As buyers advocates we won’t buy a client a property that we wouldn’t buy for ourselves. There are several types of properties that we won’t touch and off the plan properties are among them.
Over last couple of decades we’ve spoken with hundreds of property investors who have bought off the plan, only to see other properties in the building selling for a lot less than they paid. Understandably, they’re concerned that after four or five years they are not seeing any growth in their investment while the rest of the market is growing at near record pace.
Paying a premium, for limited return
We all know what happens to the value of a new car when you drive it out of the showroom. The price you can sell it for drops by as much as 20%. The value of it remains the same, but you’ve paid a premium price for a brand new product which is no longer brand new, you can’t pass that premium on. The same principle applies to property.
Who benefits from off the plan purchases?
When it comes to off the plan purchases, the developer makes a great profit and the marketing company and the sales person or trusted adviser all receive their commission.
But what about the buyer? They often pay a premium price to purchase off the plan, only to find themselves holding a property worth 20% less than they paid for it.
Forced sales set the market value of other properties in the development
After taking ownership of an off the plan property there are always some investors who cannot afford to keep their properties and are forced to sell. Forced sales often take a significant loss. The forced sale price then becomes the market value for other similar properties in the building.
Most forced sales come about because of poor financial advice, or some combination of lower rents and higher holding costs than originally advised by the selling agents or advisers (some of whom may be employed by the buyer).
When a new car sells for a second time no one really cares too much. However when a new property sells for a second, or third time in a short period of time it can make buyers wary. These sales results are logged on to several databases, all of which can be accessed by many people – including the buying public.
Why off plan properties are seductive
There are usually two things that seduce buyers when it comes to off the plan purchases. These are:
Stamp duty savings
Many buyers find paying stamp duty on just the land component of the purchase, instead of the capital improved value, an offer too good to refuse. But the reality is you can often buy these properties a couple of years after they are completed at a reduced cost. The savings in these situations are usually significantly greater than any stamp duty savings you might have made by purchasing off the plan.
Minimal deposit of 5%
A lot of buyers are attracted to buying off the plan because they only have to pay a 5% deposit to secure their property, rather than the usual 10% or 20% in the established market. However, it is not unusual for the property to be valued a lower cost at settlement, which means the buyer may struggle to get the finance they thought they would when they purchased, leaving them having to find additional funds to complete the purchase.
Are you prepared for a five to eight year lag?
On average it takes eight years for an off the plan apartment, and five years for an off the plan townhouse, to be worth what you originally paid.
While the rest of the market is prospering and growing by 7 – 8% growth a year (or more in recent years), off the plan buyers often find themselves treading water for five to eight years before they begin making any money.
Guard against lost opportunities
Buying the wrong investment property could mean you end loosing money, rather than making money – all while missing the opportunity to increase your wealth.
It only takes one mistake to set you back eight years in your wealth creation. Making the right decision can often allow you to leverage your investment and buy a second or even third investment property within a couple of years.
Good advice makes all the difference. Most people will only buy property a handful of times in the lifetime. At IPB we do it day in, day out, and have for the last 25 years. That’s why smart property investors partner with us to buy, manage and sell their properties.
