While buying off the plan can be profitable, in more recent times many an investor has been caught out by a falling market and an oversupply of product. It’s important to note a valuer can only advise what the property is worth now, in the current market, and not what the property could be worth ‘on completion’ in nine, twelve or eighteen months’ time. It’s the valuer’s responsibility to use comparable sales evidence to ascertain the current figure and they are not permitted to forecast how the market will perform into the future.
So, what are the risks of buying a new unit or townhouse ‘off the plan’ and how to best avoid these?
1. Too many new developments coming on line in the one area
It’s not uncommon for local governments to approve a number of development applications in one area without taking into consideration the impact on the local market. Too much product coming online at one time affects supply and can hurt the market. Examples of this have been seen in Redcliffe and the Gold Coast in Queensland and in the Melbourne inner city apartment sector.
But avoiding this risk is not that difficult. Most local councils make the list of current development applications visible on their website. If not, simply call and ask for a list of current applications being processed and which have been approved in the last 12 months.
It’s important not to take the developer’s marketing material as gospel and to always conduct your own checks.
Check there won’t be an oversupply of similar units – call the local council for a list of current applications being processed and which have been approved in the last 12 months.
2. Not the right product for the area
Usually the developers have spent a considerable sum on researching the market and ensuring their product meets the needs of the market. But they don’t always get it right. Is there a lack of one bedroom or studio apartments? Then it’s important not to invest in a three bedroom townhouse where the demand is low.
Again, conduct your own research. There are numerous websites that provide information on the demographics of an area and the trends in that location. Call local agents and find out what’s selling fast. Also call local property managers (who manage rentals in the area) and ask what’s in most demand. These professionals are the first to see the signs of a changing market and can provide invaluable information.
3. Property overcapitalised for the area
If the property is located in a lower socio economic area and boasts luxury features, this is a sign of overcapitalisation. Look at what other similar properties are selling for in the area and don’t move too far from this price range.
4. Proposed infrastructure development doesn’t proceed
Proposed local infrastructure is one thing which is outside of the control of the developers. Their promotional material may be correct at the time of printing and they can be acting with the best of intentions when advertising proximity to proposed infrastructure. However, nothing is assured when it comes to governments and the planning process.
Hedge your bets and ensure the property is still a good investment without the proposed infrastructure improvements.
5. Finished product does not meet contract specifications
It is not uncommon that the finished product consists of PC items/fixtures which are different from the contracted specifications. Again, sometimes it’s outside of the developer’s control, but what is in their control, is what replacements they use.
To combat any issues with inferior products being installed, have the solicitor read over the contract and specify exactly what the requirements are if the listed fixtures are not available.
What it all comes down to, is conducting your own research in the above areas and not taking the word of the marketers (who are very good at what they do). Ask the developer to see the finished product of another development completed recently. It also doesn’t hurt to Google the developer’s name and previous developments to see what information is out there and what stories and blogs have to say.Share