QLD Off-the-plan IP and Owner Occupier

Hi everyone, just wanted to get a temperature check on what everyone's opinion of off-the-plan projects, what people like, dislike etc about it.

 

The vast majority of people here dislike off-the-plan projects. Common reasons are:
1. Subject to market conditions at time of settlement, the property valuation may be under the purchase price. This may cause financing problems.
2. They are usually sold with a premium price for the "newness".
3. Price may be artificially driven up due to competition with overseas investors
4. Risk due to uncertainty in build quality, estimated time of completion
5. Terms of contract are usually in favour of the developer. Google "sunset clause"
6. No room to add value.

The list goes on...

People like off-the-plan because they're easier to buy and doesn't require you to do much research or hunt! Just walk into a shopping centre and chances are they'll be a booth flogging them

They can work in a rising market. I have bought off-the-plan in Sydney and have had nice growth in the last couple of years. But I wouldn't be buying off-the-plan again.

 

I would like to know more about your off-the-plan experience, it seems like you had relatively mediocre/bad experience? I understand your list of common reasons and it's all valid reasons to worry about OTP.

- Overvaluation does occur, but in terms of major developers it is rather rare (there is one who have delivered 3 projects overvalued and let's just say I don't sell any of their stock) but there are developers who have a track record of delivering undervalued stock as well (one which is developing one in Newstead right now).

- Another option my company is bringing in is a guaranteed finance pre-approval lasting 17 months prior essentially removing the worry of failing finance 6 months prior and desperately looking for a buyer.

- Pricing is becoming more competitive now, with 2 bed, 2 baths and 1 carparks apartments at $560K, and 3 bedroom townhouses in Kuraby for $465K. Previously though, I met someone who bought 1 year ago a 1bed, 1study and 1 carpark for $510... in the valley.

I guess the key point here is the company you use is critical to the experience you have, and yes, there are alot of dodgy companies out there. Obviously, it is better to go with a project that has a developer with a good track record and at a good market rate. What my thread here would like to do is give people a reason to consider OTP as an investment/self-living option again

 

My personal experiences with buying off-the-plan have been quite good.

IP1 is a 3/2/1 in Homebush West for 500k. Contract was signed at end of 2012 and settled in July 2013. Currently renting for $550p/w and recently valued at 620k. Comparable sales in the area were in the high 600ks.

The good:
- Rented for $530p/w within about a week of putting it up for lease which means it was paying for itself
- No major issues as far as the construction is concerned.

The bad:
- Valuation at settlement came back at 450k so had to find the extra 40k to settle. Fortunately had the extra savings but could have been problematic for some.
- The contract was originally for 530k with 2 car spaces. However the developer screwed up and basically forgot to assign the 2nd car spaces. After a bit of negotiation they agreed to drop 30k off the sale price as compensation. Whilst I believe this was a genuine mistake on their behalf, the matter could have ended a lot worse for me. With contracts stacked in the seller's favour they may have had scope to tear up the contract and return my initial deposit plus interest.

The second purchase is due to settle in September 2015. It's a 2/2/1 in Harris Park for 604k. Contract was signed at end of 2013. Intention is for this to be the PPOR for my partner and I. Couple weeks ago the vendor that sold us the apartment asked if we were interested to sell as there are interested buyers willing to pay "680k - 730k" for apartments in the building.

It was pure luck that I bought in the early stages of a boom across Sydney. I believe the CG I got is relatively moderate compared to other areas. Could've bought just about anything and gotten similar or better levels of CG in that time.

What really throws me off future off-the-plans purchases is all the additional elements of uncertainty. There was a recent article about developers invoking the sunset clause on a project in Wolli Creek. I also know someone who has purchased an OTP in Lidcombe which was supposed to settle in 2014, but construction is no where near complete and I fear the developers there are trying to pull something similar...

I think I got lucky and didn't have any of these things blow up in my face. The only real DD I did was look up past projects of the developers. I happen to have friends who bought from them years ago and I asked them about any building issues before committing to the purchases myself

Since joining SS/PC forums, and reading about the level of research the seasoned investors here do to mitigate risk and why they avoid OTP, I really wouldn't touch them again unless it's a real bargain.

Just to round this off with a balanced counter-argument, I know someone who has had quite a bit of success with flipping OTPs. His strategy revolves around paying the deposit and then reselling before settlement. This of course only works in a rising market and he has been burnt in the past. However, he has done quite well over the years, especially in the last couple of years in Sydney

 

Really keen to hear more from this person as I've always under the impression that flipping OTPs are not a common trend I Australia, it is however very common in Asian countries like China and Hong Kong

 

I agree, I used to be put off by OTP because of uncertainty issues, but having now purchased my first one (awaiting settlement), good research is truly the key for everything. I made sure my finance was sorted well in advance of settlement and only bought from a company which has completed projects on time, without significant delay and using a tier 1 builder. The key benefits I can see from mine is the tax depreciation that 2nd hand properties rarely offer as an IP as well as the lack of increasing body corporate for the first few years where as one of my 2nd hand ones is collecting over $6k in body corp a year now.

 

It's starting to become common here now. I have a client who flipped a Skytower apartment from 900K to 1.2mil, but whether it's a long term game is another question.

 

In my opinion, why his strategy has worked can be attributed to the following:
1. Networking. He runs an accounting firm and has a bunch of clients from the construction industry. Whenever they come in to do their taxes he'd have a good yarn with them to get a feel of the projects they're doing.

2. Early bird gets the worm. These clients would often inform him of projects before they become available to the public. In other words, he gets first dibs at the picking the ones with the best orientation/floor plan etc and to top it off be able to get them for 10-20k cheaper than the public.

3. Long ETA till settlement. He deliberately looks for projects that do not complete within the next year or two. If the development has multiple stages he'd go for the latest one to maximise time for CG. Of course, this is a bit of a double edged sword if at wrong phase of the cycle.

4. Buy where there is amenities, infrastructure etc, all the usual DD stuff.

I don't think his strategy is as effective as the traditional buy and hold because it doesn't allow for multiplication. However it does use leverage. It's more targeted at making a quick buck IMO.

 

I thought should be the other way around where brand new units/apartments usually have more issues than say compare to a 10 year old unit/apartment?

I've heard numerous complaints from my friends that bought OTP saying body corp raise their strata fees substantially (from $800-$1500) due to some failures to piping or water leaking etc...

 

see this is where i'm hesitate to gamble on OTPs, you never know how many of these early dippers are infront of you, and to be honest, say if you bought an OTP for 600k and before settlement people are willing to pay you $700k, minus the stamp duty and CGT and solicitors, you really only making roughly $28k from the sale but you are exposed to a risky $500k debt (20% deposit).......I can't imagine for those that does not have the finance to settle this pitfall.......

 

I agree it's too risky for me. Can someone in the know comment on if the stamp duty from the initial purchase is payable on an OTP property if it is subsequently sold off before stamp duty is due?

 

Still payable.

 

it is treated as a different sale for the same property, so whoever signed the 1st contract need to pay stamp duty, the 2nd buyer need to pay stamp duty base on their agreed value of the property. so the gov get double dips on the stamp duty even before there is a living creature in the property

 

I think it would depend on the developer you bought it off. Unfortunately not even big developers are exempt from building shoddy OTP so a good track record is usually the best indicator. Do you have names of the projects or the developers? I can do a check on them.

 

I didn't ask into that much details lol it's usually those you see on facebook when they start whingeing about their strata fees going through the roof lol

 

Curious, how do you know "overvaluation" (I presume you mean over priced) is rare and what valuation do you mean; a bank valuation or a formal valuation done by a qualified valuer post settlement? Until a formal valuation is done (or you sell it and let the market decide) you don't know what the value is.

How can you promise guaranteed approval when there is no title and therefore no security for the lender? Is your company going to sign an unconditional loan agreement with a buyer without any security?

I have read this statement a few times and genuinely have no idea what point you are making. We are not talking about buying a commodity like a TV. Pricing is set by the developer and project marketers based on what they think the market will pay. To say that pricing is more competitive is a sweeping generalisation that doesn't factor in the myriad of things that investors need to consider.

I have exchanged on 2 OTP in the last 2 years. The due diligence required for OTP is more complex than for an established property and the risks much higher. This is why people on this forum don't recommend OTP as a way of getting into the market for an investor. For an owner occupier the risks are the same, however their tolerance of the risks might be greater simply because they are going to live in it.

After doing these 2 I wouldn't go OTP again, even with the knowledge I have gained.

 

Well firstly, the company I work has dealt with approximately 30 or so odd OTP projects in the last 4 years, of which approximately 3 came in as over valued by the bank, which is the key valuation here since bank valuations tend to the conservative so as to remove risk as much as possible (aside from the fact that banks do outsource their valuations from time to time). And the valuations are usually done 90 days prior to settlment, which means they believe they do have quite an idea of the value (since when have you had an Australian bank lend you more on a risky settlement when they would rather you take the money out?). Albeit, I can't say I know that all projects are like that but I can say that were it to be a major concern, the demand would not be as high. Contrary to what most people may think, a majority of FIRB buyers finance their purchases, not pay in cash.

If you read the statement again, it say pre-approval, not actual approval which requires as you say, immediate security for the loan. A huge basis of an pre-approval is on the perceived ability to repay the loan amount, which is about the income of the borrower more than anything else. Unless your circumstances change, which it can, when settlement comes, you're not likely to be finding yourself worrying about funding the purchase. The company I work for also holds privileged status with St George, ANZ and a few other banks since it wrote nearly as much loans in the finance department as Yellow Brick Road last year by picking projects that our internal research team approved of (reducing the risk of an overvalued project). Hence, the two links of income of the borrower and the bank valuation which assist in loan approvals.

I would say buying a TV is almost like buying a house (in some instances more aggravating). Pricing is set in accordance with market demand and supply as you mention. My examples offered are that 2 bed, 2bath and 1 carpark OTP can be found under the 600K mark, with OTP townhouses in the Kuraby area under 500K. My opinion is that these prices are not horrendously expensive given the current market status, and it is a sweeping generalization that of course does not apply to all situations given the, as you say, myriad of things that investors need to consider and it only served to provide a point that not all OTP is horrendously expensive and bad ($800K for a 1 bed in Sydney, come on!). But the fact is the statement is backed with research, given pricing a few years ago compared to currently and with the Biz Shrapnel report projecting developers to be building smaller units over the 2018 - 2022 time period (which means more $$ per sqm in the long term).

Perhaps you'd like to detail what is the more complex DD that an OTP requires over an established property? I agree there is different DD to an established property but more complex I don't find it to be so. Of course, I sell OTP so I am inherently biased but again, this thread was created for me to better understand what people think of OTP so I'm happy to go over your experiences and see what it was that you came across

 

On valuations, I've re-read the posts above and the point Befuddled was making is that with OTP there is a risk that the bank valuation will be lower than the contract price, leaving the purchaser to find additional funds for settlement. I don't know the facts but it wouldn't surprise me that in only 10% of the projects you have worked on the bank valuations have been higher than the contract price. You go on to mention a developer that has a track record of delivering undervalued stock, do you mean that at settlement the bank valuation is lower than the contract price or something else? Either way the valuation risk remains, to mitigate it you should do your sums on the valuation coming in lower and ensuring that you have extra funds available.

Regarding bank valuations 90 days before settlement, in my experience it was 21 days and I reckon that would be pretty normal. This is simply because the developer won't let anyone on site until the property is practically complete and similarly valuers won't go to site until it is in a state ready for occupation. To suggest this can be done 90 days prior to the settlement date is to suggest that the developer is holding the property in an almost completed state for 90 days for some reason - it doesn't make sense to me.

Regarding finance, yes you did say pre-approval (you actually used the word guaranteed as well), but then you said "... essentially removing the worry of failing finance 6 months prior and desperately looking for a buyer". This use of the word guaranteed and the statement about removing the worry are both problematic as it gives the impression that there is nothing to worry about. This is simply not the case unless the guaranteed pre-approval means that your company will fund the valuation shortfall if the bank valuation comes in under the contract price - perhaps you could clarify that? For example, if the contract price is $500k and the guaranteed pre-approval is for 80% ($400k), then the bank valuation comes in at $480k meaning they will only lend $384k, will you kick in the $16k shortfall to protect the purchaser? That would be a guarantee, but it would also raise another concern - perhaps that the sellers commission is too high if they can afford to offer such a guarantee. A good finance broker that is independent of the seller is the best option for a purchaser.

Seriously, if an investor approaches a property deal like buying a TV then all they have to rely on is luck and that isn't a game I'm going to play. Investing is a numbers game and it most certainly could be the case that a $800K 1B unit in the Sydney CBD is a better investment than a $500K townhouse in Kuraby. On face value you would say how could it be, but if you run the numbers it might turn out that way.

DD complexity primarily arises from the property not actually existing, which in turn means;
1) it may not be possible not value it accurately, this is exacerbated by the possibility that the developer opts for a lower cost component, but in a way that doesn't materially prejudice the purchaser. Thus the property as built may not value as well - for example, glass balustrades vs rendered brick.
2) it may never be built, thus you need to investigate the developer's track record (not needed for existing)
3) it could be 5% smaller than expected (this is normal for OTP)
4) it simply may not work out the way the purchaser imagines it will - some people look at marketing brochures and I think they imagine their OTP property will transform them into something different - a bicycle riding / coffee sipping model is a common theme.
5) lending conditions might change
6) the market moves in a way that causes a problem
7) settlement dates are unpredictable, makes it hard to plan your move or sign a tenancy agreement.

Plus
1) the contract is unconditional at execution - no get out for inability to secure finance
2) short settlement (14 days commonly)

Your DD needs to factor all of the above in.

Why put yourself through all this unless the OTP property is special in some way?