The risks and rewards when you buy off the plan
In this short post, we cover the risks and rewards of buying properties off the plan.
Firstly what do we mean by buying off the plan?
It is common practice for developers to pre-sell their developments before the property has been built. This is usually a condition required in order to obtain bank financing for the property project.
In order to sell the property project, developers model a showroom to demonstrate what one of the units would look and feel like when built. Then the marketing team holds information evenings and seminars where they present to groups of interested buyers. Interested buyers are encouraged to sign up quick otherwise they will miss out. A deposit of 10% is often required with the balance payable on settlement.
It’s called buying off the plan because purchasers have to rely on the showroom unit and the plans to make a decision on whether to purchase or not.
What are the risks?
- Because there is no finished product, purchasers during the pre-sale stage have to rely on the showroom unit and the plans to visualise what the finished product would look like and this can lead to the following problem particularly for multi-level properties
- One purchaser who bought a New Lynn apartment found a window and bed space blocked by pillars she claims were not on the plans.
- There is a risk the developer might not fulfil their promises outlined on the contract. An article in the New Zealand herald titled “Price hikes hit NZ’s biggest apartment scheme” tells us that the developers of the Rose Garden Project is planning to ask people who already signed the pre-sale contract to pay up to 15% more for their unit. This type of risk does not happen when you buy an existing dwelling. For existing buildings, once the sales and purchase contract goes unconditional, the seller can’t just change the price.
- There is a risk that the developer might not complete the project on time. Especially for large building projects, it is probable that the developer will run behind schedule due to consent delays, financing delays and even unforeseen construction problems which extend the time taken to complete the project.
What are the reward?
The first key reward is potential financial gain.
Because the property has not been built yet, there is a risk that the development will not be completed on time. For this reason, buyers who buy in the early stages of the project normally pay a lower price than people who buy into the property once it has been built. Once the development has been finished, the early purchasers often can sell their unit at a premium compared to the price they originally paid. Particularly during the property boom period, it is common to hear stories of early stage investors who sell the unit on completion for profits of $100,000 or more.
The second key reward relates to your ability to customise the property.
While the developer determines the layout and configuration of the property, it is possible to ask the developer to add mod-con appliances and fixtures such as air conditioning or granite kitchens for a small additional cost. If you ask early enough before the developer has put in the mechanical and electrical, the developer may charge you less than what it would cost if you requested a custom made kitchen or fixture after the building is completed. Plus you get the added bonus of buying a unit brand new.
So that’s all for this post and I hope that take away the key benefits and drawbacks from buying off the plan.