Investors could ride the capital growth wave by purchasing tomorrow’s property in today’s market, but there are also additional pitfalls that could trip you up along the way.
As such, carrying out due diligence on your off-the-plan purchase is crucial to ensure that you sidestep these pitfalls, and that your investment is more informed than speculative.
Demand and Supply
Damian Collins, managing director at Momentum Wealth, advises investors to first research the supply in the area - not just the developments under construction, but also ones in the pipeline.
“Look around, see what other projects are getting promoted at the same time for off-the-plan sales, and see which ones are under construction,” he says.
While a development may appear to offer good opportunities, a substantial number of projects may already be underway, which could result in an oversupply in the area.
Don’t pay a premium
Gauging the price of a property that will not hit the market until three years later is difficult. However, a general rule of thumb is to compare the project to finished products on the market.
Mr Collins advises investors to not pay a premium for off-the-plan properties, even while it may have a growth prospect. If anything, investors should be offered a discount.
“You’re buying the site unseen, you don’t have the luxury of seeing what the finished product is, so you are taking a little bit of risk,” he says. “Certainly, you want a discount for buying off the plan because you’re helping the developer get their project off the ground.”
Without a discount, Mr Collins says investors are better off just buying the finished product because at least then you know what you will be getting.
Don’t just sign the contract
For off-the-plan properties, reading and comprehensively understanding the contract becomes even more crucial, as there are many clauses that you wouldn’t otherwise consider with a typical purchase.
Andrew Whitelaw, building and construction lawyer at TressCox Lawyers, warns that the devil is in the detail.
“The great tragedies can often arise where people are not aware of those speculative operations or clauses or potential pitfalls and then wonder why things might go awry,” he says. “The simple reason is you didn’t know what you were getting to start with.”
He points to some special clauses that may appear in an off-the-plan contract such as:
- The developer does not have to fulfil the contract if there is not enough interest in the development
- The developer has some form of digression in minor amendments being made to the structural and interior elements
- Simple features such as dishwashers are installed ‘to builder’s specifications’ – in other words, investors do not know what dishwasher they’re getting
Mr Whitelaw recommends investors to seek advice from an experienced solicitor to ensure there are no loopholes or ambiguities in the contract. Or even if there are, that they are brought to your attention so at least investors go in with their eyes wide open.