5 risks of buying off the plan
There are measurable benefits to buying off the plan. The most well-known benefits being the savings you can make on stamp duty exemptions. However, the extent of concessions you can apply for depends on the type of building you are investing in. These options include a single-lot freestanding property, a multi-lot low rise (up to 3 levels) or a high rise building (4 levels or more, excluding basements).
Here are the risks when buying off the plan that you should address before signing any dotted lines.
Sweat the small stuff
It is common to be swept up by the grandeur of a display suite when buying off the plan. However, be aware that what you see in the display suite may not be what you get in reality. Request a schedule of finishes for your particular apartment/building. You need to be able to see exactly what materials will be used in the build. This includes the fixtures such as door handles, light fixtures, kitchen benches, paint quality and the like. What happens if certain materials aren’t available when it comes time for the developer to install them? Will they replace these planned fixtures with items of equal value? Will they inform you of these sorts of changes? Be sure that the contract addresses these contingencies. Also see whether the contract stipulates whether you can visit the site during construction.
Dimensions are everything
It can be hard to properly visualize the reality of your investment. It is important to find out the exact dimensions of every room. Take a tape measure and string to a park and map out the floor plan once you have it. Be sure to be aware of the height of the rooms, measuring this against a surface, such as a brick wall, from which you can picture the room. If the developer limits the dimensions of your property during construction beyond 5%, seek to renegotiate the purchase price of the investment. Consider including this in your initial contract with the developer.
Developer’s often include their profit margin (15-25%) in the purchase price of your investment. This can also include marketing costs and incentives (added inclusions such as rebates, furniture, entertainment systems or even cars to your purchase). If your developer offers you a brand new television and entertainment system when buying off the plan, be aware that you will in the end be paying for this incentive.
Changes in the market
One of the biggest risks of buying off the plan can be deviations in the market. Just as the value of a property can increase over the time of its construction, it can also decrease. If it does increase, does the contract stipulate who earns the interest on this growth, the buyer, the vendor or both?
Changes in the market come down to supply vs demand. Are there other developments in the works nearby or lots that could be potentially bought by a developer and if so, will this increase supply beyond demand?
Be aware that changes to lending regulations and requirements could affect you in the future. It is best to leave yourself in a position where these sorts of changes won’t leave you up the proverbial river without a paddle.
Buying off the plan often involves a wait of 12-48 months before settlement. This can be advantageous for a buyer if they require this time to accrue extra capital. Be sure you seek legal advice when it comes to your contract regarding settlement.
It is common for projected completion dates to be put in the contract, however, there is always a risk for projects to go beyond these estimated completion dates. In this case it is common for contracts to state that after this date either the buyer or vendor can terminate the contract. There is the risk that a developer may rescind the contract to on-sell the development at a higher cost, yet there have been policies enacted to restrict this practice. The best thing you can do as an investor to protect yourself from unexpected delays to your project is to inquire about relevant permits and their status before signing a contract as well as researching the developer’s history to see whether they have completed projects ahead of schedule.