What are the risks of buying off the plan?

I want to say, up front, that I am not a fan of buying off the plan because there are a huge number of risks. And, it really bothers me that a succession of Federal and State governments continue to encourage first home buyers and mum & dad investors to buy off the plan just so that they can stimulate the construction industry.

Now that I’ve got that off my chest, here are three big risks you need to be aware of when buying off the plan.

The first risk is that you can’t settle.

When you first sign a contract for a property that’s expected to be completed in a year or two, you might have no problem getting finance. But things change. In recent years, APRA has forced the banks to tighten up their lending practices, which means that a lot of buyers have not been able to settle on their apartments.

The issue here is two-fold. Firstly, there’s an opportunity cost. If they’d bought an established property instead, they could have secured an asset and possibly enjoyed capital growth in the meantime.

Secondly, they will no doubt suffer financial penalties for not being able to complete the purchase.

The second risk is that it’s a poor build.

A new building has no history on which you can base your decisions. It’s a fact that a large proportion of new buildings have major problems which are extremely disruptive and cost their owners a lot of money.

Builders go broke, developers go broke. All buildings have defects and often the claims are not 100% covered by insurance. There’s often litigation. It can take years for repairs to be addressed.

This can be very stressful if you are living in the property, and if you’re an investor you might find that tenants won’t stick around or they want a substantial rent reduction for the inconvenience.

The third risk is that you will lose money!

Research has shown that more than 50% of new apartments bought and resold between 2011 & 2016 in Melbourne sold at a loss. In Brisbane and Sydney, off-the-plan apartments grew in value at a markedly slower rate than older apartments.

Why is this? Firstly, you are paying a premium for brand new. It’s like a new car, the minute you drive it out of the showroom, you’ve lost money. It can take a number of years before it’s even worth what you paid for it.

The second reason is that a lack of scarcity and a full development pipeline will impact growth. If you are buying a boutique apartment in an established area, this might not be an issue, but if you are buying in stage one of a new land release, you could be in for years of stagnant (or negative) growth.

Now, these are not the only risks, but they are biggies. I really encourage you to look instead at existing apartments and I’ve put the link to my apartment buyer checklist in the notes to make it easier for you.

Checklist for apartment buyers.

Further Reading:

5 Things To Look For When Choosing An Apartment

Do apartments increase in value more than houses?

Published: 3rd October, 2018

DISCLAIMER: The tips included in this video are intended to be of a general nature. Please contact us for advice that is specific to your individual circumstances. You may also need to get advice from other professionals such as an accountant, mortgage broker, financial planner or solicitor.

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