Is an OTP apartment EVER a good idea?

I generally steer clear of OTP apartments given the range of horror stories I have heard about and read, and understand the general consensus on here is to stay away. But are there exceptions?

For instance, I have found one that is in a blue chip area of Melbourne (I know Melbourne has huge upcoming supply but understand that's mainly in the CBD/ South Bank/ South Yarra etc). It's only a small development (20) so should have ok strata rates given no pool, rooftop deck etc, and all units are over 50m2, have proper bedrooms (with proper windows looking outside!). The particular one that I happened to notice hasn't started building yet so there are substantial stamp duty savings to be had (which is especially valuable in Vic given their ridiculously high stamp duty). Assuming the contract is reviewed with no alarm bell clauses (eg "final floorplan can be with 10%- most of them are just on 50m2 which I wouldn't want to go under), what do you think the catch is? Comparable sales in the area are at least the same as this one (although older buildings, some with no outdoor area), but you'd have stamp duty on top which is considerable.

Another benefit is there should be a builders warranty and everything should be up to scratch building/ fire code wise. (We have an Art Deco apartment in Sydney and I know the councils are moving through the older buildings to get them up to code which will be a huge chunk of change).

OTP haters- please critique?

 

My parents purchase an OTP apartment on the Geelong waterfront. It took a year or two longer to build than anticipated, but by the time it settled it had almost doubled in value.

They're hardly savvy investors, I think the key elements of that great result were:
* Very little alternate supply at the time.
* Amazing location, 100% water views that will never be built out (you could hit tennis balls into Corio bay, one block to Geelong CBD shops).
* Large sized apartment, definitely not a dog box. They purchased one of the best two apartments in the building.

There's nothing wrong with OTP apartments if you get the fundamentals right (scarcity, location, uniqueness). The real problem is the length of time to settlement creates a lot of unknowns and risk. Additionally many OTP properties don't meet any of the above criteria.

 

Are you sure about the value though? I have to say, I've never seen an OTP apartment that was great value for its price. At best, I've seen some that are "decent" or "okay", but nothing particularly special.

And that's without the other main issue - never seen an OTP contract that wasn't just full of potential issues that the developer was trying to contract in order to favour them.

 

Of course their can be a situation when it is a good idea.

Just harder to find IMO.

Around 2003 I saw some good ones.

 

The valuation was confirmed by a bank valuation. Even back in 2003 it was fairly rare that bank valuations were above the purchase price.

That deal wasn't without a lot of stress and several risks. They chose the apartment on the basis of 'a nice spot to retire' (unlikely they'll live there). There was no fundamental analysis, I think they simply were very lucky.

 

Yeah I bought in Jolimont OTP in 2003 and doubled my money by 2007.

Pure luck.

 

A decade ago there were plenty of investors cashing in on OTP in Canberra. There wasn't as much supply - and there was a couple of years of decent growth. You could sell at settlement and be reasonably certain of making a profit.

Not the same story these days!

Cheers

Jamie

 

OTP and the property market are cycles. Before the market booms OTP comes back encouraged by lenders who want in on the future loan. Then when the market tanks OTP is a dud and all those who cant settle emerge. The banks get jitters etc. This time around we seem to have a foreign buyer element who did OTP contracts to find lending changed, banks wont lend to foreigners and if they do its far harder to get the $ value.

Deposit bonds didnt make the comeback this time around. Many insurers got burned big time by deposit bonds which were held on OTP contracts in late 1990 to 2004. Buyers couldnt settle and they were junk.

 

Its just the time factor, Its very rare to see developers meet their initial forecasts, so thats years of waiting, without any rent, tax breaks, paying interest on the 10% deposit, not being able to make other purchases/investments, worrying about the market, madly saving extra cash as you might have to tip in extra deposit at settlement if the banks change their minds, or valuation short.

The only exception might be onsells for OTP purchasers who cant complete. But that's not really OTP then, as that happens when the construction is finished and trying to settle.

 

Sure - bought OTP Elanora Heights 600K. Valued at 850K
Bought OTP Castle Hill 620K. Valued 800K +

But just as easy to be unlucky...so its certainly not a sure fired road to riches.

 

@jodes
I count myself relatively lucky in getting no hiccups with 3 OTP apartments since 2010. Timing and riding CG growth in the 2 years between deposit and settlement is a key factor.

Most recent one settled in Oct last year and even then the lending market and had shifted sufficiently to keep me awake at night.

 

Not really relevant to OP but there's a few of us doing well buying OTP in Makati (Philippines CBD near Manila), just pick a good developer like Ayala or Shangri-La and make sure location is good. Have also done well doing the same in Bangkok and Ko Samui but I wouldn't recommend Thailand now. It's more fun in the Philippines!

 

The benefit of OTP is that you can put very little money down upfront and if the market takes off you can easily be doubling or more your initial outlay.
If you have multiple on the run going into a rising market, you are going to kill it. But flip side is you are highly leveraged and may not be able to settle.

 

For some OTP is a foot in the door for PPOR
Cheaper than a house
Smaller & suited to younger/single person
Savings on stamp duty

For an investment there is a smaller outlay at first
Hopefully some Capital Gain by the time it is finished
And a bucket load of depreciation @Depreciator
(I've never factored depreciation into a buy before, but it can really make an average investment great )

 

This can be extremely risky. If you can't settle, the contract will be cancelled and you'll loose the deposit. Many contracts have clauses that you can't on-sell without the developers permission so it doesn't help you if the property increases in value.

In the current lending environment, committing to multiple properties with a long outlook creates a good chance that you won't be able to finance the properties at settlement. I've seen this literally bankrupt people in the past.

 

Peter is correct, off the plan can be very risky and you have almost zero control as a purchaser. But you do have clear legal rights. I published a post listing my top five legal tips on my website.

 

There are some great posts above.

Financing OTP is very frustrating at the moment. Valuers are on the back foot and valuing apartments down 10% on purchase price, which can have a major impact on cash needed at settlement. There may be nothing wrong with the apartment it is just the valuers covering themselves.

As mentioned, most OTP contracts are written to protect the developer and you need to read these carefully. Engage a property lawyer to read these so you understand your rights. Pay attention to the sunset clause as many developers now are struggling to obtain finance and therefore get off the ground. As a result it can be years before you see the project get off the ground.

If you are promised a rental guarantee, read the clauses carefully as to WHEN that guarentee is payable.

Look at the special conditions carefully and ensure you car park and storage is included in the site plan and contract. Generally the contract will include detail to enable the developer to change the apartment as they wish, so get a copy of the apartment plan and have it initialled with the contract.

Generally I get my lawyer to review all my contracts and then I mark it up - send it to the developer and then politely tells me to get stuffed and may or may not call me a smart arse. Fact is most people don't have their contracts reviewed from a lawyer so they will sell it to someone else if my client does not want it.

There is always a risk that the developer will go broke, so do your due diligence on the developer - who are they and what is their track record - this should all be on their website.

Always have a lawyer review the contract before you sign - understand your rights.

Cheers Ivan

 

Some ppl seems to have done well out of it but I avoid OTP. Can't tell how market will be like in 2 years (some can perhaps time the market better) or if my employment situation changes.

Some of the OTP seems to have priced in a big premium to existing properties. Can make some of it back by higher depreciation perhaps.

 

From personal experience, it really comes down to timing. Back in mid-2010 when the Sydney market was "weak", we bought two OTP apartments in the Strathfield area for 550k and now its valued at 850k. Looking back, I should have bought a 25+ year old house in the 550k range in Bass Hill, Richmond, Schofields, Rouse Hill or similar area, I would have done 50k to 100k better.
Couple of obvious benefits with OTP would include high rental returns (e.g. 8% currently) and depreciation, no need for maintenance or repairs, but I reckon the capital gains with a house in the aforementioned suburbs would have been superior overall.
Another thing worth pointing out is the reputation of the builder / developer. TBH, we subsequently found out the builder was dodgy, but thank heavens there haven't been any major teething problems apart from high strata (around $1k a month!).
So my suggestion would be to go for established properties in Brisbane and outer western suburbs of Melbourne or even Geelong! If I had been actively following Somersoft in my younger days, I wouldn't have purchased those OTP aparments!

 

@Redwood do you think developers would change their tune and be more accommodating to people concerns about their contracts given the greater media coverage of OTP oversupply?