Buying a property that is yet to be built is a popular strategy, particularly for first-time homebuyers. It offers the potential for stamp-duty savings, time to save more for the deposit, and, of course, the opportunity to move into a brand-new home.
While the glossy brochures and artists’ impressions can be appealing, purchasing property off-the-plan is not without risks, particularly in a falling market. Here we outline the four key considerations to be aware of before you sign on the dotted line.
Research the market
An oversupply of stock in the market can also substantially affect the value of property. Despite approvals for new projects falling sharply, CoreLogic data1 says 252,000 new apartments will hit the market between 2018 and 2020. Both the Sydney and Melbourne markets are expected to have excess supply, which will further weigh on the falling property market.If you are an investor, you may also want to look at vacancy rates as this data can help to paint a picture about the health of the rental market.
Suburbs where demand is strong and property values are still rising are therefore a much safer bet.
Before making any property purchase, it pays to research the market in your target area. When property prices are falling, buying off-the-plan could mean locking in a price today and losing money (or bank financing) before you even move in.
Check out the developer
Do a background check on your developer and builder to find out as much as possible about their previous projects. Do they use quality builders? Do they deliver projects on time? Have there been any failures? Make a point of visiting some of their projects so you can assess the finished product first-hand.
It is also worth contacting the builder licensing authority in your state to check if any complaints have been lodged about the developer.
Another consideration in off-the-plan property purchases is the reputation of the developer and builder behind the project.
Look into your finance options
To mitigate their risks, many lenders will only agree to an 80% loan-value ratio. This means you may have to obtain 20% of the sale price before a lender will agree to finance your purchase.
Speak to your mortgage broker about your financing options as failure to secure finance by the time your property is completed could put your initial deposit at risk.
While most off-the-plan developments only require a 10% deposit, many lenders are concerned that the market will decline, resulting in a property that is worth less.
Understand the contract
Some things to pay attention to include the length of the cooling off period and expected completion date. You should know exactly what your rights are in the event the vendor is unable to complete the property in the expected time.Buying a property off-the-plan can be a sound investment. But as with any property purchase, do your research, get to know the local market and always ensure you are not paying too much.
It is also worth looking into whether plans have been approved by the local council and what your rights are if the finished property does not meet the specifications or quality you were expecting.
Off-the-plan contracts can be complex, with many provisions in place to protect the developer. Make sure you seek legal advice before agreeing to sign any contract.
1.CoreLogic Settlement Risk Report, 2018