Home risk you can’t afford to ignore

Buyers are hedging their bets paying top dollar for properties that could go backwards in value in just a few years, experts say. Here are the biggest risks buyers are facing.

Homebuyers need to do their research.

For those buying an apartment, the “shiny and new” nature of an Off The Plan development can be an attractive proposition – but it can also be risky.

Here are some of the most important things to consider before buying Off The Plan (OTP).

PAYING A PREMIUM

Just as the value of a new car drops as soon as you drive it, an OTP purchase price is calculated to be above market value at the time of sale, says Sydney buyers agent and Buy Your Side podcaster Michelle May.

“The developer will estimate the selling price – not at when you buy it, but two years down the track once the building is complete,” she says. “You pay a premium. Typically it takes five years minimum for that building to fall into line with the rest of the suburb sales.”

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OTP developments usually build a premium into the purchase price.

This is important because if you do end up needing to sell the property before then, you could lose money on the deal.

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“And this is a country where your home is a part of your wealth creation,” she said. “If you don’t buy well, it could really change the course of your future.”

Sydney buyers agent Michelle May. Picture: supplied

OVERSUPPLY

Location is always an important factor when it comes to real estate, but for OTP developments in areas where there is likely to be an oversupply, it pays to be extra cautious, says Rethink residential director Mina O’Neill.

“A lot of people purchase in areas where there are a lot of multi story buildings, but the value of your property goes down because you have so much competition,” she says. “You might be paying more for something that costs less and that could affect your Loan to Value ratio as well.”

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A new or incomplete building doesn’t have any Strata evidence to back it up. Picture: NCA Newswire / Gaye Gerard

STRATA AND BUILD RISK

It’s not just the potential for capital loss that sees May choose not to purchase OTP property – or any brand new property, for that matter.

“We do not buy property less than five years old because we want to have that strata evidence to know that yes it is a good building, it has been looked after, it has been built well,” she said.

Since you can’t assess the quality of the building if it hasn’t been built yet, O’Neill recommends researching the reputation of the developer.

“Things like, have they been involved in any past or recent litigation, are they newly established as a company or do they have a lot of experience,” she says.

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Mina O’Neill pictured with husband and business partner Scott O’Neill from Rethink Investing. Picture: Supplied

If they have completed any recent developments in the area it may be possible to inspect them yourself.

But, it’s not just the build quality you have no oversight over, May says. Buying OTP means you have no idea who your neighbours will be if you are an owner occupier. And if the developer holds a percentage share of the building this could come with big ramifications from a strata perspective.

“If there are any issues, you as a single unit holder will have very little to no power to get things done,” she says.

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It’s always best to seek advice from an expert before signing a contract.

DUE DILIGENCE CHECKLIST

Engaging a property lawyer who specialises in OTP is crucial before signing a sales contract, says Rethink Residential director Mina O’Neill. Here are some things to look out for both in the terms and conditions and in your own research.

* Sunset clause – this entitles both parties to walk away from the contract if settlement hasn’t taken place by the end date included in the clause

* Deposit requirement – make sure you are clear on what your deposit requirement is as well as the financial implications of the loan when it comes time to settle

* Penalties for delays – delays could come at an extra cost to the buyer depending on what has caused them

* Developer reputation – has the developer been in strife with previous constructions, or do they have a good track record?

* Insurance and warranty – make sure these protections will be in place and get a building inspection done before taking possession

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Originally published as Home risk you can’t afford to ignore