So what does ‘off-the-plan’ actually mean?

Quite simply, it means you commit to purchase a property before it has been completed – indeed, often before construction has even started. It’s more common for this type of property to be part of a larger scale development – such a unit complex.

For many buyers in Australia, the appeal of off-the-plan property is that the property will be brand new and you can typically pick internal fixtures and finishes based on your budget.

You can also secure it on the day of launch simply by putting down a relatively small deposit. If upon completion the property increases in value, then the buyer also enjoys a capital benefit.

So is it this simple?

Let’s look at some (to be considered seriously) pros and cons.

Pros

The buying process

First of all it is (generally) a lot less complicated than a normal existing property transaction. The developer will have their solicitor in play and all the usual legal searches will have been completed. This means when you view the plan/site, you can exchange there and then.

The selection

Another advantage is selection options. Unlike purchasing an existing property (which only becomes available when the owner’s ready to sell and in ‘as-is’ shape), with off-the-plan, you can often choose from a range of different styles – from townhouses, units or studios and even the exact location of the property within the development block.

And as everything will be new, a new build warranty will be available which could be (up to) 10-years on construction defects.  Also, compared to an older building there will (or should) be, very few maintenance issues for the first few years.

Capital gain

In Australia’s (generally) overheated property market, you can often enjoy capital gain while the property is moving through the planning, approval and construction process. It is not unheard of to see some investors see an appreciation in the tens of thousands of dollars! Be mindful, however, this is not always the case.

Holding your money

As you only have to put up a small off-the-plan deposit and then nothing until completion, none of your larger purchase money is tied up or in case of a loan, you have not had to draw on or make interest payments.

Short term rental guarantee

You can, in certain investment circumstances, negotiate a rental guarantee as part of the settlement process. One year is typical. This mean that regardless of what is happening in the property marketplace, you will be guaranteed a certain rental return for the first year. This can help ease the initial cash flow concerns in situations such as where a large quantity of apartments is released at once and tenants have a lot of choice.

Cons

Higher (overall) buy cost

We all know buying property is the largest financial transaction you’re likely to make and one of the disadvantages of buying off-the-plan can be the price. These properties can be more expensive than comparable existing properties – sometimes priced 10 per cent to 20 per cent above the local market because they’re ‘shiny and new’ and sell a particular lifestyle!

Size differential

As well as cost, off-the-plan properties are generally smaller than existing comparable properties and in many cases, there are no options to extend and add value. This could be a big issue for a growing family or the happy home renovator.

Finance

Despite the ease of signing the purchase paperwork, in Australia’s current restricted lending environment, securing a mortgage on an off-the-plan property can be more difficult than on an existing bricks and mortar property.

Indeed, if the buy price is already inflated, the lender may not be prepared to give you a mortgage as in the case of repossession, it may not get back the original amount loaned to you.

This is a big one to be aware of so talk to your lender before you sign anything!

If you are looking at this as an investment opportunity, while you can be rewarded with large returns when the market is rising, in a falling market, however, you may find yourself liable to complete a purchase which is worth less than you paid.

Delays in completion

If your property’s completion date extends beyond an agreed lender finance date – typically six months, you need to be sure you will be able to extend or replace your mortgage offer. The lender’s agreement to purchase is still valid and they will be held to their contractual obligation to purchase even if the mortgage offer expires. Banks don’t like this – so guess who’ll wear the penalties?

Services

As with other leasehold properties, there will most likely be strata fees for facilities such as pool, gym and lifts – and these quarterly charges can be very high. Make sure you know what they are going in.

The long and the short

So there are clearly pros and cons with off-the-plan buying. We also note we have only listed a few of each – so we strongly encourage you to seek advice before your commit to an off-the-plan buy.

Always look at the project in its entirety and never be fooled by a glossy brochure.

At Property Alchemy, we specialise in property management for investors and have the strategic alliances to be able to provide you with sound advice on off-the-plan purchases. We encourage you to talk to us!