There are many different problems with buying a property off the plan. Before you go ahead and sign that contract and put down your deposit, let’s have a look through the problems of purchasing a property off the plan.
While buying property off the plan can sometime seem like a great investment, this isn’t always the case and I have heard a lot of stories of people getting stung by purchasing property off the plan. So I wanted to list some of the problems, not to say ‘never buy a property off the plan’, but just to make you aware of what problems there are so you can make a more educated decision.
Problem #1 is Inflated Prices.
A lot of times people will sell you to buy a property off the plan because if you put down and lock in the price early and then if the market goes up, well then there’s a windfall for you.
But they don’t tell you that more often than not they actually take market predictions into account. So rather than you purchasing a property at the value that it is today, they’re predicting what the market will be like when the property is finished and charging you accordingly.
It’s only if the market does extremely well, much more than expected, that you’re going to get that windfall. So you are often purchasing at an inflated price based on what they expect to be good market conditions. If the market stays stagnant, chances are that you’re paying more for a property than it’s actually going to be worth.
Don’t believe me? Check out this article about people buying overpriced properties.
Problem #2 – Unsure Of Market Trends
Another problem with buying off the plan is that you’re unsure of what the market will do. Will it go up, will it stay flat or will it go down?
Now because we’ve already talked about the inflated prices, you need the market to go up in order for that property to be worth what you paid for it. If the market stays flat or if the market goes down, well then you’re actually paying more for a property than what it’s worth.
Problem #3 – No Flexibility
Another problem with purchasing off the plan is that you’ve got a long time period where you put your deposit down but you’ve got nothing to show for it and no flexibility there.
Because you’ve already decided what to buy, you put down your deposit and commit to purchasing. Now the property needs to be built, which may take 12 months or even more than 12 months. In that time you can’t really go out there and research the market and see if there are better deals. As the market changes, you’re locked in and it’s very inflexible (unless you want to lose your deposit).
Problem #4 – Locked In If the Market Goes Down
I’ve already talked about the fact that we’re unsure of what the market will do, but you’ve also got the problem that you’re locked in if the market goes down.
Because you’ve paid your deposit, because you’ve committed to buy, if the market plummets, if it goes down then you’re really committed to purchase that property. Otherwise you’re going to lose your deposit even if that property is not worth what you’re paying for it when it is finally built.
Problem #5 – No Opportunity
Another problem is that you can’t really do anything to improve your investment. I love property investing because it gives you a level of control that you don’t get with stocks or with other forms of investments.
You can actually purchase a property that is a great opportunity that you can do some work to increase the value and return on your investment.
With a new built property that you’re buying off the plan. There’s a limited scope of things that you can do to increase the value of that property or to increase the rental yield of that property because you’re getting what you’re paying for and its brand new so there’s not really anything to go ahead and fix or improve.
Problem #6 – Commissions
Another problem when buying off the plan that you really need to be aware of is built-in or hidden commissions. Depending on who you’re buying the property from, whether you’re buying it directly from the developer or whether you’re buying it from a marketing company (eg. See my DPN review), there’s a good chance that there are commissions built into that deal.
What I mean by this is that the person marketing the property to you and hoping you’ll purchase it, isn’t actually the person building the property and they’re getting a commission for the sale of the property that you’re purchasing.
Because it’s a new built property, there’s a semi loop-hole where they can actually put these commissions unto the cost of the build itself so you won’t necessarily know exactly what their commissions are, it’s not going to appear in the contract of sale.
It could be $5000, it could be $40,000, and the risk of this is obviously that it’s inflating prices even more. So before buying a property off the plan, it might be worth asking whether or not the marketing company is getting commissions and truthfully if they’re a marketing company the answer is going to be yes but they might not actually tell you.
And then ask them how much are you getting in commission and if they skirt around the issue, well then I would be very careful.
Problem #7 – Oversupply
The last problem with purchasing a property off the plan is an immediate oversupply of housing when the property is finished. This same danger is a potential problem with house and land packages.
If you’re building a large block of units and all of a sudden there’s now 200 units that are now available on the market either for rent or for sale, well the chances are that you might have an oversupply of housing.
This could make it hard to rent your property, this could mean that your rental return is diminished because you need to compete on price to get people in quickly. It could mean that when trying to sell your property there’s a flood on the market and it becomes a buyer’s market rather than a seller’s market.
You do need to look at supply and demand, what developments are happening in the area and how this development is going to affect the supply and demand of the area in the short to mid and even to the long term?
There you have some problems with purchasing property off the plan. Obviously it’s not all bad but I just wanted to cover the problems in this episode and cover the pluses in another episode.
Purchasing property off the plan isn’t inherently wrong and there’s no guarantee that it’s going to be a good or bad investment but I just really wanted to educate you on this matter so that you can go out and you can make a well informed decision.
If you’ve decided that purchasing property off the plan maybe isn’t exactly for you and you want to see existing properties that generate a positive cash flow, well sign up for On Property Plus and you’ll get full access to the new properties that I list every single week.