but it has to be said – please please please, do your own research whenever buying anything, especially when it comes to hundreds of thousands of your own money!