In the current market, I suggest buying an established apartment, say 3 or more years old, will be a less riskier than buying brand new or off the plan. In my opinion, here are the pros and cons.
Many Australians have been burned buying properties off the plan.
There are risks associated with developers not delivering on what they promised. There’s also the risk that you agree on a purchase price, only to realise when it comes time to settle that the market has declined and you’re now over-paying for the property.
There’s also the risk that your financial circumstances will change between paying the deposit and settlement time, and you will find it difficult to obtain finance. If you’re unable to settle on the property at the agreed time, you risk losing your deposit.
Despite all these risks, astute investors can enjoy significant benefits when buying off the plan. Many developers need a set number of committed sales before they can proceed with the development. This means they may sell some properties at discounted rates early on to achieve the required number of sales.
Furthermore, if the real estate market is growing strongly, the price you agree to pay when making your deposit, may be lower than market value by the time the building is complete. This could give you a substantial amount of instant equity in the property.
So if you decide to go ahead with buying off the plan, and are willing to accept the associated risks, what are some of the key things to consider so you can increase the odds of success?
1. Understand the Contract
Off the plan contracts can be complex, with many provisions to protect the developer. Make sure you seek legal advice before agreeing to sign any contract.
Some of the elements that you should look for in a contract include:
A cooling off period of several days after you sign the contract.
Carefully examine all the plans for the property and building. These plans may be subjected to change if they haven’t been fully approved by the local council.
Also, developers can make some moderate changes to the plans, so make sure you know what your rights are in the event that they make changes that are detrimental to you.
Once you pay your deposit on the property, the funds will be held in a trust account and invested. Make sure you know who gets to keep any interest accrued on these funds.
The fixtures and finishes in the development may be changed by the developer, on the assurance that they do not prejudice the buyer in any way. However, if you feel that the developer has included fixtures and finishes that are of lower quality than you were expecting, what rights have you got to withdraw from the contract and receive a full refund of your deposit?
The developer will give an expected completion date, but you should know exactly what your rights are in the event that the developer is unable to complete by the expected time.
2. Know the Developer
In an ideal world, all developers would be trustworthy. Unfortunately, prior experience has shown that is not always the case.
Before agreeing to purchase any property off the plan, do some background checking on the developer. A good place to start is their website. Make sure all the details are correct and you can identify who the directors of the company are. Conduct online searches for all the directors, as well as the company’s previous developments. If there were any major problems, these should become apparent.
You should also obtain the licence numbers of the builders working on the project and verify that they also have a good track record.
3. Home Warranty Insurance
Check that the developer has home warranty insurance to cover any costs associated with non-completion of the project.
Be aware that many lenders are reluctant to lend for off the plan developments. Lenders may be concerned that the market will decline, resulting in investors who have paid top dollar for a property that is now worth less.
To mitigate their risks, many lenders will only agree to an 80% loan-value ratio. This means you have to obtain 20% of the sale price before the lender will agree to finance your purchase.
If you’re unable to obtain finance by the time the property is complete, you may be forced to forgo your initial deposit. Get advice from an experienced mortgage broker regarding finance.
Finally, if you proceed with an off the plan purchase, you should be vigilant and regularly monitor progress on the development. Make sure you know if the development is experiencing hurdles in the local council, if various stages of the development are being completed on time, and if there are any other issues causing delays.
While buying off the plan may be more complex than other types of purchase strategies, if you do your homework, you can reduce the risks. Ultimately you can acquire a desirable property for a good price if you understand the pitfalls.
What about a 2nd hand apartment?
If you're like me with a conservative risk profile, buying an established apartment may suit you better.
A second hand property with a few years under its belt will have any building / strata issues ironed out, the strata levies are set at realistic levels, and they can be bought at incredibly good prices with similar or better quality to a new one.
Buyers are entitled to look at the minutes of strata meetings to get a glimpse of the condition of the building. You'll be able to see whether they have had to deal with issues in a building. You can get a pretty good idea in a 10-year-old building whether there are problems.
Developers also tend to set proposed strata levies at the lowest possible level to make it attractive. Invariably they increase once the true cost of running and maintaining the complex emerges over a couple of years. Then there is the inevitable warranty maintenance required for for the first couple of years as the building settles and other nagging issues are dealt with.
There are good developers and good builders out there but you don’t know who they are anymore. Some of the good ones are now producing worse quality. You simply don’t know if the builder you are dealing with is going to close down tomorrow, whether they are on the edge and cutting corners.
My advice to people in the market for a new apartment is don’t. Don’t buy until it is four, six, seven or 10 years old plus. There is some great buying at the moment and you'd be crazy not to check out a used apartment in great inner city lifestyle locations such as Highgate, East Perth, Northbridge, Mt Lawley and West Perth.
For more information about buying an apartment that suits your needs, give me a call today and take advantage of my 20 years inner city apartment sales experience.