No need to secure loan for OTP purchase?

Was chatting with a friend of mine as she was having difficulties getting a loan for a purchase that she made last year, a two bedder in Brunswick. She's paid the 10% deposit but the rest need to come from a loan, that's like half a million.

I am just surprised that you don't actually need to have a loan secured before you could purchase the apartment? At least in my home country, you need to have a loan secured before they could let you progress with the purchase.

It just made me thinking how risky it is for these buyers, say if any of them cannot secure a loan (due to different environment two, three years after they purchased) and they would have to forfeit their deposit?

 

loan approvals generally last only 3 months to expire.
No need for a loan approval to sign a contract either.

 

You hit the nail on the head. And this is why OTP is generally frowned upon by seasoned investors unless you score a good deal or you're buying in a clearly rising market. It's just too risky. If it comes in under valued by 100k, you're either screwed...or if you have the cash, you're still in a bad spot - that's a lot of non-leveraged cash to sink into an investment.

 

Vendor could potentially sell for a lower price and then come after the purchaser for this plus extra costs they incur relating to the resale. Could be a lot so if you think you cannot settle you should seek legal advice on the contract tomorrow.

 

Yikes. Does this happen often? Or do the legal fees disuade most companies from coming after buyers?

 

There are about 100 others reasons to frown upon OTP...this is just ONE of them.

 

Most times the vendor just keeps the deposit and resells. But in a falling market they are more likely to sue because of the loss and ease and likelihood of success.

 

It's common practice. The bank won't lend against something that doesn't yet exist.

This is why OTP makes me nervous - especially if the property is in a large development.

Cheers

Jamie

 

That's not the case in Malaysia, we had to secure the loan before they let us sign the S&P. If anything falls out from the bank, the developer will fully refund the deposit. I am just surprised there's no law like that in Australia protecting the buyers.

 

Some of the OTP stuff that was purchased Pre-GFC but who needed valuations post GFC was particularly bad. One building on the Gold Coast that we were acting for buyers in was very interesting. On between 2 and 3 occasions per unit, the bank vals come in low, we said can't settle need a price reduction, receivers threaten to sue, take more than 3 months to agree to price reduction, bank vals expired and new one needed, bank vals come in lower again, buyer can't settle & need price reduction, receivers threaten to sue, take more than 3 months to agree .......

 

This is essentially one of the biggest pains of OTP. There's a reason why so many people say to avoid it like the plague.

 

It is scary especially the valuation differs by 10-15% even from the same office different valuers... Makes valuation industry so much more opaque.

 

unless you are the developer selling stock OTP

Not all product is the same, some will make great investments IMO.

I have sold 3 OTP townhouses in Melb that will be completed in February, and they are attractive product as they will be cash flow positive, also huge savings on stamp duty, close to CBD, rail and lower entry level.

Buyers must pay 10% deposit and its unconditional after cooling period because bank values will not come in, unless townhouses are close to completion.

My point is there are bad investments and not all OTP are bad, not all are in large complexes, with high strata fees etc etc

MTR

 

Agreed @MTR. Have said many times OTP can work.

Rarely

Plenty of bad established stuff as well!

 

Absolutely, there is a very scary thread on investors who jumped into EOS armchair developments, sobering.

MTR

 

You've got me stumped...what's EOS?

 

it's a company that was promoting OTP to investors in Perth

 

Gotcha. Ta.

 

And some OTPs take a few years. You hear about all the ones who bought apartments in Chatswood for $800k now worth $1.2m....You dont hear the bad tales. In NSW the past few years saw many OTP contracts and now prices have jumped bandit developers had screwed the buyers by telling them to pay more of they would rescind using unconscionable contract terms. Stories of contracting a 3bed to be told its a 2bed take it or lose it. etc.NSW Govt seems to have patched it but its not perfect. I saw a few clients who got burned. They now have a deposit which didn't earn a cent and no property in a market that rose 20% +. And a developer who used them to fund their project. Very bad experiences all around.

I recall 15 years back the deposit bond market crashed when prices dropped too. The deposit bond insurers got smashed.

Lenders only can approve once the property can be accessed to value it. In some sites there can be a disaster if valuations all come back slim. Buyers back out and values crash !!!! Lenders can blacklist projects, suburbs or areas where this occurs. This is why Meriton are Australia's leading landlord in Alexandria Zetland etc.

OTPs for SMSF can be worse too. Generally major lenders don't do OTP SMSF loans at all or very very low LVR. Has this changed better or worse under the new post APRA regime ?????