At Worth Property Investing, we’ve seen far too many horror stories of investors who’ve bought off-the-plan properties, only to be seriously burned.
While we don’t advise against all off-the-plan investments, we feel very strongly that if you’re considering buying property this way, you need to undertake some additional due diligence to ensure you’re protected.
The fact is that buying off-the-plan means buying sight (or site) unseen.
Most people wouldn’t consider buying an article of clothing without first trying it on. Nor would they buy a new sofa without sitting on it first. Yet we often see people invest their hard-earned savings into an unbuilt property without doing the necessary research or background checks.
Off-the-plan investing is riddled with potential pitfalls.
Here are some of the more common ones we’ve encountered at Worth Property Investing:
Pitfall 1 – Inflated Prices
Developers often price properties at what they think the property will be worth by the time the development is complete. Rather than charging you today’s value, you end up paying a price based on an estimated future value. Such long-term estimations of the real estate market are riddled with complexities, and nobody can really tell what a specific property will be worth in several years’ time.
To avoid this pitfall, make sure you do your research to understand the real values of properties in the area you’re investing in. Make sure you are paying current market prices and not a price based on a hypothetical future value.
Pitfall 2 – Unsure of Market Trends
Market trends are notoriously difficult to predict within a specific geographic location. There are so many variables to consider that are out of your control. If you’ve paid an inflated price for a property based on an estimated future value, you may find yourself in financial difficulties should the market be flat or even decline.
If you are in a position that you need to sell your investment, you may find you have negative equity – owing more to the bank than the property is worth. Alternatively, if you plan to rent-outthe property, your rental yield may be less than expected, in which case it may not cover your monthly mortgage repayments on the property. These are all important reasons to be careful that you’re not paying too much for a property!
Pitfall 3 – No Flexibility
It may seem like an attractive proposition – you need only put down a relatively small deposit to secure an investment property. However, once you’ve made your deposit, you lose all flexibility.
The property may take 12 months, or longer, till completion. During that time, the market may depreciate. Alternatively, your life or financial circumstances may change. Despite all of this, you have no flexibility and are committed to a property at a pre-determined price.
Failure to settle on the property at the specified time may result in you losing your deposit.
At Worth, we’ve seen too many clients lose thousands in circumstances such as these. Buyers have been left having to fight legal battles which have been costly, time-consuming and stressful!
Pitfall 4 – Locked-In to a Declining Market
Once you’ve paid your deposit, you’ve committed to paya specified price for a property, even if the market declines.
Failure to settle on the property can result in you losing your deposit, even if your investment property is now worth less than what you’ve committed to paying for it.
Pitfall 5 – Limited Value-Adding Opportunities
With a newly built property that you’ve bought off the plan, there are limited opportunities to add value to the property. One of the great advantages of real estate investment is that you can do renovations to increase a property’s value. By then sell the property, you’re able to pocket the additional value you’ve created.
However, the scope for value-adding to a brand-new property is very limited. This is particularly the case with apartments. There’s very little to fix or improve. When investing in property, you want to have a level of control that doesn’t come with other investment classes such as stocks.
Pitfall 6 – Commissions
Believe it or not, it’s often the case that the person marketing the property to you, is NOT part of the company developing the property. They are simply a salesperson who will earn a commission from the sale of the property to you.
Often, commissions are camouflaged within the building costs – leaving you totally unaware how much commission the salesperson is actually making. However, you end up paying an inflated price to cover their commission, whether it’s $5,000 or $50,000!
Avoid this pitfall by asking the salesperson if they earn commissions. An evasive answer would probably mean they do.
Pitfall 7 – Oversupply
Another pitfall is an oversupply of properties by the time your off-the-plan property is complete. Large apartment developments, or house and land packages, lead to large numbers of properties hitting the market at the same time.
If you’ve bought off-the-plan and need to sell the property soon after completion, you may find there are many other similar properties being simultaneously listed, decreasing the value of your investment. This could also make it hard to rent your property, with depressed rental returns.
How can Worth help you?
At Worth Property Investing, we’ve seen all the tricks developers get up to. We’re here to help you find the right investments and avoid the pitfalls associated with off-the-plan developments.
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