Buying off the plan - pay a deposit, wait few years and settle with capital gain, or sell with profit, right? Wrong! Investing or speculation? Follow investor’s rules when looking at residential or commercial apartments, here are same considerations.
Buying apartments off the plan sucks
Buying off the plan - Good investment decision or not?
Selling agent’s talk - buy off the plan, pay a little deposit, wait and settle with capital gain, easy like that making good profit when selling. Marketing talk, it is just speculation. Nobody really knows what an investment product will be worth when it comes on the market. The developer sold a “promise” and when completed who knows what it is worth money in terms of quality and whether the market goes up or down at the time of settlement?
Buying off the plan might be interesting for people trying their luck by playing LOTTO, but as investor you would breach basic property investing rules:
· Never trust promotional figures on glossy leaflets painting a rosy future. Nobody can ensure predictions and know the economic future years ahead. Just believe in reality- who did predict the credit crunch 2007 and the following economic crisis, did anybody see Japan's tsunami or Canterbury’s earthquake coming?
· Never buy anything you can’t check in terms of standards, quality and market value. Why would you think the leaking house crisis is over, because of the changed building code, nowadays used treated timber, detection of substandard workmanship?
· Never enter a business relationship with a ”body” that does not exist at the time you sign a contract. Remember, the developer engaged body corporate management and controls everything, but that body corporate changes at settlement. So, the first year’s very optimistic budget is given by the developer for reasons to make profit. I have seen cases where “developer’s” body corporate failed to claim for repairs and services under warranty. In following years the new elected body corporate management (chairman, committee, building manager) was not able to remedy issues with appliances, the building etc only to pass on related costs to the apartment owners.
· Never peculate by selling for profit before settlement. The problem is when a number of new apartments come onto the market the stiff competition might push profit out of seller’s reach. Seen few times the market value dropped considerably at the time, ill speculated, can you offset loss?
The basics of selling off the plan
Developers have to present reasonable profit margins for getting finance. That has to be built into the selling price. To follow this through the sales funnel must include a substantial budget for the advertising agent. In other words the cost for agents, full-page ads and expensive glossy brochures are buyer’s expense.
What is seducing to you — brand new, covered by warranties, no maintenance/repairs? Well, glossy leaflets are encouraging, however the delivery on marketer’s promise is not as easy as thought. The apartment building is owned by the body corporate and the single apartment owner has no control.
How to estimate the apartment value?
The selling agent has some valuations on hand. Are they convincing or what is the basis for the presented figures? If sold to investors, the commercial use of an apartment building could be holiday apartments, student accommodation, or short-term accommodation such as serviced apartments, renting by room, etc. Note, commercial values are assessed on yield or cap rate not like residential properties on market valuation.
Because of possible commercial interests estimating the apartment value can be challenging. I look firstly at the size of apartments in square-meters and the percentage of owner-occupiers in the building. Owner-occupiers tend to increase the capital value.
By knowing the expected income ($ rent), you can estimate the apartment value by dividing the annual income by the yield (or cap rate). Example:
Two-bedroom apartment (50sqm), rent $600 per week:
- Pre-approved loan 300,000 Dollars, 7% interest rate
- Expenses: BC levies 6k, council levies 2k, maintenance 2k
Annual rental income: $600 multiplied by 52 weeks = $31,200
Annual expenses: 21k interests + 10k expenses = $31,000
Estimated Value by Gross yield of 10%
= annual rent / yield = 31200 / 0.10 = approx value of 312k
Divided by 50sqm = 6240 Dollars per square meter
The cap rate or yield indicates the potential how much income an apartment will produce. The rule of thumb— Higher Income (rent) = Higher Apartment Value
Getting value for money is the main concern as “off the plan” buyers can’t valuate the apartment that just not exists at the time they sign the contract. Quality and workmanship are an promise and cheap appliances imported as discounted bulk order with restrictions on warranty and without a service line for repairs might be troublesome.
The body corporate management engaged by the developer is another reason why “off the plan” buyers are disadvantaged. If the first year budget is not realistic, maintenance deferred under financial constraints and claims under warranty elapsed, the financial consequences will have to be passed on by rising body corporate levies.
Probably you got an idea why buying “off the plan” sucks. You don’t really know what you get for your money, you have no idea what the building management will be, but you need a huge portion of trust in what you get yourself into. I feel you should receive a sizeable discount for all the uncertainty if you buy off the plan. Good luck.
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