There have been several short reports for public consumption of late, discussing off-the-plan buying. Most have been masquerading as buyer tips or advice, but they take a very pro-developer side of things.
Now, without wanting to peeve too many of our developer clients – we have helped, after all, over 550 new residential developments (nearly all of which involved pre-selling) come to fruition over the past 15 years – below are my thoughts as to what a buyer should be asking when considering buying a dwelling before it has started construction.
I haven’t bothered to comment on the obvious here – stamp duty concessions; building depreciation; potential for growth before settlement (don’t we all wish!); time to sell your house or other investments or even the need to match the dwelling type to demographic/economic demand – but have touched on some less covered ground.
There can be great benefits to buying off the plan, but inherent in such purchases is risk.
One of the biggest risks is that the project is cancelled – or that the completion date will be delayed for lengthy periods of time, during which you may be required to commence paying fees without the ability to live in or rent out the property.
Another risk is that the development will not be built to a high enough standard to reflect the price you paid.
A third risk – which applies to investors – is that your property won’t attract the actual rent and yield you were told it would.
It is important to do your own homework in order to limit your risks – ascertain information regarding the property you are interested in and comparable sales/rents in the area. It is also important to seek legal advice regarding the terms of any contract. Okay, now that the basic caveats are out of the way, here we go.
Risk 1 – the building is late or doesn’t happen
Right off the bat, a buyer should question the number of sales being reported. A fast sales rate, with only a few remaining for sale, is one of the oldest spruiks in the book – it’s project marketing 101.
It used to be that a new off-the-plan dwelling sale was only reported as “sold” when a contract went unconditional, the full deposit was paid and all the necessary documentation was signed by both parties. Too often today a “sale” is reported, based on a holding deposit only – sometimes as little as $1,000.
One service my business conducts is “mystery shopping”. We send buyers to new projects to critique sales techniques and to ascertain the real sales status. Often, and increasingly of late, our mystery shoppers have been able to purchase “sold” stock. Sometimes up to a third of the sales claimed to be made had not really occurred at all.
In addition to challenging the number of reported sales, a buyer should also ask if the proposed project has all the necessary development and building approvals to go ahead.
Another good thing to query relates to multiple sales being made to the same buyer. Also, ask if any sales have been made internally i.e. to people directly associated with the development; and whether any of the reported sales actually reflect unsold stock taken off the market.
A buyer should also question the time period for the reported sales. Often developers will “soft” launch their new project to interested buyer groups many months before going to the open market. Many of the sales might have been made during this period, yet the sales spruiking is often based on the public launch date. Don’t always believe the “50 sales made in the first two weeks” or similar headlines. Fifty sales might have been made but our experience is that they took many months, if not up to a year, to make.
Finally, in relation to this first risk, a buyer should ask about the financial conditions needed to be met before start of construction. And although somewhat obvious, too few ask about the exact planned start and finishing dates.
Risk 2 – building standard
First and foremost, make sure you know the answers to these questions: Who is the developer and/or builder? What are their track records? Have they developed/built buildings before, and do they have any history of being sued over defects?
Also important is to check that the three-Fs (fixtures, fittings and finishings) in the display and printed material are guaranteed. Beware of glossy leaflets with annotations along the lines of “artist impression” and “subject to change or availability”.
Ask, too, whether the construction will merely meet Australian standards. These standards are, in the main, inadequate for the realities of modern urban living; and in particular, for those residing in large apartment complexes. You are better off paying for higher than the prescribed building standard.
Risk 3 – rent and return
Paramount questions when building an off-the-plan apartment or townhouse are: Who will manage the complex? What is their track record? And under what circumstances could these arrangements change?
Sometimes the management rights are sold early in the piece. That is okay, as selling the rights to manage a complex forms an integral part of a developer’s income stream. But you should be told who they are and make sure that you have full voting rights at the first AGM.
Whilst many buyers ask how much the body corporate fees are; like they do with council rates; too few ask for a breakdown of the body corporate costs. Nor do they ask about cost projections.
Also, make sure that your view – for which you will pay a premium – is unlikely to be blocked by any future development. And also ask an independent agent for their opinion on the suggested rent.
In most cases, you will receive honest and satisfactory answers to these questions. But in those rare examples that you don’t, our experience is that it might be best to move on.