Yellow Brick Road: Home

Buying Off the Plan – This Is How to Manage the Risk

In this article:

Prepare for unpleasant surprises when buying property off the plan.

Buying off the plan can go horribly wrong or wonderfully right, so what can you do to ensure the scales tip in your favour?

When buying a property not yet built, it’s vital to prepare before you commit. Knowing what you’re up against and what might go wrong can give you the winning edge.

Rather than relying on the facts from a property developer, do enough research to understand the fundamentals of the purchase. Learn from unbiased sources, rather than those keen to convince you of a specific purchase because they have a vested interest.

Here are some of the risks you may encounter and precautions you can take.

Drop in value

If property values fall in the period between deposit and settlement, your property may end up valued at less than you paid for it. This outcome requires you to top up your deposit to meet the loan to value ratio (LVR) or make a new arrangement with your lender.

Avoid this scenario by buying well in the first place. Research the growth potential and trends for the location, looking at statistics on employment, demographics, median apartment price growth, vacancy rates and rents. Is there growth drivers such as good amenities, transportation and infrastructure?

The right choice of an apartment within the development is also an important consideration. Maximise the potential for capital growth and rental yields by considering issues like its outlook, its susceptibility to noise and how much storage is available.

Be wary of buying in an area where there is a lot of high-density housing development planned. When there’s an oversupply in one suburb, this can slow capital growth and restrict rental yield. Lenders may be reluctant to finance the purchase, and your pre-approval may be subject to later reviews or LVR limits.

Take the first step

Variations in design and quality

The finished project may differ to what you anticipated. Even if you view display suites and artists’ impressions, the developer may later change the design and finishes.

To safeguard against disappointment, have a comprehensive contract that sets out in plain English the details of the proposed development and quality of fixtures and fittings. The brand and model should be outlined clearly, as well as information about whether the buyer can select appliances and what happens if an item is unavailable.

The contract should answer questions such as what are my rights if the design is altered? Can I make changes to the finishes? Can I visit the site during construction? What do I become liable for if I withdraw from the contract?

Obtain legal advice on the terms of the contract and the benefits and restrictions they contain. The developer gets considerable flexibility on how the project is completed, so it’s vital that your legal representative works to protect your buyer’s rights before you sign.

Construction delays

The development may never get off the ground, or it may be delayed by planning approvals, poor weather or bankruptcy.

It’s important to check out the credentials of the developer, builder, architects and directors of the company. Find out about past projects and financial performance, including any penalty notices, license cancellations or disciplinary determinations.

Use online forums to find out the kind of experience other investors from previous projects have had with this developer. Research resales in those developments to see if there has been price growth. Also, obtain proof of insurance from the developer and know that the builders are licensed and qualified.

If the developer goes bust before completing, you may not get your deposit back. The terms of your contract will dictate the outcome, so it’s essential to seek independent legal advice.

Financing the purchase

Talk to your Yellow Brick Road mortgage broker about the best approach for funding an off-the-plan purchase. Some lenders may offer conditional approval before construction commences but won’t approve the loan formally until they have performed a valuation of the finished apartment.

Blemishing your credit record with a loan rejection or losing your deposit because the deal doesn’t go through are risks we can help you to manage.

You’ve heard about the risks of buying off the plan, now here are the benefits.

  • Government concessions
  • Capital gains from the property value rising during construction
  • Low initial outlay with a deposit as low as 10%  
  • More time to save with balance paid when construction is complete
  • Choice of apartment type and option to customise floor plans and finishes
  • Potential tax and depreciation benefits if purchased as investment.
**The information on this article contains general information and does not take into account your personal objectives, financial situation or needs. If you require further information don’t hesitate to contact the branch directly. 

Feature articles

Steps towards equality for women mortgage brokers This year’s International women’s day theme of ‘Each for Equal’ focuses on what each of us could do at the individual level to make a difference. In line with this thought, we spoke with women Branch heads at YBR to understand what made them thrive professionally.

6 Money Mistakes You Don't Want to Make Spend big in the lead up to Christmas then pay for it in the New Year. It’s an all too common habit that many of us fall into. See these solutions.

Pay Off Debt in The Lead Up to Xmas Take aim at debt now before the expenses of Xmas start mounting up. Here’s how to clean up your finances, including dealing with your credit card.

Principal and interest vs interest-only? How to choose between an interest-only and standard home loan? See if you fit into any of these common scenarios.

Should You Invest in A Holiday Home? Holiday homes – is investing in a beach shack or bush retreat a good move?

View all articles

Enquire now