Remember when the Harry Potter films came out, and everyone got angry because film Hermione was prettier than book Hermione?
Or when the government said we’d have NBN by the end of 2012, and it’s now the end of 2015 and still no NBN?
How about that time you paid for express post, but your parcel got lost in the mail?
Bottle up that feeling, times it by about 100, and that’s the emotional risk of buying property off the plan.
What is an off the plan property?
When you’re buying your first home, you likely search online first and then attend an inspection. Whether that’s an apartment or a house, you put away a tidy home loan deposit, get approved for a home loan, and go through the settlement period. Done and dusted!
When you buy off the plan, you’re investing in a yet-to-be-completed property. Developers offer lower prices and financial incentives when the property is all but a blueprint and a dream, giving first homebuyers and investors a brand new property (eventually).
You can understand the appeal behind buying off the plan – it gives first homebuyers and investors that extra room plan, but most importantly, more time for capital growth prior to settlement. You might even get a say in the colours of the walls. It’ll be just like on The Block!
But before you go ahead with buying off the plan and viewing paint swatches, ask yourself this:
- Do you enjoy unwanted surprises?
- Do you like financial uncertainty?
Of course you don’t. Read on smarty pants.
Risks of Buying Off the Plan
You could lose your money
When you buy a property off the plan, the developers will likely offer you an attractive price. This is because they need the demand to fulfill the supply ¬– basic rules of economics.
A development might take two years to complete, giving Sydney property prices plenty of time to increase…or decrease. Of course, Sydney property prices are on the up. But there are always ups and downs. If the property has reduced in value when settlement is due, the bank will only use the lower valuation.
You could lose your deposit
If your developer goes bankrupt, they won’t be able to finish building your property. You’d also lose your deposit if there’s no clause in your contract that specifies a deposit refund. Always read the fine print!
You might be missing a bedroom
No one wants to be this guy. Poor fella bought a property off the plan, only to discover the developers never built his bedroom with the promised sliding doors. If you’re promised a bedroom with sliding doors, you kind of expect that, right?
So why would the developers show him an artist’s impression of the apartment, and then give him an apartment that is actually illegally too small? Developers will change the specs of a design when they feel like it, and they won’t tell you. They’ll often blame council regulations, claiming health reasons. And these can be legit, but it’s often the result of poor planning. In the example above, apparently they had to remove the sliding doors to allow for ventilation. Why? Because the bedroom had no windows. They were basically building a cave.
Developers are worse than bad boyfriends/girlfriends
They’ll drag construction out till the contract pasts completion. They’ll call it off at the drop of a hat, and say it’s not you, it’s them. They just couldn’t make it work, so it’s best if you two part ways.
You’ll get your deposit back, but if you’ve been waiting for two years, you’ll experience quite a bit of heartache. Not too much losing that extremely valuable capital growth.
That’s why they do it, to resell at the higher value.
It makes getting home loan pre-approval a nightmare
Credit policies are changing all the time. Loans that could have been approved months ago would now be declined, because lenders are getting stricter with who they give credit to.
When you buy off the plan, you get pre-approval at the start of your home buying journey. You then get your formal home loan approval once the property is nearly complete. But here’s the catch – a pre-approval generally lasts three months, and most off the plan constructions take a year or two to complete. This means you and your mortgage broker need to start from scratch with finance approval closer to the completion date, making it potentially far more difficult to get pre-approval. Just because you might get pre-approval today, doesn’t mean you will in two years time.
When it comes to buying your first dream home, you need to be able to put your money down with confidence. When you buy a property off the plan, there’s far more problems that can occur than with an already existing property.
Need more advice? I’d love to help! Get in touch for my 100% genuine, honest advice on buying your first home.