What are the dangers of buying property off the plan? There are many different dangers and different risks that you’re taking when you buy a new‑built property off the plan, which means you’re buying it off the drafts, off the drawings, before it’s actually been built.
There are also some benefits with this, but today I want to talk about the risks and the dangers of buying this way.
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Buying Off The Plan Risk #1: The Product Not Going Up In Value
I’ve had this happen recently to one of my readers, who I’ve been in email contact with. They sent me an email saying look, I need some ideas.
I purchased this property off the plan, I paid $420,000 for this property, and I’ve now had a value that’s only worth $390. I can’t sell it because it’s not worth what I paid for it, and it’s costing me money every month to own.
This is a major risk. When they’re selling off the plan, they want to make as much money as possible. So they might not be finished for two years, so what they want to do is sell you what they think the property is going to be valued at in two years’ time, so they can pull the maximum value from that.
They will often market it like you can buy the property now, and you get capital gains and you don’t have a loan and things like that.
You really need to do your research before you just accept what they’re telling you.
The property may not go up in value, which may leave you with a property that you can’t sell if you needed to.
Buying Off The Plan Risk #2: The Developer Could Run Our Of Money
The developer could run out of money. Which means the property isn’t going to get finished, and it means that your deposit that you put down, you’re at risk of losing that.
I haven’t heard of this happening on a really regular basis, but it is a risk that you need to consider, what happens if the developer runs out money and you need to find a way to put a clause in there that if that happens, you get your deposit back.
Buying Off The Plan Risk #3: The Property Is Not Completed To The Agreed Upon Standard
Risk number three, is not the property not being completed to the agreed‑upon standard. So you might be buying a property off a plan and off drawings, and it’s got this very high standard, and that’s what the rental market needs, or that’s what you want when you’re going to live in it. Then the developer just might not finish it to the standard that you agreed upon and they agreed upon.
They might have had issues with the building and had to spend more money on foundations, and so they didn’t spend enough on the interiors of the building, or all different things can happen where they don’t actually deliver on what has been promised.
That is something that you need to think about and something that you need to find a way to hold the developer to.
Buying Off The Plan Risk #4: Not Being Able To Rent The Property Due To Oversupply
If you’re buying in a big building complex that’s just being built, you need to be aware it may be difficult to rent that property, because all of a sudden, you might have 50 or 100 units coming on the market at the same time because this development has been finished all at once.
There are all of these brand‑new units, and if there are not enough people looking for units in the area, well then you’re going to be competing with everyone else in your unit block to rent out your unit.
You many not be able to rent your new‑built property due to oversupply in that area. That goes again if there are other unit blocks that are going up as well. You’re not just competing against your own unit block, but you’re competing against others in the area.
Buying Off The Plan Risk #5: Guaranteed Rental Returns Are Almost Always A SCAM
Risk number five is that guaranteed rental returns are almost always a scam. So if the developer is telling you, purchase this property, we’ll give you a guaranteed rental return of 10 percent, or 9 percent. We’ll guarantee that.
If they’re going to guarantee that, then that money is coming from somewhere, and that money is coming from the profit that they’re generating out of the sale, which is probably inflated.
You’re probably buying at an inflated price if you’re going to get that guaranteed rental return. I have heard many stories of people who had a guaranteed rental return for a year, and then for some reason that just ended after a month or two and they had no way of actually getting that money back. So be very careful with guaranteed rental returns.
Buying Off The Plan Risk #6: It Can Be Difficult To Sell
Again, because there are so many new properties available, it can be difficult to sell, and especially if you’ve already purchased and it’s overpriced, it can be difficult to sell that property.
So make sure when you’re buying it that it is a bargain, make sure it’s what people in the area want. So when it does become time to sell it, you will be able to sell it and make your money back if not more.
Buying Off The Plan Risk #7: Opportunity Cost Due To Lock Ins
Risk number seven is you’re locked in for months, or maybe years, without anything to really show for it. So you’re buying off the plan, then that property is not going to be finished for however many months or however many years, but you’ve committed to that property. You’ve put down a deposit, you’ve committed to purchasing that property.
If you don’t end up buying the property, you lose your deposit, and there’s an opportunity cost with that.
For one year or two years, you committed to buying this property but you don’t actually own it. It hasn’t actually been built, you’re not collecting rental income, and so you’re locked in without that actual property behind you.
So there you have my dangers of buying a property off the plan, I hope that has given you some insight. For more information on investing in positive cash flow property, sign up for our five‑part audio master class series, which is free. Head over here and put in your name and email address.