What is off-the-plan & why do people warn you to steer clear?
When it comes to property, in Australia the majority of people buy ‘second-hand.’ That is, properties that have already been built – from homes that are just a few years old, to perhaps a couple of hundred years old in the case of federation era homes or terraces.
A second, and much less understood category, is new property or buying ‘off-the-plan’.
With first home buyers returning to the market in force, a trend largely attributed to government incentives – most of which are only available for buying new or off-the-plan property – we have put together a comprehensive ‘buyers guide’ to buying off the plan, to share our expertise in this specialised area.
What is off-the-plan property?
Buying a house, apartment or townhouse ‘off-the-plan’ means signing a contract to buy a property that is yet to be built. You can view the developer’s plans, designs and renders for the property, but can’t view a physical building.
Typically, purchasers pay an initial 10% deposit, with the balance of funds not due until construction is completed. Construction time varies, it could be only a few months or some years – with houses generally completing faster, and apartments taking longer.
What are the pros and cons of buying new or off-the-plan property?
First home owner grants and stamp duty savings may be the first draw card for many, however, there are other significant factors which greatly increase the appeal of off-the-plan property, particularly for investors with a ‘buy and hold’ strategy. There are also some factors to be aware of prior to making your purchasing decisions.
Depreciation benefits
History tells us that the longer you can hold a property for, the better that investment will perform, which is why we recommend a ‘buy and hold’ strategy to all our customers. But property investing involves costs beyond the purchase price like maintenance, repairs and ongoing bills. Without proper cashflow management, these bills can become too much for some investors, forcing them to sell their property.
Over time, any building and the assets contained within it will experience wear and tear. Current legislation allows the owners of any income producing property to claim this wear and tear as a tax deduction called depreciation. Buying off the plan comes with greater tax depreciation benefits than buying an established property because of this wear and tear – meaning that a greater portion of your property expenses and bills are offset against your tax return, working to improve your overall cashflow.
New properties are also easier to hold as they generally require less maintenance and fewer repairs than established properties. Because they’re often fitted with the newest technology, for example LED lights, water-saving taps and solar panels, their ongoing bills are usually lower too.
More choice
Depending on how early you get in, buying off the plan gives you more choice on the location and finishes of your property. For houses, this can mean choosing a position that is closer to the park or in a more tucked-away part of the development. For apartments, you could have the option of what level, aspect or floorplan you choose.
When buying second hand, these same choices don’t exist – in fact, you have very little choice at all. If you buy a property second hand, you can only pick from those that are on the market, which may not be in your preferred street, or ideal floor plan layout. In some cases, you may have to wait years for your preferred property to come on market as they are so tightly held.
Buying off the plan means you have more choice, which may have a big impact on the return on your investment over time.
More time to save
Like with any property purchase, you’re required to pay a deposit upon signing the contract for an off the plan property with the balance due upon settlement. Off-the-plan properties don’t settle until the property you purchased has been built, meaning there could be a period of months or even years between paying the deposit and paying the full purchase amount. Saving a 20% deposit can take a lot of time, and delay people getting into the market. With off-the-plan you generally only need to pay 10% or perhaps even less to secure your property, and then you have time (usually 2+ years for apartments) to save the remainder of your deposit – a strategy that many of our Ironfish customers utilize.
Price
Early on in the sales process, the developer is motivated to sell as many properties off the plan as they can before they start building as they generally have a quota of properties they must sell before construction can begin.
To encourage these early sales, the developers may set their pricing at quite an attractive rate, but once construction has begun, don’t be surprised if you see these prices go up! With the majority of a development sold, and time to sell down any remaining stock as construction progresses (sometimes over a number of years), developers will often look to increase pricing and sell the remaining properties over a longer period of time.
First home buyer incentives
For first home buyers, some states and territories offer incentives for buying off-the-plan. Concessions on stamp duty and cash rebates are the most common incentive offered, which can be a saving of tens-of-thousands of dollars. For many first-home-buyers, this is an appealing option to help get their foot on the property ladder.
Stronger rental yields
Imagine if you were a tenant, comparing an old home vs a brand new home, complete with contemporary floorplan, architecturally designed spaces and new appliances. If you’d prefer the newer home, you’re not alone – brand new properties are more in-demand with tenants, leading to lower vacancy rates and higher weekly rental amounts.
What else do you need to know?
Uncertainty
When you purchase a property off the plan, you are committing to something that has not yet been built. It’s a big commitment that comes with a degree of uncertainty. The quality of the developer and their ability to finance the construction is one of the biggest uncertainty most purchasers face. Keep in mind, any company can create amazing renders, but not all developers are able to deliver a property to the standards you may expect and in the timeframe you were hoping.
Engaging a team of experts and doing your research is key to overcoming this uncertainty. The right team around you can help navigate these uncertainties by knowing the signs of a reputable and trustworthy developer, and helping you understand the terms of your contract and your entitlements – as well as what is open to change.
Changes to the property
Depending on your contract terms, during the construction period, developers can be entitled to switch out appliances and fittings for ones of similar quality or make small changes to the floorplan. Reputable developers who put their customers first will avoid doing this as much as possible, so make sure you do your research on who you are buying from. A good solicitor will also ensure the contract protects you from potential changes, and will alert you to any pertinent clauses.
Valuations
In order to get a loan, your bank will need to undertake a valuation, which is where an appointed independent valuer will visit the property and assess how much they think it is worth. This applies regardless of whether you are buying a new property or second hand.
Valuation is an opinion, and can vary depending on the specific valuer who assesses your property. No matter whether you buy off-the-plan or second hand, you should be prepared for a potential valuation shortfall – you’ll need to cover the difference if this is the case.
It’s also good to know that if a valuation does come in short, you can choose to order another valuation to find a valuer who understands the value proposition of the specific property.
What are some typical off-the-plan properties?
When people think off-the-plan, most immediately jump to apartments. But any property type can be purchased off-the-plan including townhouses and houses – usually referred to as ‘house and land’ packages.
We have a buyer’s guide for each of these off-the-plan housing types.
Ironfish have helped over 10,000 Australians purchase off-the-plan properties nation-wide. We research the markets in our 6 largest cities looking for great locations, and then identify outstanding properties within those locations.
Every property we recommend undergoes a rigorous selection process, considering the developer, builder, architect, delivery, timings, price, location, contracts, owner-occupier appeal and much more.
Using our group buying power, we pre-negotiate prices and contract terms for our customers. After purchase, our team work one-on-one with our customers to walk them through the settlement process and help them navigate the process.
We completely understand that buying off-the-plan can feel challenging and buying ‘sight-unseen’ can feel scary. Ultimately, our aim is to help people to purchase with confidence, so more Australians can get their foot on the property ladder sooner and get closer to achieving their longer-term property goals.
To find out more about how we can help you, enquire here.