Dangers of OTP Apartment Purchases - Contract Rescission before Settlement

Hello PCers,

Just thought I would share a couple of stories about the dangers of purchasing OTP apartments that happened days ago.

My aunt and sister in law each purchased OTP (off the plan) apartments in the Inner Western suburbs of Sydney back in 2013. The apartment was due to settle at the end of 2017, but as of last Friday, they were informed that the property developer issued a rescission of contract meaning that their OTP apartments would not be built due to the local council rescinding a pre-approved development application (it's quite a complex story and I'm really skimming on the details).

Although my relatives will receive their respective deposits back (~10% plus some small amount of accrued interest), they have essentially lost over $300k each based on Capital Growth figures with other recently settled OTP apartments in the complex. Also, there isn't much point in taking legal action as the contract is watertight (in the developer's favour) and includes special clauses that are designed to protect the property developer from these sort of events. Just imagine the opportunity cost ...

In a nutshell, this highlights the risk of OTP purchases. Yes, for the vast majority (~95%) of the time you will make a good profit out of OTP purchases (I've seen it firsthand), but unexpected events like above are starting to become a bit too common in recent times. I thought I would share this story with the PC community and highlight what could go wrong when OTP deals go sour.

Caveat Emptor / buyer beware.

 

Why would it take 4 years to find out a development is not approved? Was it always expected that construction would not start for 4 years? (Weird.) What did the contract say about the timeframe? At least it's not the developer cancelling contracts using a sunset clause and keeping the gains themselves.

 

Surely they would have known before 4 years were up that the DA was in trouble and the apartments were still not even started to be built?

 

The opposite happened to us. We rescinded the contract for an OTP apartment (was going to be our PPOR) after the developer needed our permission to extend the date of completion. The only sweetener they offered was a slightly better cooktop (!). We took our deposit and purchased a house in a neighbouring suburb which has grown 25% since we purchased it three years ago. Comparable apartments have dropped 100k+ since then so we were very lucky.

 

Dodged a bullet !

 

Hi Ekin, how you doing ?

I agree with others, they should have known before now.

 

You can't and shouldnt put a value/loss on potential capital loss
It's the nature of the game.

What ifs is a potentually dangerous mind set

 

Not sure if I agree with your statement about what ifs, but we can agree to vehemently disagree.

Purpose of the post was to highlight some actual events and hope other PCers can take this into account when deciding to purchase an OTP apartment.

 

OTP is inherently dangerous - there have been many actual events like this in the past, and there will continue to be many more in the future. Many PCers wouldn't touch OTP with a long stick.

Wondering about what could have been is natural... in this case it sucks massively. However what if the property market crashes and that +$300k turns into -$100k? Or -$200k? Your aunt and SIL wouldn't be too upset about it then, would they?

They have to reassess the current market and choose the best move available to them now that they have their deposits back.

 

Deja Vu....Last time it took out the deposit bond market and it never really recovered.

OTP has one critical assumption - That the property increases in value. If that doesnt happen and oversupply occurs valuations can get slashed aggressively buy unwilling lenders. Then the loss can be confined to a 100% loss of deposit.

 

I'm more interested in this part. What info do you have about this?

 

you dont have to agree at all
but you are feeling hurt because the contract was recinded which I would be too, but you feel its a double insult becuase you "lost" $300k,

I put money into a different investment about 10 years ago, the value has not recovered once, and maybe next year will return to what I put in, it was just a crap investment, that I learnt from, I dont consider it as potential loss, I would have been 30% better off if I put it in a term deposit which is virtually risk free

 

you dont have to agree at all
but you are feeling hurt because the contract was recinded which I would be too, but you feel its a double insult becuase you "lost" $300k,

I put money into a different investment about 10 years ago, the value has not recovered once, and maybe next year will return to what I put in, it was just a crap investment, that I learnt from, I dont consider it as potential loss,

I would have been 30% better off if I put it in a term deposit which is virtually risk free

but I cant and wont live my life thinking what ifs

 

But many are tempted to buy OTP due to FHOG.

 

Is FHOG a big enough risk buffer/compensation for those who want to buy inherently risky properties as their first home?

 

That's the gamble with OTP.
It's not settled until it's settled.
Happened in Sydney many times in recent years.
I agree with @TMNT that $300k was not lost, because it was never there in the first place, but obviously opportunity cost was lost.

 

The apartment was due to settle at the end of this year, but hadn't started construction yet?

Willing to share the longer version of the story? It does sound unusual.

 

Opportunity cost of the deposit monies was already accepted once they exchanged on an OTP.

 

A lady I work with has been to hell and back for a land lot in NW Sydney. Land value has risen $300K and her developer has gone bust with it 95% complete. Good news after 3 years is bank will fund completion under a deed of company arrangement and she gets her land for the agreed price. No loss of deposit, no loss of the land - Great outcome. A number of other buyers sued and means they technically rescinded contracts. Their claims arent quite so certain.