Off-the-Plan Purchase and Their Risks

I noticed several times on my Facebook feeds a developer advertised an Off-the-Plan development opportunities where the end valuation would be almost twice the development cost ie. 50% return. The advertisement went onto something like “Invest now in a vast growing suburb. Total development cost including site is $2.7mil and the end valuation will be at $5.5mil, it will be a 50% return on your money”. A 50% return means, if you invest $100,000, by the time the project is finished, your money will be worth $150,000.

Sounds good to be true? Maybe, maybe not. This article is not about knocking people who are trying to do business like this, but rather, try to remind you of the risks. Investing in an off-the-plan purchase like this is almost the same as using a crystal ball to predict where the property market is going. Basically, you’re buying into the promise where it would be valued at $5.5mil. The question is, how do you know it would be valued at $5.5mil? Yes, they can say they have done all the research they can, but at the end of the day, they’re building a product which nobody would know if they would sell or not. 

“What’s the difference between this and your own house-and-land package investment property though?”, you might ask. It’s a good question, isn’t it? While you’re also bidding on people liking your product, the difference is, with house-and-land you can actually have more control over the build. You get to choose what features it needs to have and its cost. When I’m building my own house, I get to decide how my end product needs to look like. While with off-the-plan purchases, a lot of the times you don’t get to do this.  By the time it’s finished building, you’ll end-up with multiple similar-looking products competing with each other. Again, why would yours be valued higher or why would a renter choose yours over the others?

Other off-the-plan examples are apartment builds. This is even a riskier venture, especially if it’s a high-rise apartments. When it’s finished building, you’d end up with hundreds of properties all looking alike to each other.

Advantages of off-the-plan purchases

1. You leave the stress to the professionals. Let them do all the calculations, the build, etc. After all, you yourself wouldn’t know what the market might want anyway, would you? Same as managed fund or superannuation. You just leave your money to the professionals who will give you a good return.

2. The areas which these off-the-plan properties are located are often great ie. close to amenities, shops, etc.

Managing risks

Off-the-plan or not, either way property is a long game. If you can hold that property for a long time, you’re always in it for the win. So, my tips when you’re purchasing off-the-plan:

1. Check the location to ensure that economy is strong in the area. Prices and growth are always driven by jobs and financial situation of the area. The last thing you want is for the end product to be valued the same (worse, lower than) the original build price due to economy downturn.

2. Check for selling price of similar products in the area. It would take up to 2 years for an off-the-plan build to finish. And remember, the developers are mostly NOT using their own money (that’s why they try to lure you to invest in the first place), yet they have factored in their margins in the build price. Then on top of it, the marketing costs, etc. Therefore, often, the build price is already increased way more than the current market price. This is why you have to make sure that the purchase price (and the projected evaluation/profit) is according to what it should be.

3. Check if you need to pay strata fee or not. If you do, check how much you have to pay. I can’t stress this enough, but strata fee is a cashflow killer! And often, these off-the-plans purchases are in the likes of townhouses and apartments, which are attracting strata fees.

4. Check the inclusions and features you get with the property you’re purchasing and make sure you’re comfortable with them. Remember, the end products wouldn’t always look like what they were promised at the beginning. This can be due to an increasing cost, thus, at the builder’s discretion they get to change some of the specs. So you have to keep this in mind also.

5. Check demands for similar products in the area eg. rent price and purchase price.

6. Get a solicitor to run through the contract papers to make sure you’re comfortable with everything that is set in there. To minimise risk, you always need to have control, meaning, you always have to understand what you’re getting yourself into.

7. Check cashflow, check cashflow, check cashflow! This what allows you to hold your property for a long time.

Conclusion

Buying the right property is the only way. Off-the-plans or not, you need to be able to hold onto the property for a long time. And the only way to achieve this is to maximise your cashflow as much as you can. Therefore, you need to understand the costs that are involved with your property. I hope this article helps!