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What are the risks when buying off the plan?

Published on 01 Oct 2015 by Mark Mendel

What are the risks when buying off the plan?

Like everything in life there is always an element of risk when buying off the plan. However, buying a property off the plan does have a lower level of risk associated to it, compared to buying shares which can be quite volatile, as long as you understand what you are doing and do your homework first.

In order to get anywhere though you need to take some level of risk, but the amount of risk you are comfortable with taking is of course different for every individual and their circumstances. Someone who is nearing retirement will prefer lower risk investments compared to someone who is young and has less to lose.

Buying off the plan is a great way to build wealth by building up a diversified property portfolio. Diversification is key to reduce your risk as you spread your risk evenly and this is particularly important if you own more than one investment property.

At iBuyNew we confidently understand what the risks are when buying off the plan property and will keep your risks to a minimum. We have numerous clients buy an off the plan property with us over the years and from the trusted service we have provided, we have seen many of these happy clients return to us to buy their second, third or even fourth property.

And because they are happy with the service we have provided them, they have recommended their friends and family to use us too, giving us a high client referral rate.

In order to help you minimise your risk as much as possible, I wanted to identify what the risks are when buying off the plan and how you can protect yourself as much as possible.

So, what are the risks when buying off the plan property? Here are our top 16 risks you need to be aware of before you buy:

Top 16 risks when buying off the plan

1) Developer goes under – A major risk when buying off the plan is the developer goes bankrupt. Many buyers fear that means they will lose their deposit, but if you are sensible and your deposit is held in a trust account then your deposit is safe. The only thing you have lost is time in the market.

2) Dodgy developers – Unfortunately there are some dodgy developers out there. By using a ‘dodgy developer’ your property is at risk; whether it is from poor quality of work or not seeing a project through. It is therefore in your best interests that you use a developer that is highly reputable and is known for their high quality work. It is best to research the developer first and look at their past projects and whether there have been any previous disputes.

3) Building defects – As you are buying a property before it has been constructed, you are relying on the quality of the builder and developer to do a good job. However, upon completion you might come across some building defects. Upon settlement you can do a settlement inspection with your agent and note down any defects which require fixing first. The developer will then have three months to fix these issues. However, to avoid any major building defects it is best to use a reputable and high quality developer that has plenty of experience.

4) Rising interest rates – Although the interest rates at present are at an all-time low at 2.0 per cent, you also need to be aware that interest rates can rise. By the time your property has settled, interest rates might have risen, which means your mortgage repayments will be higher. Before buying your property, you should speak to a mortgage broker and work out exactly how much you can afford and what is the highest point you can go to if rates do rise. It is important that you have some room in your budget for movement.

5) Falling property market – Property markets can fluctuate daily, monthly and yearly. This means that you might end up paying too much for a property if the market does fall.

6) Liquidity Risk – When buying a property, it is important to have other liquid funds available such as cash or shares in times when you need money fast. In the wrong market, properties may take some time to sell if you need to sell up quickly. To counteract this, you could consider buying a property in a high demand area, which would be easier to sell than in an area that has low demand.

7) No rental tenants due to oversupplied market – If you have bought in an area that is oversupplied then you might find it difficult to secure rental tenants for your investment property, because you are facing a high level of competition. You therefore want to buy in a market that is undersupplied with a high level of demand. It is best to research this before you buy and to find out how many developments have been approved or are planned for the area in the future as this will affect your ability to rent out your property.

8) Development does not go ahead (check for pre-approval) – Sometimes a builder may not have received pre-approval. This means that the development does not go ahead and you have wasted valuable time waiting for something to be built. You therefore should check that a developer has gained pre-approval for the works to go ahead first to avoid any delays.

9) Risk of not diversifying – You might have come across the old saying, “Don’t put all your eggs in one basket”, which essentially means do not risk everything on one venture. What this means for property is that you should buy properties in different locations, at different points in the market, so if one property market takes a tumble, not all your properties will be affected.

10) Wrong property type for area – Another risk when buying off the plan is choosing the wrong property type for the area. You might want a three bedroom property, but the demographics in the area are mainly singles or couples, requiring just a one or two bedroom property. It is therefore essential that you carefully study the area to see the types of properties already here and the demographic profile of the area.

You can easily do this by looking online at various tools and statistics, as well as looking at recent property sales in the area. You might also want to walk around the area to get a feel for the locality.

Even though you might want to live in the property, when it comes to sell it may prove difficult to sell as you are targeting the wrong demographic.

11) Agreed fixtures, fittings and inclusions not correct – Although not a major problem, you might find that come settlement, the fixtures, fittings and inclusions that were agreed upon are not honoured or what you expected. You should therefore get your solicitor to check your contract before signing. If this is something you are worried about then you could always get the contract to have a list of all the fittings/fixtures and appliances to be included with your property.

12) Opportunity cost due to lock ins - As an off the plan property can take several years to complete, you are locked in to this property and contract as you have handed over your deposit. If for whatever reason you do not end up buying that property, you will lose your deposit as well as time in the market – the opportunity cost as you are unable to buy anything else during this time period. It is also likely to mean that two years later, property prices have increased and you have missed out on any capital gains.

13) You can’t physically see it – One of the biggest emotional risks when buying off the plan is that you cannot physically see or inspect the property you are going to buy because it has yet to be built. This means that you need to rely on floor plans, schedule of finishes and CGI images. This seems to affect first home buyers more as they build more of an emotional attachment with the property, compared to an investor who will sensibly buy with their head.

14) Property might not go up in value due to being overvalued from the start – If you have not carefully done your research beforehand you might discover come settlement that you have paid over the odds for your property from the start and in the two years since signing the contract, your property has not gone up in value. To help minimise this risk, you should look at property prices in the local area before buying to find out the current property prices and how much growth the area has seen.

15) Finance Risk – By the time settlement occurs, your circumstances might have changed since when you first purchased the property and you are unable to raise the funds, or be approved a loan by a lender to purchase the property. This means you will need to sell your property to someone else to alleviate yourself of the legal obligation to complete the contract.

16) Legislative Risk – You might choose an investment strategy based on the current tax laws and regulations. However, the government can change these laws and regulations at any time which could adversely affect your investment property. One of the major legislative risks at the moment is whether negative gearing is ruled out or not. The majority of properties are negatively geared and some investors rely on the tax deductions such as depreciation to end up in pocket.

Whilst being aware of the risks when buying off the plan property is all well and good, you need to take precautions to minimise this risk and have a plan in place. At the end of the day you are the one buying the property. One important step for you to do is to ensure you have a Solicitor or Conveyancer who can check the terms of the agreement to ensure that you are protected if something bad was to occur. You should also research the project and developer to check they are reputable.

At iBuyNew, we can show you how to minimise your risk when buying off the plan. We only work with reputable developers and take on high quality projects in areas we believe will benefit from good growth. So, if you are ready to buy a property off the plan, then it works in your favour to book a meeting with one of our expert Property Consultants today by phoning 1300 123 463.

Mark Mendel

Mark is the Founder and CEO of iBuyNew.

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