Off-The-Plan - Reduce The Dubious

Market Insights
9 years ago
6 minutes

OFF THE PLAN: Pointers to reduce risk of a dubious ‘Off the Plan’ development

Buying off the plan is a strategy, which can be excellent, but it can also equally be fraught with danger. Whilst there are benefits, such as reduced stamp duty (paid on the land value only), greater value of cost of construction as a component of the overall purchase price, and acquiring the rights to the property at today’s price rather than the price on completion, there are disadvantages such as the risk being undertaken by the purchaser, as the contract will become unconditional (no longer subject to finance) long before applying for a loan to settle on the property, the developer may be pricing the development to factor in some capital growth, so the purchaser may not in fact benefit much by locking in a price on the property in today’s dollars.

There are some basic rules or rather considerations designed to lessen the risk when purchasing an investment property using this strategy.

The most important research that should be undertaken is on the supply and demand forces in the suburb in conjunction with population growth. Often property marketing companies will manipulate the perceptions of the potential purchasers of these properties by only advertising how great population growth may be in the area but not in conjunction with supply and demand. Understanding where in the property cycle the state and suburb are in will also help.

Always consider avoiding high density and/or high-rise developments. Why be forced to compete with hundreds of other people to tenant the property and compete with many when eventually selling the property. The higher the percentage of the development sold to investors rather than owner-occupiers increases this risk. Purchasing a more boutique development, representing elements of scarcity and uniqueness is a huge advantage. Banks normally will not lend above 80% in high-density developments anyway, normally not over 4 floors and 20-30 apartments.

The buyer is wise to ensure the internal size is over 50sq metres, making it more favourable for a bank to lend against it. Be careful with what the developer states the size as being as it could include walls, and wall cavities rather than the actual space between the walls. Valuers are quick to pick up on this and it leads to loans not being approved.

Seeking good advice on the purchase contract before signing is always important but there is more of a significant benefit in doing this when buying ‘off the plan’. The stipulations around the sunset clause and body corporate are important to understand. Sometimes developers may just want to corral a group of investors for maybe up to 4 years, so considering the opportunity cost with the deposit monies being tied up for this long is important. By avoiding high density and high-rise developments, the risk of long periods of construction is reduced, given there are fewer units in the development. Make sure if there is a car park, that it is listed on title in the contract.

Research the demographics of the suburb to make sure the size of unit is suitable and in demand by the type of tenant in the area. Check the trends of vacancy rates and medium prices. The proximity to transport and the aspect, such as if it is north facing are all important. Aesthetics and inclusions, and appeal are important for exit strategy and rental return. Appeal should also be aimed toward owner occupiers and tenants, a tenant may consider it more a home, and when it comes time to sell, an owner occupier may want to buy it, increasing the resale appeal is always wise.

The developer’s reputation, their previous developments are also worth investigating. Has the developer been assertive in the areas they have developed in? Are there any court proceedings against the developer/builder and what do these pertain to? Licensing issues and court cases are the negative things to look out for; the positives things are performance of previous developments, for capital gains. Consider checking www.austlii.com.au, being mindful that some cases could be less important than others such as body corporate matters and insurance claims, however, the body corporate costs and the management company handling this is worth looking into, The reputation of body corporate managers is important, i.e. strata managers, do they have a good reputation and how have they managed defects in the past. The body corporate premiums can very soon eradicate any benefit of the higher yields associated with units. Actually talking to residents of a development that has been completed by the builder can provide further confidence and security.

Discounted stock, units being sold at a discount could be a sure sign of a red light, and to walk away. If units are being discounted, it may negatively affect the price or comparable sales of the other stock in the development and surrounding developments, causing other buyers to lose their deposit by not being able to get finance due to low valuations. 10% deposit paid at the start of the process is always at risk with ‘off the plan’ developments if the buyer cannot get the loan when it comes time to settle. Rent guarantees are another warning sign and something that possibly should be avoided, firstly lenders do not accept rent guarantees for servicing (affording) the loan, secondly, the rent guarantee normally is only for a couple of years, after which it will be more expensive to own the property, so investors should not base decisions on this anyway, and thirdly, the guarantee is often built into the price. Rarely will a buyer get something for nothing.

Overall, there are many more bad developments out there than good, not just due to the developer or their reputation, but also location, supply and demand, size of development, as well as quality of inclusions, aspect and appeal.

By following these tips, a good development is more likely to be found.

Andrew Crossley is a property investment advisor and property advocate and the founder of Australian property Advisory Group, specialising in representing the buyer not the seller. He is also the author of the #1 International Amazon Best Seller ‘Property Investing Made Simple’ comprising of the 7 key tips to reducing property investment risk and create real wealth. (Busybird Publishing, $24.95). For more information visit

www.australianpropertyadvisorygroup.com.au or contact andrew@austpag.com.au