This strategy involves entering into a contract to buy a property that is not built yet, having only seen the plans and drawings.
Leverage on market and time to add value
Investors utilise this strategy to create equity by using the market and time to add value as it can give you great leverage for a small amount of money as a deposit; assuming always that the market rises. Therefore, you should understand the property cycle for growth.
Have the ‘plan’ valued (cost of land and building) by an independent valuer at the commencement of the contract process, not at the end. Conduct a rental appraisal at the commencement of the project to understand the financial viability of the investment.
In a capital growth location, buy a property at least 18 months away from completion to secure a high cash-on-cash return.
You may pay only a fraction of the full stamp duty otherwise payable.
Downsides of this strategy
Interest rates could increase before you settle on the property, leading to greater costs of holding the property, affecting your cash flow.
You can ‘lock-in’ a fixed purchase price and secure the property at today’s prices, even though completion may not be for a year or more.
In a rising market, this can mean large capital gains before you move in, which is what we want.
Beware an off-the-plan property may be overpriced and there is no flexibility to negotiate a fairer price, especially if it is a retail price.
Unfortunately, there are occasions where properties purchased off-the-plan may have dropped in value by the time the property is completed and ready to settle; therefore investors may find themselves out of pocket because lenders are not prepared to lend you more than what they think the property is actually worth.
Some developers may accept deposit bonds to cover the deposit instead of you having to use your own cash.
You pay a 10 percent deposit upon signing the contract (held in a lawyer’s legislated trust account for safety and bears interest usually divided equally between purchaser and vendor on completion) and stamp duty payable within three months.
The interest cost of this deposit must be factored into your financial due diligence.
You need only pay the balance of the purchase price when construction is completed, giving you extra time to maximise and organise your financial affairs, and perhaps sell your existing home without the need for costly bridging finance.
Conduct proper due diligence
In purchasing off-the-plan, you should rely on the reputation, honesty, goodwill and the financial security of the developer.
These developments tend to be heavily marketed by skilled project marketers and you have to be careful to see through the spin and focus on the underlying fundamentals of the project itself.
Always buy in stage one of the development because it will be the best price.
You may be able to choose from a range of floor plans, internal colour schemes, finishes, and upgrades on fixtures and fittings.
Beware of additional inclusions that can significantly increase the final cost of the real estate.
Beware of contracting issues
Off-the-plan contracts can be complex documents and may contain unexpected provisions and clauses that can be to the detriment of an uninformed purchaser. Please engage an experienced lawyer to advise you.
Shrinkage clauses are commonly included in off-the-plan contracts that allow builders to ‘shave’ a small percentage of the total size of the property to be built. So an apartment that was supposed to be 100 square metres, as per the proposed floor plans, could end up being 97 square metres when built, for example.
Like shrinkage clauses, sunset clauses can be inserted into any off-the-plan contract. They allow either the vendor or the purchaser to rescind the contract if the property is not completed within a certain time frame (e.g., 12 months).
The contract should fully disclose all charges, fees, inclusions and measurements. You should be aware of whether there are any hidden charges or any other ways that the purchase price may increase. This should limit the scope and possible scope creep.
The contract should clearly specify the cost of upgrading fixtures and fittings if you do not like the standard ones. It should also include carpeting, painting, window dressings, and possibly appliances. Make sure whatever has been discussed on these matters of detail, like particular brands of fittings, are clearly stipulated in the contract.
The contract should require the developer to commence and complete construction within a specified time.
The contract should also contemplate the remedies available to you if construction is delayed and whether there are any penalties for late completion, especially on a per day basis.