Is buying off the plan a good plan?


5 things to consider before you sign

Whether you're a first home buyer, an upgrader or a property investor, the idea of buying a brand new property 'off the plan' is certainly 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 potential hidden maintenance issues within an older home.

But is buying the off the plan a smart move in today's property market? Here are five things to think about before you hand over your deposit.

1. What's it really worth?

It's very difficult 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. And if the market falls while the property is still under construction, you may find you've paid over the odds.

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.

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 price1, 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. 

Getting in early can get you a better price, because property developers are often seeking quick initial sales to meet their financial requirements

2. Buying now, paying later

One of the benefits of buying off the plan is the smaller upfront commitment. Typically you need to put down up to 10 per cent, 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.

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

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' why it's wise to put 'subject to finance2' in your off the plan contract (even if you have pre-approval).

3. Off the plan incentives

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. For example, in NSW first home buyers are only eligible for the First Home Owner Grant if they purchase or build a new home. 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.

Plus, 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 part of the purchase price – even your appliances could be included.

4. 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, and the reality could be a little different.

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

Looking at a beautifully styled development sales suite showroom is a bit like shopping at Ikea. It looks like a dream lifestyle on display, but you need to get out your tape measure. Pace out the floor plans 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 the 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.

5. Get down with the locale

It's relatively easy to buy an off the plan development in another city or unfamiliar area, but you still need to do your homework on the neighbourhood.

It's important to know what other infrastructure is planned for the area – new roads, schools, hospitals and transport options will all have an impact on your property's future value.

If you're planning to rent out the property, investigate what the future supply of similar homes will be like. It can be difficult to forecast an accurate rental return (beware of any 'developer guarantees'), so be conservative in your estimations. Imagine what the rental market would be like if all the properties in your development were available at the same time – and then check local council developer applications to see what other properties you might be competing with.

And 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 check 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 a great 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.

We're here to help

Our experienced team of home loan specialists are available to help you make the right home loan decision for your situation, call us 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.