Buying off the plan

[sabre_ac]

I am thinking of buying an apartment in inner perth (central) off the plan, settlement in 2011.

What are some of the pro's and con's of this kind of investment, I must say I am attracted to e idea of buying in now and paying later. However I realise there must be a few obvious down sides.

 

[Papa G]

I am thinking of buying an apartment in inner perth (central) off the plan, settlement in 2011.

What are some of the pro's and con's of this kind of investment, I must say I am attracted to e idea of buying in now and paying later. However I realise there must be a few obvious down sides.

Pro - I don't think you have to pay stamp duty.

Con - Could look very different from the drawings. You have no way of judging the quality of the workmanship or fittings.

 

[Jimmy_the_Gent]

Some positives:

Buying 'Off the Plan' means reserving a property in a new development before the property is completed, for a set selling price. The developer is usually very keen to sell as many properties as early as possible so prices are normally extremely competitive. The price also reflects the difficulty of purchasing when there is nothing to show potential purchasers except a floor plan and artists impressions of the finished development.

Benefits of buying ‘Off the Plan’

· Only 10% deposit is required to secure your chosen property. This can be invested into an interest bearing account or can be borrowed using products like deposit power or bank guarantees.

· You do not settle until after the development has been completed and title is issued. If the development is not due to be completed for say 12 months, then you have secured a property at today’s price but you don’t start paying for it for 12 months. It is not uncommon for a property to be bought and sold again prior to completion.

· Many developments are built for Holiday Accommodation. These provide better security, higher income potential and the opportunity to holiday in your unit every year if you choose.

· Good tax incentives utilizing depreciation benefits etc. Get advise on taxation issues to increase your overall investment

· Overseas investors can buy ‘Off the Plan’ in Australia Click Here for more information regarding Foreign Investment

How can a high return be possible?

1) Lower prices offered by the developer initially.

As discussed above, the developer is keen to sell the properties as quickly as possible so prices are normally very competitive.

2) Best properties get sold first.

Normally when a development is released a pattern emerges, i.e. penthouses, corner units, best views and ground floor with private gardens tend to sell first.

3) Show home available/building commences.

As soon as the main structure of the development starts to take shape and/or a show home is opened, prices normally increase substantially as prospective purchasers can see much more easily what the finished development and individual properties will look like.

4) Final Completion achieved.

Once the development is finished you will be the owner of a brand new unit in a new development with beautiful gardens and a pool. The person who wants to buy at this stage is usually prepared to pay significantly more for somewhere they can move into or rent out immediately rather than when the development was just a plan on a piece of paper and a plot of land.

The reasons listed above explain why prices should normally increase as a development is built.

http://www.cpq.com.au/off-the-plan-info.html

And negatives"

There are many risks for a purchaser in acquiring a property which he cannot inspect. The purchaser cannot see what the property looks like, the standard of finishes, the practical layout, the size and dimensions or the view or the outlook.

These problems can only partially be overcome by viewing a demonstration unit, video presentations and sample finishes. In addition to the aesthetic issues, there may be financial factors which the purchaser will find difficult to estimate.

These include the anticipated state of the rental market at the time of completion, projected property values at the time of completion and estimates of likely maintenance contributions which will be payable.

A purchaser should make every effort to understand the issues which will arise in construction of the development; apart from the unit itself, these will include the style, appearance and finish of common areas, likely noise, proposed security system, visitor parking, access to garages, ventilation, garbage disposal and landscaping.

To develop an understanding of such issues in a particular project requires painstaking research and healthy scepticism; a purchaser should not buy off the plan "on a whim".

http://www.afsd.com.au/article/aip/austinv6a.htm

Another decent site: http://www.homesite.com.au/new-homes-and-land/tips-and-guides/off-the-plan-contracts

I'm sure you've run into all these site sabre but thought I'd post them up anyway for people who are interested.

For what it's worth, a workmate of family member has made a fair amount of money buying off the plan and she's swears by it.

 

[FIGJAM]

Obvious risks are associated with not knowing what views, finishes etc. are, but I think the greater risk is paying more on settlement that the actual value of the apartment is.

Forget stamp duty savings...they go straight into the developers' premium.

The developer will charge you more than what a similar 'secondhand' apartment is worth. Often they will also assume the market is going up and charge what they think it will be worth in a couple of years...plus their 10% premium. Then there are some developers who have zero ethics and will swindle you through smoke and mirrors and have you paying riddiculously over the odds, or they sell it to ignorant interstate/overseas people (resulting in a two-tier market situation).

I'm an expert in inner city apartments and I wouldn't ever buy off the plan. Ever. I have seen one development in Port Melbourne where the 'Off Plan' purchase was the valuation upon completion, and that is only because the market in this suburb went through the roof.

Typically, people lose money. It may only be on paper for a brief period, but there's opportunity cost involved and if you have to sell quickly for whatever reason, then you will lose plenty of wealth.

Imagine in 2003 buying a $500K house in Albert Park, compared with an apartment in Docklands. The apartment has recovered to be worth about the off plan price, whereas the AP property is worth $900K.

Like I said, be careful. Pay for a property valuer to give you advice, as the $500 you spend may save you $50K. Developers are sharks and you have to watch out.

 

[bunsen burner]

I am thinking of buying an apartment in inner perth (central) off the plan, settlement in 2011.

What are some of the pro's and con's of this kind of investment, I must say I am attracted to e idea of buying in now and paying later. However I realise there must be a few obvious down sides.

Con - are you f*cking nuts?

Unless you're buying in Claremont or Leighton - don't touch it.

 

[bunsen burner]

Pro - I don't think you have to pay stamp duty.

Only in Victoria as far as I know. Everywhere else you pay stamp on the complete purchase price.

 

[bunsen burner]

Obvious risks are associated with not knowing what views, finishes etc. are, but I think the greater risk is paying more on settlement that the actual value of the apartment is.

Forget stamp duty savings...they go straight into the developers' premium.

The developer will charge you more than what a similar 'secondhand' apartment is worth. Often they will also assume the market is going up and charge what they think it will be worth in a couple of years...plus their 10% premium. Then there are some developers who have zero ethics and will swindle you through smoke and mirrors and have you paying riddiculously over the odds, or they sell it to ignorant interstate/overseas people (resulting in a two-tier market situation).

I'm an expert in inner city apartments and I wouldn't ever buy off the plan. Ever. I have seen one development in Port Melbourne where the 'Off Plan' purchase was the valuation upon completion, and that is only because the market in this suburb went through the roof.

Typically, people lose money. It may only be on paper for a brief period, but there's opportunity cost involved and if you have to sell quickly for whatever reason, then you will lose plenty of wealth.

Imagine in 2003 buying a $500K house in Albert Park, compared with an apartment in Docklands. The apartment has recovered to be worth about the off plan price, whereas the AP property is worth $900K.

Like I said, be careful. Pay for a property valuer to give you advice, as the $500 you spend may save you $50K. Developers are sharks and you have to watch out.

1. If you do your diligence then you can buy off plan at market price (or slightly above). Develpments like Adelaide's Newport Quays are one such development that is over priced. But there's plenty that are market value (or slightly above).
2. You are not an expert. You are a doomsayer. I bet you have f/a in the way of property investments.

 

[bunsen burner]

Sabsi, I am no expert on stamp duty, but i think the above comment is incorrect. I think you would need to lodge your contract at state revenue within 2 months of signing, and then you need to make payment within 2 years from the date of signing. So if you sign now, you would pay stamp duty in approx 2010. (But of course you should check this for yourself)

The main risk sabsi is that if the asset price fall between now and 2011, then you will be locked into a contract for a purchase price above the market rate. This is obvious. But obviously this works both ways. If prices go up, then you will purchase the apartment for an amount well below the market rate - meaning you could on sell the apartment straight away at a profit.

I guess you need to make a decision about where you think prices will head in the next 3 years.

Correct - and the Parth market is likely to go down more than up in the next 3 years. Either hold on or buy off plan in Melbourne.

 

[Tim the Toolman]

Only in Victoria as far as I know. Everywhere else you pay stamp on the complete purchase price.

That's probably because our stamp duty is so high to start off with!

 

[FIGJAM]

1. If you do your diligence then you can buy off plan at market price (or slightly above). Develpments like Adelaide's Newport Quays are one such development that is over priced. But there's plenty that are market value (or slightly above).

When I deal with new apartments, I give leeway to those apartments which are brand new.

Within a perfectly flat market, I find that the reasonably priced apartments that you are talking about, are typically 5-10% above what they would resell for if offered to the market through a local real estate agent once tenanted.

Naturally, there are crooks out there. For example, I valued an apartment from a bloke buying a 2 bedder off a developer for $650K. He was from Perth. It was tenanted. The one directly below it sold for $405 and was practically identical. That is classic two-tier marketing, as the bloke purchased it sight unseen through financial advisors.

I agree with you that you can find reasonably priced new apartments if you are dilligent. Soooo many people aren't though bb, and that's the truth.

Still, in all likelyhood, you will see a reduced value if sold within a 2-3 year period, or you may see the following which I will use as a recent example. Docklands property, purchased new for $660K in 2004, lived in for three years, market has gone up about 10% in 2007, valuation date is end of 2007 with identical apartment directly above having resold for $667K, and that's about what it is worth. The owner and bank then want to know why if the market has gone up 10%, why the apartment is the same friggen value. Variables such as depreciation and a shorter marketing campaign that the developers have something to do with this, among about 100 other variables. But the premium paid over the odds will eventually have to be absorbed by the purchaser.

This is why I would flip my dough into a similar 'secondhand' apartment. You would have pocketed the 10% rise and also the 5% or so return.

The apartment market in Australia is relatively green. In Ireland, people queue up overnight to buy off the plan, because there is stuff all developable land. At least in Melbourne, that ain't gonna happen for at least 20 years. There are continual supply issues in this regard.

2. You are not an expert. You are a doomsayer. I bet you have f/a in the way of property investments.

I am a property valuer who specialises in inner-city apartments. I am an expert and can be called as such in a court of law. That's good enough bunse!

I am also not a doomsdayer; I am a realist. I cannot afford to be either optimistic nor pessimistic. I'm just calling it how I see it.

 

[utility]

The owner and bank then want to know why if the market has gone up 10%, why the apartment is the same friggen value.

The following may have something to do with it...

http://www.theage.com.au/news/natio...perty-middlemen/2008/02/13/1202760398858.html

Lifting the lid on property middlemen

Lawrence Money and Suzanne Carbone
February 14, 2008

LAND tax, stamp duty, agent's commission — there are all sorts of fingers in the property pie, pushing Melbourne's crazy prices even higher. But here's another unwelcome digit you may not have known about.

A suburban lawyer has rung Diary in amazement: "I've just done the conveyancing for a new block of off-the-plan apartments. My total fee for all apartments was less than the fee the middleman got for flogging just one of them. This is just the guy who promotes the sale, not the developer, and the fee is hidden in the price." In this case, Diary understands it was around $30,000 per apartment! That's a loading of almost 10%, more than four times a real estate agent's commission.

Three times in the past week Diary has asked self-appointed spokesman for property middlemen John Hopkins how such mark-ups are justified, but we've had no reply. Hopkins, who has a penchant for cowboy hats, founded what he calls the Property Investment Association of Australia in 2004 to "develop a range of ethical and conduct standards to ensure fair practice".

As Mr Diary reported in December, "Hopalong" Hopkins and his trusty sidekick, Vivien "You know it will keep its value" Reid, sold off-the-plan CBD apartments in Melbourne between 2001 and 2003 that, like new cars out of the showroom, plunged $30,000 to $40,000 in value after purchase. Could this be explained by the hidden middleman commission? Again, no answer from Hopkins, but the Real Estate Institute of Victoria's Paul Caine told Diary last year that apartment blocks, particularly in the CBD and Docklands, were laws unto themselves — developers and their middlemen charged as much as they thought buyers were prepared to pay.

So what are the danger signs? A handy rule-of-thumb for consumers was given in a report in 2005 by the Ellis Property Group, now Preston Rowe Paterson. Beware of middlemen boasting:

■Guaranteed rent. When it fizzles out after 12 to 18 months, the rent drops to the real level, sometimes hundreds of dollars less.

■Glowing "depreciation schedules" showing near cost-free investment. They are based on the artificial "guaranteed" rent and hence are worthless.

■Saving on stamp duty by buying off the plan. Forget it. Anything saved is more than wiped out by the hidden fee to the middleman.

 

[bunsen burner]

Still, in all likelyhood, you will see a reduced value if sold within a 2-3 year period,

Ever considered that many investors know which markets are on the rise and which developments are likely to get good growth? You're sitting here doomsaying and saying buying off plan is a bad percentage play?

or you may see the following which I will use as a recent example. Docklands property, purchased new for $660K in 2004, lived in for three years, market has gone up about 10% in 2007, valuation date is end of 2007 with identical apartment directly above having resold for $667K, and that's about what it is worth. The owner and bank then want to know why if the market has gone up 10%, why the apartment is the same friggen value. Variables such as depreciation and a shorter marketing campaign that the developers have something to do with this, among about 100 other variables. But the premium paid over the odds will eventually have to be absorbed by the purchaser.

Great you picked an example of someone who bought in a flat market not long after a boom. Of course that's going to happen if you buy at that time.

This is why I would flip my dough into a similar 'secondhand' apartment. You would have pocketed the 10% rise and also the 5% or so return.

The idea of buying off plan is to buy when the market is moving upwards. From 6 o'clock to 9 o'clock. Buying off plan means you don't have to pay straight away - that's a big advantage.

I am a property valuer who specialises in inner-city apartments. I am an expert and can be called as such in a court of law. That's good enough bunse!

You're kidding yourself. People are making millions by muying off plan (yes, of course there are losers too), but here you are with what seems little investing experience and proper knowledge telling others what the go is?

I am also not a doomsdayer; I am a realist. I cannot afford to be either optimistic nor pessimistic. I'm just calling it how I see it.

You are seeing it skewed. Seen countless people prosper out of off plan. Seen a lot more people who profit than lose and the people who profit profit far more than the people lose who lose.

What happens id you buy off plan at 10% over and the market turns downwards? You just hang out and ride it out. All you lose is opportunity. And when the market does go the right way you profit greatly. If you buy off plan and can afford to hold it then that's worth risking.

 

[Tim the Toolman]

■Guaranteed rent. When it fizzles out after 12 to 18 months, the rent drops to the real level, sometimes hundreds of dollars less.

■Glowing "depreciation schedules" showing near cost-free investment. They are based on the artificial "guaranteed" rent and hence are worthless.

■Saving on stamp duty by buying off the plan. Forget it. Anything saved is more than wiped out by the hidden fee to the middleman.

3 points here and as I'm not well versed with doing the quote / unquote thing that many of you do I'll write on each of these together

1. & 2. With regards to guaranteed rent I've known for years that this was always loaded into sales prices and I keep on telling everyone I know this fact yet people still fall for it? I guess a sucker is born every minute and a fool and his money are soon parted. The depreciation shedule is not the 'glowing' document as it merely shows the depreciation on fixtures and fittings on any property and needs to be signed off by a Quantity Surveyor. I think what you'd be referring to is a marketing cash flow showing, based on one's current tax situation, how an investment property could pay for itself. IN Melbourne I couldn't see any property paying for itself without a substantial deposit as it just can't be done (except for a display home with has a loaded price to start off with or a commercial lease arrangement but = higher risk) and the only way to make the cash flow work is to provide a substantial lease arrangement and I've seen these guaranteed rents coming in about 7-8% which is approximately double the realistic rent. I first saw these in Queensland 14 years ago and have been wary since. There are many stories of houses being sold by mortgagees because all of a sudden the mortgage repayments could not be met with such a dwindling rent after the guaranteed term finished and the mortgatgor has not got anywhere near the price of the house that it was purchased at because it was loaded with commissions and rent. Yet people still fall for these cash flows and the marketers will continue to do it!

3. I believe FigJam spoke about this before and I see what he/she is referring to here and I apologise for my comments regarding to SRO making all stamp duty accountable. What FigJam was saying is that whilst you save on the Stamp Duty, the commissions taken by referrers etc... is taking up the apparent saving of stamp duty. As FigJam is a valuer working in inner city, he or she would see a lot of this and obviously knows what they are talking about. As I work in the industry of outer suburbun construction, we don't see much of this as it just won't stack up on valuation as it's very tight but the inner city is a law unto itself as rightly pointed out in the newspaper article recently.

 

[FIGJAM]

I'm a bloke Timmy!

 

[Murray]

Interesting .......

 

[Tim the Toolman]

3 points that I was responding to there you idiot, not 3 points to make.

I guess a Collingwood supporter from Frankston explains the package?