updated 4th October 2016
Off-the-plan purchases have a lot of the advantages I have already touched on with new properties. An off-the-plan purchase is a brand new property which has higher depreciation benefits.
The stamp duty payable on the purchase is reduced because the property is not yet completed.
The Foreign Investment Review Board will allow an overseas investor to purchase an ‘off the plan’ property, where they can’t purchase an established property.
Perhaps one of the biggest advantages is that there is the potential to secure the property without putting any of your money down. Some developers accept Deposit Bonds to cover the deposit instead of you having to use your own cash. If the property is not completed for a couple of years, this is a much cheaper option and allows you the flexibility of using your cash for something else. So there is a potential equity gain for the investor to be had, even before settlement. But only if you get it right.
There have been occasions where properties purchased off the plan, may have dropped in value by the time the property is completed and ready to settle, therefore investors may find themselves out of pocket. These developments tend to be heavily marketed by skilled project marketers and you have to be careful to see through the spin and focus on the underlying fundamentals of the project itself.
With some new developments the area and type of product that is being developed may not have been tested before. This is a warning sign. Past performance is the best indication of future performance, without past performance the future performance is unknown. Therefore there is more scope for the purchase price to be set artificially as there is no precedent. You need to factor this risk into your decision making process.
Paying the upfront deposit prior to any valuations being completed commits you to the property before you have a true “value” on the property. Remember you haven’t actually “seen” the property you are purchasing. If there are a number of large developments going on in the same area, it can reduce the value of the property you have purchased even before its completed because there is an over supply (remember Docklands in Victoria?).
With large developments, if a certain percentage of the properties are not sold before construction, there is no guarantee the project will commence, which means you may have lost valuable time and missed out on other property opportunities.