Residential construction has hit an all-time high in Australia, and some buyers are looking to purchase properties while they’re still being built.
So we asked a buyer’s agent and a financial adviser what you need to know about buying a property under construction.
Buying mid-construction vs buying off-the-plan
Senior Property Consultant, Rob Di Vita from National Property Buyers, says developers sell off-the-plan properties as a vision. So the property really only exists on paper and in the mind of those creating it. It can be hard to visualise the reality.
He says buying mid-construction, as an alternative to off-the-plan, can make it a little easier for buyers to know what they are purchasing.
“Buyers wanting some added certainty in their off-the-plan purchase, would benefit from buying a property mid-construction,” Di Vita says. “A half-constructed property is at least tangible. Buyers can more clearly see the dimensions of the property and quality of workmanship.”
Di Vita cautions that buyers should bear in mind that developers will usually reserve the right to amend the construction of off-the-plan properties throughout the build – from materials used to room sizes – so changes can still be made by the developer.
Di Vita also says there are more variables, and therefore more risks, with off-the-plan properties, regardless of the stage of construction or whether you’re buying it to live in or as an investment.
For this reason, Di Vita says established properties are still usually perceived as a safer option and can tend to perform better in terms of capital growth.
Buying a property mid-construction
Brand new properties are appealing to many buyers – who doesn’t want to be the first to live in a new home? New builds are also popular with foreign investors, as the Foreign Investment Review Board looks favourably upon off-the-plan purchases.
Financial adviser and real estate agent, Alon Pashut from Masu Group, says developers often offer discounts to encourage buyers to get in early when buying off-the-plan or mid-construction. This means there can be financial benefits to buying this type of property, but he cautions that there are no guarantees.
“Buyers might conceivably be able to sell the property at a profit without actually ever owning it,” Pashut says. “This is, however, a very dangerous way to approach buying off-the-plan and should not be the main objective. If this outcome is achievable it should be considered a bonus.”
Pashut says the earlier you buy into a new development, the more chance you have of being able to choose the best unit or property, or the one with the best layout or aspect.
It’s also possible that the developer will let you have a say in choosing fixtures or fittings and making small modifications.
Buying off-the-plan or during construction also gives buyers more time to save, which can help with the deposit.
“This is especially true when there is a long delay between entering into the contract and the final completion of the project,” Pashut says.
Purchasing off-the-plan is not without risk. Buyers can miss out on opportunity costs, or the money lost in capital gains while the property is being constructed. So buying mid-construction, rather than off-the-plan, can reduce the time lost to opportunity costs.
“For example, if a buyer purchases off the plan for $500,000 and the build takes 18 months to complete, the buyer has missed out on 18 months of capital growth,” says Di Vita.
“Sometimes off-the-plan properties can even lose value by the time they are constructed. They may have been purchased at $500,000, but valued at $490,000 once completed, so the buyer has lost value on the property as well as time spent waiting for construction to be completed,” Di Vita explains.
There are other financial considerations to make when buying mid-construction.
“Buyers should also be aware that they will only receive a percentage of the stamp duty concession depending on the stage of construction,” Di Vita says.
For example, buyers will receive 100% of the stamp duty concession if they buy directly off the plan, but if construction has begun, the concession is pro-rata so if the property is 30% constructed, the buyer will be entitled to a 70% discount.
Plan for the unexpected
Pashut says a buyer’s circumstances may change, which means the property may no longer be suitable by the time completion or settlement comes round.
Or a buyer’s job or the bank’s lending criteria may change and this can have a negative impact on their ability to qualify for the finance they need.
“Laws or policy may change making it otherwise very hard or impossible for the buyer to complete the transaction, as is happening right now for many foreign off-the-plan purchasers,” Pashut says.
What to consider when buying mid-construction
Di Vita points out that that the key considerations buyers should make before any purchase are the same for every property no matter what the stage of the build.
“The condition of the property, market value, and contract conditions are all important factors buyers need to be aware of, and it would be the same for a semi-constructed off-the-plan purchase,” Di Vita says.
Buyers should weigh up the prospect of capital growth influenced by proximity to amenities, or whether there is an oversupply of similar stock in the area.
But Di Vita says those thinking of buying mid-construction also need to bear in mind:
– The quality of work
– Whether the build is on schedule (and if not, how far off)
– The reputation of the developer and builder
– Any conditions of the purchase (e.g. stamp duty concessions)
– That parts of the build can still change between purchase and completion.
Pashut’s advice to buyers is to deal only with reputable developers, recruit the help of a good lawyer or financial adviser to help with the buying process and to leave yourself plenty wriggle room.
“Make sure that you are only buying what you can comfortably afford,” Pashut says “And try to have a contingency plan if things go wrong if you need to exit the purchase.”
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