Puzzle Finance Blog

Pros and cons of buying off the plan

Open the real estate section of any newspaper and you are bound to come across glossy advertisements spruiking a shiny new development being built in a prime location in your capital city, usually close to the CBD and established amenities.

With capital cities across Australia suffering from a housing shortage – which subsequently pushes up property prices – the proliferation of new developments is seen as contributing to meeting the housing needs of our growing urban populations.

One such development in Melbourne, Live Brunswick East by Little Projects, is selling off-the plan one-bedroom and two-bedroom apartments from $340,000 just 6km north of the CBD. In the inner Sydney suburb of Newtown, another new development Industri is selling one-, two- and three-bedroom apartments as well as terraces off the plan.

Buying off the plan means signing a contract to buy a home before it has been built. While there are benefits to buying an apartment off the plan, there are also drawbacks.

What makes it an attractive option

Property lecturer and author Peter Koulizos says the primary attraction of off-the-plan apartments for buyers is their location and accompanying lifestyle. “These apartments are often in desirable locations,” he says. “For owner occupiers, their number one priority is not to make a profit – it’s to enjoy a certain lifestyle and that is the appeal of buying off the plan.”

If you enjoy the thought of living in a brand new home that has had no other inhabitants before you, then buying off the plan may be for you. If you get in early, you have your choice of apartment that will suit you most, rather than choosing from what’s left at completion.

There can also be stamp duty savings, depending on which state you live in. In Victoria, you are eligible for a 40 percent reduction on stamp duty if you buy a newly constructed home for $600,000 or less. In NSW, you do not pay any stamp duty for new homes under $550,000 and receive a discount on homes between $550,000 and $650,000.

What can go wrong

Buying off the plan means you are buying something you can’t see – you are relying on the developer’s display suite to portray an accurate depiction of what your future home or investment property will look like. The result may not always be what you expect. Koulizos says developers can make changes during construction if they are running out of money, choosing cheaper finishes to finish the job on budget.

“Changes can be made without your permission,” he says. “It will be written in the contract in very fine print.”

Furthermore, Koulizos has researched the capital growth of off-the-plan apartments around Australia and has found that many apartments end up selling for less than their original price, especially if sold within four or five years of construction.

“You buy something at today’s prices in 2013 to settle on something in, say, 2016. The theory is that property price will have gone up in three years,” he says.

And generally, that’s true. What can happen with off-the-plan properties, however, is that investors tend to snap up these properties with the intention of on-selling their contract at a profit before the development is completed. “So you have a large number of apartments going up for sale in the one development, which invariably brings down the price of all other apartments,” Koulizos adds.

Another issue with buying off the plan, according to Koulizos, is the potential of an oversupply of new developments, such as what happened in Melbourne’s Docklands, where an oversupply has meant property prices have not increased in value in 10 years. Pyrmont in Sydney is another example of an oversupplied area.

If you are considering buying off the plan, Koulizos recommends the following checklist:
  • Ensuring there is at least one car park on title.
  • Look for views that can’t be built out.
  • High-quality fittings and finishes.
  • Quiet location.
  • Read the contract carefully.

Posted by RateCity on 11th January, 2014 | Comments | Trackbacks

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