How to buy off-the-plan: the pros and cons

By Staff Reporter 21 March 2013 | 1 minute read

With new buyer incentives offered by the government, and a growing understanding of the benefits, many investors are considering buying off-the-plan for their portfolio. However, property investors must be aware of how to go about this in the right way.

- Clear idea of the property’s condition, knowing there will be no wear and tear
- Full depreciation benefits
- Suits those who currently have a deposit but want to build it up before they take out a loan
- Potential for increase in value before completion
- Some buyers can currently take advantage of bonuses and concessions

- No guarantee prices may rise – they may also fall leaving you with a property worth less than you paid
- If a lender values it lower than initial purchase price, financing could become a problem
- Could tie up funds for many years if the development takes time, hindering potential opportunities
- Some buyers may find themselves slugged a ‘premium’ for a new product
- No potential for renovation or for puchasing at a discounted price

Reputable developers will warn buyers of the dangers, however slim. According to Graeme Shields, managing director of property investment planning business Property Queensland, buyers should look closely at the financial strength, reputation, quality and credibility of the developer.

“Ask the developer to show you their portfolio of completed projects as well as providing you with the opportunity to speak with previous customers,” he says.

As with any purchase, a testimonial from an independent and satisfied genuine customer of the developer can go a long way towards increasing the likelihood that your own buying experience is a good one. It’s worth talking to friends, relatives and colleagues to get firsthand feedback on their off-the-plan purchase experience.

It’s also important to ask the developer how they are funding the new development and what will happen to the deposit that you are paying. Your deposit should be held in trust by an intermediary until completion of the property. If that’s not the case, you should be asking why – and where the money is going.

Monson Property Group's director, Simon Mehegan, explains that the best developers should be able to pinpoint who the buyers and tenants will be.

"I think about the type of buyer I want to attract and go from there," he says. Pointing to a Melbourne development, Evie Apartments, he sayd that "For example, young professionals will typically want to be close to the city and amenities. The site’s size is also important, I always check if it will suit the kind of development I want to create."

Points tdevelopers consider include whether there is space for carparking and if they should compromise the size of the apartments or decrease the number of apartments. "These kinds of things will affect profitability so it’s important to consider before buying into a site," says Mr Mehegan. Investors will find that this affects their profitability as well.

"Finally, it’s worth researching other developments in the area. I go and look at other developments in the area (either already built or currently being built) to see how I can differentiate mine from the rest."

When analysing a developer, he suggests to look at these points:

- Do they have a track record in delivering successful projects? Many projects never see the light of day so make sure you do your due diligence.

- Research the architect and interior designer – do they have a good reputation? Are they known for high quality work? Look at previous projects they’ve worked on for comparison.

- Make sure details of the fixtures, fittings and appliances are in the contract so you can double check quality of the work.

- Think about what will make it attractive for tenants. Does it have carparking? Does it have an appealing / practical floorplan? Is it close to public transport? Is it close to shops and dining?

As always, the fundamentals of the area in which you buy should stack up regardless of whether the property is off-the-plan or not.

Before making an off-the-plan purchase, other considerations may include:

•    The financial strength, reputation, quality and credibility of the developer
•    The reputation and credibility of the agent they are dealing with
•    The length of the ‘sunset clause’ i.e. how long the developer has to complete the building project
•    Any ‘get out’ clauses that enable developers to cancel contracts

If, however, you're considering building new yourself, you might want to read: Be wary of building incentives as part of your due diligence.

How to buy off-the-plan: the pros and cons
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