Things To Consider When Buying Off The Plan

[youtube id="9eW3aaJFZB4" align="left" mode="lazyload" maxwidth="500"] When buying property off the plan there are some serious risks you need to consider or you might end up with a bad investment. When investing in property, one of the things you'll probably ask yourself at some point is, "Should I buy existing property or should I purchase property off the plan?" It's a question that a lot of people wrestle with. And so, today, I wanted to talk about some things to consider when buying off the plan. Both the benefits of it as well as some of the risks that are associated with it. So, hey, I'm Ryan from onproperty.com.au. I help people find positive cash flow property. And a lot of people do email me asking what do I think about buying off the plan. In fact, I was on a webinar with Ben Everingham last night and someone asked this very question. What do you think about buying off the plan? They were saying, if it's got a decent yield, does that mean it's okay? The fact is, there's a lot of things that you need to consider and thing about so I thought it'd be great to create an episode. At the end of this episode, you'll be more educated and you'll know the things to look for if you are actually considering going down this route. First, let's look at some of the benefits of buying off the plan as well as why people seem to get so excited about this type of investment. Well, I think, one of the most exciting things as a human being full of emotion, which we all are, is buying something brand new is extremely exciting just for the fact that it's brand new. It's all of this really nice fixtures, really nice fittings, brand new everything. And chances are, you've probably never moved into a house and lived in it and been the first person that's lived in there or in a unit. And so, to get something that's brand new versus something that's existing and old and a bit worn down is obviously very exciting. It makes us feel good about ourselves and our place in society. There's also a lot of marketing hype around new build properties. They've got signage. They've got sales people. They've got models of it. They've got walkthroughs. And so, it can very exciting with all the marketing hype and things like that to try and get the best of the best in terms of property. You also have the opportunity to lock in prices. So, you purchase the property and it might be a year or 2 years before that development is finished. But, you signed it a year or 2 years ago and you got a price at that point. So, there's the opportunity to lock in the price. You have a smaller earlier commitment. You do need to put down a deposit. But, obviously, you don't assume a loan for the development until you actually take over that property and own it yourself. You also have the opportunity for depreciation. Because it's a brand new property, you can depreciate a lot of things. So that can help for tax purposes for some people. So, that's kind of the exciting things and why people think about it. But, there are actually a lot of risks when buying off the plan properties that people don't think about. So, I really want to cover them because they'll never talk about these in the marketing flyers that you get or in the consultancy call that you talk to people about this sort of stuff. They're not going to talk about these risks. They're just going to talk about how great the area is, how great this development's going to be, how you're going to lock in your price now. And so, I thought we're going to look at two types of risks. There's risk when actually buying the property. But, the larger risks are actually the ones after you've property, what happens then. I just want to start by saying that there are some good new build properties out there – new build developments and things like that. There are some that are really, really successful. And so, if you can find them, great. But, there's a lot of duds out there as well. I just want to talk about the risks and I'll leave it up to you to assess whichever new build you're looking at and you can assess whether these risks apply or not. Some of the risk when actually purchasing the property is actually inflated prices. One of the draw cards of off the plan property is that you can lock in a price now. If the market goes up, then you're buying a property at less money and, therefore, you're going to make money instantly as soon as you settle. But, the fact of the matter is, in a lot of cases, that they're actually taking in the potential growth of an area into account into the sale price of the property. Let's say, a property development is going to take 2 years. They're likely going to predict; what is this property going to be worth in 2 years' time? What is the market going to do? And then, they'll try and sell you that property today for what it's going to be worth in 2 years' time if the market goes up. Now, obviously, if the market stays stagnant, if the market goes down and you've actually paid the price for what it's going to be worth in 2 years, then you could actually be behind. And we see this with a lot of people. So, in a lot of cases, the property is over valued. So, they're charging you too much for what it's worth. Both because they're taking into account growth and also, because they can do a lot of marketing and a lot of sales in order to sell them for more money than they would be comparably worth to other properties on the market that are already in existence. So you just need to be really careful there, you need to be really savvy. The best way to combat this is, rather than just looking at the unit and looking at the prices that they give you and comparing it to other prices in that same off the plan construction, actually go away and say, "Okay, I'm looking at a 2-bedroom unit that's got 1 bathroom and an en-suite, this sort of size." Go away and look for products on the market today. So, existing units that are similar to yours – 2-bedroom with an en-suite, balcony, whatever it may be. Try and find ones that match yours in a similar area and look at the prices of those and then compare them to each other. Because these are the properties you're going to be competing with when you actually own your new build property and so, it's important to know, "Okay, what's the price difference? Am I overpaying for this property or not?" So, inflated prices are a big risk because, as well, a lot of properties are sold through property marketers who get a big commission when they sell you one of these off the plan properties. So, there's a big commission bagged in which can increase the prices as well. You also need to be careful when buying for falling property prices. If you lock in a price today and the market doesn't go up as you predict. But, it actually goes down, well you've locked in the price and so, what they market as, "This is the best thing. You lock in prices now, you're going to get it cheaper." can actually work against you because if you lock in the price and then the property market goes down $100,000, then you're still locked in on that price. So, be very careful with falling property markets. There's also rising interest rates can happen in between when you decide to purchase the property and when the construction is finished. Your situation may change in that time as well. Maybe you'll lose your job or have kids or decide to travel, etc., etc. Which may make getting a loan hard or may make it hard to re-pay the property. 2 years is a pretty long time in my eyes for situations to change, jobs to change. I've had a friend of mine. I was talking to him just the other month and he was talking about his job, how he loves it and how he could see himself working there his entire life - unless, of course, the company gets liquidated. And just the other day, the company unfortunately got liquidated and he's now without a job. He'll probably find another one. He's a good worker and things like that. But, situations can change that can affect your ability to purchase this property or whether or not it's actually good for you. There's also the risk of bankruptcy with the development. The development could become bankrupt and not get finished, etc., etc. I believe that risk is pretty rare. That doesn't happen all the time. It does happen, but it's not going to be super common. But, it is a risk, so I thought I would talk about it. But, what I really want to talk about is the risk after purchasing a property. And I want you to listen to these risk and then think about comparing it to maybe purchasing an existing property instead and the risk associated with that. The biggest risk that I see and it kind of all comes down to this – is the potential for oversupply and competition. So, oversupply, let's look at that. If you buy off the plan, let's say you buy in a unit complex that has 150 units. When the construction is finished on that unit complex, all of a sudden, 150 properties are flooding the market. They might be sold to owners already, so let's say 30% of those are to renters. All of a sudden, 50 new properties are available to renters in a market where there might only be 10 properties a week that come up. This can lead to oversupply as well if there's other developments in the area or in neighboring suburbs and things like that. Then, a market can get oversupplied quite quickly. I've seen this most recently in Darwin where things were going really well in Darwin. But then, all of a sudden, we're seeing vacancy rates or 9-10%. People can't rent out their properties. Tenants can go around, look at properties, they can negotiate and haggle on price. That's not a situation you really want to be in. You want to be in a situation where you can charge more because there's so many people coming through the door. Oversupply can be a big issue in these developments and something that you need to think about.