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Investors warned about off-the-plan risk

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Buying off-the-plan can be a profitable investment strategy provided investors are aware of the risks, a property adviser has stated.

Owen Davis from DFG Property says investors need to be aware an off-the-plan property’s value might change between signing the contract and construction being completed.

“From the time you sign the contract, the value of the property at settlement can be different from the price you agreed to pay. This can good, if the value has increased; and it can be bad, if the value has dropped,” he said.

“It can really ruin your day when you arrive at the settlement date only to find that your bank won’t lend you the amount you requested because they’ve valued the property at less than what you agreed to pay the developer.”

In his experience, these fluctuations are caused by normal movements in the market.

However, he also warns bank valuers tend to be cautious and favour lower valuations on such properties.

“It’s the job of the bank’s valuer to protect the bank from bad lending decisions, so they’re a bit more conservative than a more optimistic developer,” he said.

“When it’s a large development, or there hasn’t been a lot of comparable sales in the area to get a guide, a bank’s valuer may err on the side of caution and inadvertently ‘undervalue’ a property.”

Nonetheless, Mr Davis said investors could also use market movements to their advantage.

“If the property value goes up, for little to no deposit you’ve secured the property under your name, paid little or no deposit and made a capital gain without paying any interest,” he said.

He encouraged investors to do their research and avoid overcommitting in case the value drops.

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