Fancy earning part of your deposit for nothing by simply buying the property before its built? Perhaps an off the development purchase might be the free kick you need*…
If purchased correctly and with care, off the plan apartments have the potential to be a sound wealth creation tool. However, like many investments, they are fraught with danger and are a much riskier proposition than buying a property that is already built.
Of course, like any real estate investment, proper due diligence and research on key metrics such as amenities, suburb growth, demographics, schools and transport should be factored into your decision. Potential future stock coming to market should also be considered. For example: Kings Cross (2010) has little space for new developments compared with Parramatta (2150) where there is an endless supply of stock coming onto the market. Greater supply equals fewer opportunities for capital growth with plenty of stock for tenants to chose from. Lots of stock equals lower rental yields.
Tips and Traps: Off the Plan Developments
Below we share a number of tips and traps to navigate purchasing off the plan property. Although they do not negate any of the risk, they provide insight to help you see through the glossy sales material. We divide the purchase into three distinct chapters: Pre-Sale, Contract Negotiation and Settlement.
Chapter One: The Pre-Sale
Developers Former Projects
Most off the plan developments have showrooms which are sparkly, new and fresh. They aim to win your heart though confuse your rational mind. I encourage clients to look beyond the visuals of the showroom and research and consider the developers former projects. If you can, go to an open inspection for one of their older projects to get a feel for the development and materials used. This will help you gauge the quality of the finished product and how it has aged. Although this is over-kill, running a strata check on former projects will also allow you to gauge the building defects post settlement.
Do a developer “Google-Stalk”, check reviews and other social media searches to understand both the positives and negatives. You’ll be surprised at what you can find…
Lastly, well-known, established builders with multiple projects under their belt is something you should be aiming for.
Check the Development Application
Most projects submit a Development Application to council before they hit the market for sale. The development plan includes architectural drawings, models and are much more detailed than a glossy sales brochure. Other fascinating things you will find includes shadowing and the cost of the project.
A good example is the City of Sydney DA Search. Here, users can search by suburb and street and download the plans lodged with council. I often find these helpful to check ceiling height, common areas, ventilation shafts and garbage chutes to ensure the apartment isn’t in the vicinity of something which may impact property value or rental demand. Reviewing these plans will be the most valuable part of your research. You’ll also be able to check how the building meets (or does not meet) council standards.
Chapter Two: The Negotiation
Not all developers allow deposit bonds though I encourage you to ask the developer or sales agent if they will let you use one. Rather than pay cash, which is best left in your offset account saving you circa 4% of interest each year, the funds can be best used to grow your wealth in other areas.
Deposit bonds act as a substitute for cash and “guarantees” the deposit using collateral (such as your home or investment property). If you don’t settle on the property, you still owe the deposit so its therefore critical that your finances are in order. Settlement risk is important and I encourage you to work with as many professionals as you can to ensure this process is smooth and without complication.
The cost of a deposit bond is calculated on the time to settlement, the sunset clause, the deposit required and property cost and typically is between 1% and 2% of the purchase price.
If you are short liquid cash, this is a very powerful and simple tool to get your purchase over the line.
Increasingly, I am seeing Land Tax payable on off the plan purchases where the purchaser is effectively paying the land tax for the developer. Land tax is paid annually and if you settle on your property early on in the year the cost can be prohibitive.
I would encourage you to get a strong solicitor who specialises in property (rather than a tick and flick conveyancer) to negotiate this off the contract for you. Depending on the development and time of settlement, this could save you many thousands of dollars. Some developers wont budge though its worth asking and could potentially result in many thousands of dollars in savings…
Chapter Three: Settlement Time
Valuations and Money for Jam
Many off the plan developments have a time lag (anything from 18 months to 3 years). In this time, the property has the potential to increase in value. Beware, during this time, property prices could equally decrease giving you negative equity.
Valuation time is where many mortgage brokers show their worth. Some lenders will value the apartment at contract of sales price. Others, however, will value the property on market value. For example, if you purchase an apartment in Surry Hills (2010) in 2016 for $1,000,000 and property prices increased 10% in this time, you have $100,000 in new equity that you can use as deposit*. In this example, you have an extra 10% deposit which may be the difference between Loan Mortgage Insurance or not, or the ability to obtain a much cheaper interest rate.
Not all banks do this so partnering with a mortgage broker such as Private Capital Management will help you navigate this complex process.
- Thoroughly research the developer to ensure they look after your best interests;
- Review the development application and architectural plans to check your property is well placed;
- Use a deposit bond (if you can) to maintain your liquid cash;
- Negotiate paying land tax out of the sales contract; and
- Find a bank which will value the property at market value (not contract of sales price).
*We use this as a hypothetical example and do not guarantee that you will make profit on an off the plan purchase. We have used an example in Surry Hills looking at the potential price increase which may happen. Just like any investment, property prices could have decreased by 10% over this same period. The examples within this commentary are general in nature. We recommend that you obtain professional Mortgage Broking advice before you proceed with any property purchase.
About Private Capital Management
Private Capital Management was established to provide clients an integrated, intelligent and holistic mortgage broking and wealth management (financial planning) experience. Our values and ethos are built on exceptional customer service, with trust and ethics guiding our work to the highest standard.
Nathan Ide has over 13 years financial markets experience within Investment Banking, Investment Management and Wealth Management and has worked within some of the worlds largest banks. Nathan has presented at TED looking at Australia’s superannuation industry and has been a frequent presenter at the Australian Securities Exchange.
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