Buying off the plan (OTP) appeals to many home buyers as it presents an opportunity to secure a brand-new property that no one has lived in. Alongside this there are some financial benefits associated with buying OTP.
However, while the idea of a shiny new apartment or house might seem appealing, OTP purchases come with some significant risks. From delays in construction, defects in the final product delivered to financial uncertainties, it’s essential to weigh the pros and cons carefully.
The Risks of Buying Off-the-Plan
- Construction Delays and Rising Interest Rates OTP buyers often face lengthy delays. Imagine committing to a new apartment or townhouse and planning to move in within a specific time frame. However, as construction progresses, you hear less often from the developer and you start to get news that completion is being pushed back – multiple times this happens. The delay might be a few weeks, months or longer.
A client of ours bought OTP and endured completion being delayed almost 2 years. Aside from the inconvenience of the delays, as the delays mounted, their pre-approval expired and with interest rates rising, their ability to secure a loan was in jeopardy.
- Risk of Defects and Quality Issues Buying something that doesn’t yet exist means you’re committing to the unknown. Every property has some defects but unlike established properties, OTP properties can’t be inspected before you commit to buying.
What do you know about the developer and builder behind the OTP property you are looking at? Do they have a reputation for quality? Are they doing the work themselves or contracting it out? Do they have experience in managing this to ensure all works are quality? Yet even reputable developers can encounter issues. Resolving defects after moving in can be a lengthy and stressful process, often requiring legal involvement.
- What you see is not always what you get Developers has scope within a contract to make changes to the property that you are buying. Broadly speaking the changes can’t be significant. It might just be a cosmetic change but it might be a small reduction in the size of an apartment or change to the configuration.
- Builder Insolvency In today’s market, even established builders are not immune to financial troubles. Should the builder go bankrupt, you could be left with an unfinished property or, in the worst-case scenario, lose your deposit entirely. Builder insolvency can result in lengthy legal disputes, financial losses, and emotional distress, all while leaving you without the promised home. Very few builders will step in and take over a build midway and when they do, it invariably is at a higher cost.
- Depreciation and Diminishing Value While a newly built property sounds appealing, it’s important to remember that value typically depreciates the moment it’s handed over. The initial “newness” premium fades quickly, and as more properties flood the market, values can stagnate or even decrease. Unlike established properties with proven market histories, OTP properties lack certainty in future valuations. One of our clients bought an apartment OTP in St Kilda, only to sell it six years later for $80,000 less than the purchase price. This is a harsh reality many OTP buyers face – and it can be particularly problematic for investors expecting growth.
- Fall in property value – Due to the time lapse between when you buy and when you settle, your property is likely to rise or fall with the market. That is great for the purchaser in a rising market but hurts if prices fall and can make getting the required level of finance hard or most costly.
- Price does not necessarily equate to value – The price set by developers represents the price that gives them desired profit. It does not necessarily reflect the apartment value. So at times we see banks valuing properties at less than what clients have paid for the property
To illustrate how the last 2 points can impact a client, here is an example. A client bought an OTP apartment for $415,000 and planned to borrow $394,250 (95% of the purchase price and the max loan possible). As settlement approached and we sought a full loan approval and the lenders valuation came back at $390,000 meaning that the bank would only lend $379,500, leaving the client short almost $15,000 in funds. Whether this was because the client paid too much or because the property value had declined the impact was the same. Fortunately, family were able to give the client the additional funds needed.
Advantages of Buying Off-the-Plan
Despite these challenges, buying OTP can still have advantages, especially if your priority is to live in the property rather than seeking a financial return.
- Brand New Property – For owner-occupiers, the allure of a brand-new home with modern fixtures, fittings, and amenities is undeniable. You can often choose the finishes, fixtures, and even floor plans (houses more so than apartments), creating a space that suits your lifestyle. OTP buyers frequently enjoy the peace of mind that comes with brand-new appliances, warranties, and a property that needs minimal maintenance initially.
- Potential Stamp Duty Savings and Developer Incentives – In some states, buying OTP can mean substantial stamp duty savings, particularly if purchasing as an owner-occupier rather than an investor. Additionally, developers may offer incentives such as appliance upgrades, free furniture packages, home theatre rooms or minor customisations to attract buyers.
While these incentives are attractive, it’s essential to keep in mind that these upfront savings do not necessarily translate to long-term gains. Also, when it comes to bank valuations, the bank will back out of the price you paid the “steak knives” thrown in (eg furniture package) as it is only interested in the value of the property.
- Depreciation deductions – If you are buying an investment property OTP then you will have increased deductions in the early years, maximising your negative gearing benefits due to significant depreciation deductions for the property.
- Time to Save – With an OTP purchase there is an extended time between purchase and settlement (unlike with existing properties), giving you extra time to save before the final settlement. This can be beneficial for buyers able to save strong amounts during this time. It can mean a reduced loan amount or an increased buffer post settlement. However, this also carries a risk, as changes in the lending market (lending policies) or personal circumstances (e.g. losing a job) over time can complicate a buyers’ ability to get a loan approval come time for settlement.
- Increased value – In a rising market the value of the property you bought OTP may have risen materially since you bought it. This might help you to reduce or void Lenders Mortgage Insurance or secure better interest rates.
Off-the-Plan: Good for Living, Risky for Investing
OTP properties can be a suitable choice for owner-occupiers who plan to enjoy the home’s newness, location, and amenities. However, for investors, the OTP route is often high-risk and low-reward. Potential returns are less predictable than established properties, with many OTP investments leading to diminished resale values and slower growth compared to established homes. We have often seen investors sell properties they bought OTP for 10-20% less than what they paid (especially inner-city apartments).
Final Thoughts
While there are some potential benefits to buying OTP, the risks are high. Significant financial losses, delays, and potential defects make OTP a challenging choice, particularly for investors. If you’re considering OTP, make sure to weigh all factors carefully and consult with a knowledgeable broker to understand how financing options may change over time.
Are you considering buying OTP? Our team at Hatch Financial Services is here to help you navigate the complexities of property purchases and ensure your next home is a solid investment.
