- Off the plan properties often decrease in resale value
- Risks are compounded in oversupplied areas
- Do your research first or hire independently, says Pete Wargent
Off the plan properties are those which have not yet been constructed, leaving buyers solely reliant on their plans to envisage the final product.
While buyers can be drawn in with the promise of a shiny new unit, Co-founder of BuyersBuyers Pete Wargent warns prospective buyers that not everything may be as it seems.
Off the plan red flags
According to Mr Wargent, growth in the housing market often comes hand in hand with an escalating number of salespeople promoting off the plan properties.
These salespeople often use tactics such as offering ‘free’ services, or rental guarantees to nudge unsuspecting buyers into purchasing off the plan units or apartments.
“For owner-occupiers and downsizers, a desirable new unit might be a perfectly desirable choice, but the sales pitch to investors is usually based around tax benefits and rental guarantees, and the model is flawed,” Mr Wargent said.
Buyers are not made explicitly aware that the salesperson may receive commissions from developers for selling new stock, and can be swindled into purchasing a property with little selling power in future.
“The problem is that we know that new units have systematically underperformed from an investment perspective, and when the investor comes to sell, there is an increased risk of loss on resale because they are then selling a second-hand property that has lost its shine and newness premium.”
Pete Wargent, Co-founder BuyersBuyers
Mr Wargent reminds prospective buyers that Australian citizens are free to purchase any property, unlike non-residents, and that investors should broaden their search away from properties that haven’t yet been built.
Mr Wargent also advises that rental guarantees are cause for concern and depreciation allowances should not justify a purchase.
Avoid oversupplied areas
According to Don Peleg, CEO of RiskWise Property Research, areas that are experiencing oversupply due to the lack of immigration should especially be avoided if considering purchasing off the plan.
“Statistically buying off the plan comes with more risks, including construction defects, pre-settlement valuations coming in lower than the contract price, and ultimately a statistically higher risk loss on resale.”
Don Peleg, CEO RiskWise Property Research
Mr Peleg says the risks associated with buying off the plan are only further compounded in areas that are oversupplied.
Suburbs in every state across the nation are considered currently oversupplied. Schofields in NSW is in the lead with over 3000 new units on the cards in the next two years, equaling 115.7% of the suburbs existing stock.
The top take-aways
Mr Wargent warns buyers to remain cautious of those offering free services, to avoid falling into an off plan property trap.
“If you’re not paying, you are not the client – someone else is. And that someone effectively pays for the marketing campaign and the advisor’s sales commissions, which are often surprisingly lucrative at more than 5 per cent of the contracted sales price,” he said.
Mr Wargent advocates for buyers to search for existing properties instead, as these generate less risk and likely higher capital growth. He also encourages buyers to conduct thorough research or hire an independent expert to assist them, and most importantly to steer clear of anyone offering free advice.
