Is buying property off the plan a good plan?


Buying property off the plan can be a tempting proposition. But, before you put down your deposit, it’s wise to take time to consider the pros and cons of buying a new development.

Whether you're a first-home buyer, an upgrader or an investor, the idea of buying a brand new property 'off the plan' can certainly sound appealing.

The developer's glossy brochure invites you to picture yourself at home in a 'seamless indoor-outdoor environment', with European appliances and facilities worthy of a five-star resort.

There's no nerve-wracking auction bidding to worry about, and you don't have to think about pest inspections or the many hidden maintenance issues potentially lurking in an older home. But is buying off the plan a smart move in today's property market? Here are the things to think about before you hand over your deposit.

What's an off the plan property really worth?

It's the million dollar question and, unfortunately, it’s challenging to tell whether a new development is being offered at 'fair market value'. You don't have any previous sales records to look at, and the suburb average will be skewed by the type of home already in the neighbourhood, rather than what's planned for the future.

Even a registered valuer will find it challenging to forecast future values accurately for an unbuilt development.

“As with all property purchases, it’s research, research, research,” says Peter van der Westhuyzen, Head of Institutional and Direct at Macquarie’s Banking and Financial Services Group.

“You need to arm yourself with as much intelligence as you can,” van der Westhuyzen says. “While it’s usually impossible to do a like-for-like comparison, it’s important to cast your net wide, and take multiple aspects into account.”

“You can do a lot of research online and look at some of the similar property sales in the area for that type of property. What's the quality of the build? What's the quality of its fixtures and furnishings?

“Of course, the builder will likely provide some information, but I would certainly encourage somebody to think about multiple sources of information, to help build a full picture of what the fair value is.”

The financial pros and cons of buying off the plan

One of the benefits of buying off the plan is the smaller upfront commitment. Typically you need to put down a deposit of around 10%, and you won't need to make the entire payment until development is completed. That's why it's a popular choice for investors who don't want to tie up large amounts of capital straight away.

Bear in mind that you are still tying up your borrowing capacity. Your bank may not be prepared to give you additional loans for other investments during that construction period.

The major thing to consider is the purchase price – what you commit to is what you’ll pay, even though the property may not be ready months, or years, later.

“When you are buying off the plan, effectively, you're locking in that purchase price at that moment in time. From that point on, the risk is yours, good and bad,” says van der Westhuyzen.

“It’s vital to remember the lender won’t be able to value the property until it’s completed, so you won’t get the peace of mind of a bank valuation when you initially agree to purchase off the plan. A property might be valued at $500,000 today, but it may have an 18-month build time. In 18 months, it could be worth more than that, or it could be worth less. That’s the risk you need to weigh up.”

In the worst case scenario, if the bank's valuation at the time of completion is less than the agreed purchase price, you may not be able to borrow enough to complete the sale. That's why it's wise to put 'subject to finance' in your off the plan contract (even if you have pre-approval).

The lifestyle pros and cons of buying off the plan

While you should look to secure home loan pre-approval from your lender before committing to buying off the plan, that pre-approval won’t be valid when you get around to settling on the property. Pre-approval typically lasts three months, so it’s important you keep in contact with your mortgage broker or lender to extend or reapply for pre-approval as you approach the settlement date.

Of course, this means that if your personal circumstances change, so too may the pre-approval. If you have children or change jobs, you’ll need to update your lender or broker. Before you make any big decisions, such as quitting your job to work for yourself, make sure you know the implications for your home loan. Usually, if you’re working for yourself, lenders need at least two years’ tax returns before considering a home loan application.

“The lender can give you an indication of how much they would lend to you now, but there are lots of variables when you try to predict future borrowing capacity,” says van der Westhuyzen. “Your circumstances may change, the value of the property may change with the market cycle, and even your lender’s risk appetite could impact your loan approval at the time of settlement.”

The fixtures and fittings benefits of buying new

One of the big pros of buying a new home is that, because it's a brand new property, there should be nothing to spend once you get the keys. Everything from carpets and fixtures to landscaping is wrapped up in the purchase price – even appliances could be included.

“Everything you are buying should be brand new,” says van der Westhuyzen.

“It should be the start of life for many of the appliances and the building, and in many cases, there’s a builder’s warranty. It's almost like buying a new car. You've got certainty that things will be fixed within a certain period of time, if they don’t work as they should.

“If you buy an established property, maintenance issues may come at any point after you buy it. The next thing you know, you're spending money, and the only person who's going to pay for that is you.”

The downside of buying new property

There's a lot less guesswork with an established home. You can walk around the place and see exactly what you're buying – including room for improvement and potential for capital gain if you renovate.

And typically, if you're comparing an older two-bedroom unit with a newly built one, you'll pay less for the old one – but you may also be up for more maintenance or renovation costs in the short term.

“In addition,” says van der Westhuyzen, “you're setting the price now, and by the time you come to settle in 18 months or two years, the market could have fallen, and you’re burdened with a property that you’ve overpaid for.”

The financial incentives for buying off the plan

As we all know, it's important to understand the total cost of buying your property – and that's where off the plan has a few clear advantages.

First, there are government stamp duty concessions on new developments in most states and territories, potentially saving you tens of thousands of dollars when compared with buying an established home.

There are other government incentives as well that may be applicable, including the First Home Owner Grant. And if you're buying the property as an investment, you'll benefit from depreciation on fixtures and fittings – which can help reduce your income tax bill.

“Some of those incentives can really add up,” says van der Westhuyzen.

“There could also be incentives from the builder for early-stage buyers because, in some cases, a builder might need to show a certain number of presales before securing finance to build. It's a good look to have pre-sales, so they might offer a discount to the purchase price or some other incentive to get buyers over the line.”

Understand all the risks

It's worth remembering that the photos in that glossy developer's brochure aren't real – they're an artist's impression or an architect's render. In reality, the property could be quite different.

“Sometimes what you expect to be built and what you expect to settle on can be different to what you actually get,” says van der Westhuyzen. “When you buy an established property, what you see is what you get.”

That's why it's important to do some due diligence on the developer, architect and builder. Look at other buildings they've completed and check to see if there have been any previous problems.

Looking at a beautifully styled development sales suite showroom is a bit like shopping at a furniture store - everything looks better on display. Get out your tape measure or pace out the floorplans to see how much space you're really getting.

Think about the aspect and how much light will come in at different times of the day – if in doubt, choose a north-facing property. Check that the surrounding open spaces have not already been zoned for other major developments.

It's also smart to ask about proposed levies. Those resort-style facilities may sound great, but pools and gyms also need to be managed and maintained which can be quite costly.

Check the contract

Finally, if you're sure this off the plan development ticks all your boxes, make sure you check the fine print in the contract. Things to look out for include:

  • Are you comfortable with the 'sunset clause' – that is, the maximum time it could take to complete the build?
  • Can the developer substitute brands for fixtures and fittings?
  • Do you have a builder's guarantee for defects?
  • Will you get your deposit back if the developer goes bankrupt during construction?
  • Can you sell your interest in the development to someone else if you change your plans (for example, if you relocate interstate)?

Buying off the plan can be an excellent option for first-home buyers who need a bit more time to save but want to lock in a property purchase now. It also makes sense for investors looking for a property that's easy to manage, with a low upfront deposit. But, as with buying any property, it pays to be informed – and you need to be confident you know exactly what you're buying.

So how do you get the best value from an off the plan purchase? Savvy investors know that getting in early can get you a better price because property developers are often seeking quick initial sales to meet their financial requirements. And you'll also get first choice of the best location within the development – look for prime views or the quietest corner.

Key takeaways

  • Valuing an off-the-plan property is incredibly tricky and will involve a lot of research.
  • The price you pay is what you agree upfront - not the value of the home on completion.
  • Remember, pre-approval typically expires after three months, so keep in contact with your lender or mortgage broker to ensure you can still borrow when you settlement date arrives.
  • New builds usually require a 10% deposit, with the remainder due on settlement.
  • If you have major life changes in the time before the property is complete, your borrowing capacity may be affected.
  • Buying off the plan offers the benefits of everything being new and under warranty.
  • The opportunities for adding value through improvements are limited, however.
  • There may be concessions and incentives for people buying off the plan.
  • Beware – the photos in the glossy brochure may be different to what is delivered in reality. Visit existing homes built by the builder to get a feel for the quality.
  • If you get in early you may get a better deal.

Want to know more about the financial implications of buying off the plan? Call one of our home loan specialists today on 13 62 27.

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Unless stated otherwise, this information has been prepared by Macquarie Bank Limited ABN 46 008 583 542 AFSL and Australian Credit Licence 237502 and does not take into account your objectives, financial situation or needs. You should consider whether it is appropriate for you. All applications are subject to Macquarie's standard credit approval criteria.