What you see is what you get, but that isn’t necessarily true when you are buying off the plan. Because what you see are plans and glossy advertisements, and there’s always a risk which way the property market would turn.
Buying off the plan is becoming a popular choice for property buyers in Australia, especially the investors. This is mainly because the buyers want to cash in on the increased prices later, and First Home Owner Grant being offered by many states for new constructions is further boosting the boom.
However, many buyers have lost their deposits or paid up heavily due to lower valuation of their property by the banks at completion. While financing an off the plan property is not much different from financing any other property, there are risks involved that a buyer must be aware of, beforehand.
What are the risks?
- A mortgage offer lasts normally up to 3 to 6 months. If your property is not completed within this period, you would have to extend the mortgage offer. Usually, this is not an issue with the banks but it definitely gives them a chance to change the lending terms. Most banks would carry out a valuation of the building on completion or nearing completion, before giving out a rate.
- Most of us go in for off the plan purchases to cash in on the current price and benefit from the inflated pricing once the property is complete. However, it is not always true that the property would increase in its worth. More often than not, you are over paying at purchase. Why?
- Because, the amount you agree to pay includes the money spent on advertising by the developer as well as other amounts payable to the middlemen.
- Secondly, the property rates fluctuate and they might go down when your property is ready. Other factors such as location, infrastructure, vacancy rate, quality of fittings all effect the final price of the property.
In case you have over paid, remember, banks won’t finance your extra. Lenders valuation is dependant on the actual selling price of your property and not the amount you have paid for it.
What happens when you have over paid?
As mentioned above, it is possible that the property developer over-priced the property at the time of sale or the market goes down at the time of completion, bringing the value of the property down. When the buyer finally has to make the settlement at completion, the lenders may not provide them complete financing for an over valued property. This means that either you save a bigger deposit to bridge the shortfall; or, face the consequences of non-performance of contract – the chance of losing your deposit with the seller (10-30% of the property price) and the risk of being sued for non-performance.
So what can you do to minimise the risks?
Save up a fatter deposit – One of the simplest ways to avoid the risk of lower valuation at completion is saving at least 20% of the purchase price as deposit amount. Low Loan to Value ratio loans (less than 80% LVR) do not require the borrower to take up Lenders Mortgage Insurance, which means low chance of scrutiny by the mortgage insurer and low possibility of physical valuation by the lender at completion.
Don’t let the gloss fool you – It is easy to fall for the glossy brochures that the developers use to market their property. However, don’t be blinded by what is being advertised, make sure you get an independent valuation done before you decide to buy an off-the-plan property.
Be thorough with the paper work – Do take professional legal advice before drawing up a contract. Have you checked the shrinkage clause? Is the developer bound to notify you in case of any changes in the building plan or the fittings and fixtures? Have you agreed upon the minimum quality standards for construction in your contract? What about the sunset clause and the option to repurchase at the seller’s new price once the sunset clause kicks in and your previous contract is rescinded?
Avoid the high risers – We all know that buildings depreciate in value over time but land always increases in value. Thus, it is important that you always avoid buying a property in high-rise buildings. More the number of units on a piece of land, lesser is the land to asset ratio. This means that as the number of floors in your buildings increase, your land rights decrease, bringing down the value of your property.
Safe post codes – Thorough research is the backbone of smart property buying. You must go in for an area that has performed well historically and is expecting growth in terms of property prices in the future. It is important to take into consideration the location, accessibility and infrastructure in the area. All these aspects have a bearing on the final value of your property. Certain post codes are risky post codes as they are more prone to fires, flooding, termite attacks and other natural calamities. Buying in such an area means lower rates and higher chance of scrutiny by the lenders.
Whether you decide to buy off the plan or are looking to refinance your existing house, compare home loan deals on HashChing to get the great home loan rates in the market. We also answer your home loan queries within minutes through our verified mortgage brokers online, absolutely free of cost and without any unwanted calls to you!
By: Vidhu Bajaj