The Advantages and Disadvantages of Buying Off the Plan?

The Advantages and Disadvantages of Buying Off the Plan?

As the population in some of our major cities such as Melbourne, continue to grow, there is going to be more and more demand for accommodation and that likely means, people will increasingly start looking to live their entire lives in apartments.

One of the most common ways to buy apartments is when they are offered ‘off the plan’ by developers.

While this type of purchase is often promoted heavily, what are some of the advantages and disadvantages of buying off the plan?

Advantages of Off the Plan Apartments in Melbourne

One of the most important elements of buying off the plan is that you know what the price is. You lock that in at the time. In an environment when house prices are rising, this is a way to build instant, albeit speculative, equity.

At the same time, the initial deposit is often quite low and the rest of the payment doesn’t need to be made until the property is built.

Buying new properties can also attract significant Government subsidies and/or stamp duty exemptions, certainly for the likes of first homes buyers. This is something you should speak to you mortgage broker in Melbourne about.

New properties will also be subject to significant depreciation benefits if you’re an investor and you’ll be covered by the builder’s warranty.

Disadvantages of Off the Plan Apartments in Melbourne

When buying an off the plan apartment, there are a number of risk factors that most buyers won’t consider. They are drawn to the idea of getting a new apartment and potential price rises.

However, when the time comes to settle on the property, is when most buyers run into trouble. This is why it’s critical to be working with a mortgage broker in Melbourne prior to putting in an offer.

The biggest issue that buyers are faced with is valuation risk. What that means is that when the time comes to settle on the property they purchased, the property gets valued at a price lower than what they paid for it.

That can happen for a number of reason. Perhaps the overall property market has declined, or it could even happen if there have been sales in the new building that have taken place a lower values than some of the earlier ones.

What it means for the buyer is not only have they technically lost money but to be able to settle on the property, they will be forced to come up with the shortfall in cash to appease the lender. Buyers could find themselves in a position where they are needing find another 5% or more of the purchase price because the valuation comes up short.

There is also a risk that the lenders change their policy between the time you bought the property and then when you have to pay for it after it’s built. While a good mortgage broker in Melbourne can help you get pre-approved under current conditions, things can change rapidly. Look at the changes that took place thanks to the COVID situation, where many lenders tightened up their criteria considerably. If interest rates rise, that will also impact the way a lender looks at your application as you will be required to make higher repayments.

Finally, there is also the risk that your own personal circumstances change. Imagine a scenario where you lose your job, just weeks before your off the plan apartment is due to settle. The reality is that if you are not earning income at that point in time, lenders will very likely not going to give you access to finance.

Not only does that put you in a tough position, but you are also liable to lose your deposit. This situation could also put you in a position whereby you are in breach of your contract with the vendor. For example, you could be liable for the difference between the agreed sale price and the eventual sale price to another buyer, if you’re unable to settle.

There are also risks that the builder or developer goes bankrupt, which happens more regularly than many might think. 

While the prospect of speculative gains on low deposits is always appealing when buying off-the-plan, there are is a considerable list of risks that you must be well aware of before entering into a contract.

If you’re a bit unsure of the risks, please give us a call and we can look at your personal situation. 

1 Comment
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