When buying off the plan turns out to have an unplanned downside

MARIKA DOBBIN
Date: February 8, 2010
Source: theage.com.au

Beware the many pitfalls that come with purchasing property before it is built.

YOU'D never buy a pair of expensive jeans without trying them on first. After all, the cut could be unflattering and sizes are not what they used to be.

But somehow, property investors feel comfortable risking a lot more than the cost of designer clothes when they buy an apartment without having stepped inside.

Nancy De Losa, 39, lost $75,000 purchasing off the plan. What was touted as a secure real estate investment for which she paid $655,000, turned out to be a dud asset.

Just a year after taking possession, Ms De Losa last week handed over the keys of her Melbourne apartment to a new owner who paid her just $615,000. With all the extra costs of buying and selling, the body corporate fees and a lower than expected rental yield, it has been a financial disaster.

Ms De Losa's story illustrates the many dangers of investing in property before it is built. While the development industry relies on sales off the plan to get projects off the ground, the arrangement does not always favour investors.

For the past two years, the credit crunch has hamstrung apartment development and investor confidence has also wavered.

But in recent months, the Bureau of Statistics has reported a surge in investor housing finance with a corresponding lift in dwelling approvals, many of them private sector apartments and houses.

Developers are keen to cash in on heated demand for property, but the banks are still nervous, insisting that 80 per cent of an apartment project be sold before a loan is granted. The pressure is on ''mum and dad'' investors to sign up.

The sales targets for such apartments are mostly the same: empty nesters moving to the city and Gen Xers who want modern apartments a short stroll from work.

Property is only going to get more expensive, the argument goes, so it is prudent to get in now for a deposit of only several thousand dollars. Then, of course, there is stamp duty exemption and depreciation tax savings.

All of those points are valid. But there are two problems at least. The first is that often investors do not realise they are being sold to. The pitch can come from a trusted financial planner, wealth generation seminar or accountant that does not disclose the hefty commission they get on every unit they sell.

The second problem is that the tax savings are offset by the 10 per cent GST on new buildings that is absorbed in the price. On top of this, many new apartments drop in value over the first few years.

A first-time investor, Ms De Losa purchased a proposed two-bedroom, two-bathroom apartment in ING's Waterfront City at Docklands in 2007.

The first sign of trouble came when the apartment was completed three months late, just a few days before Christmas 2008.

''I was not able to let it out for two months because of the settlement timing and also because there was a complete glut of properties available all at once,'' she says.

Ms De Losa was eventually forced to accept a tenant at $630 a week, much less than ING's rental expectation of $750 or more. The body corporate fees of $5000 were double the original estimate.

It was not long before she sought advice on her situation and decided to cut her losses. The reduced resale price could have been even worse had she not sold at the market peak late last year.

''It hurts a lot to have lost a significant chunk of money, but I feel confident it was the right decision to stop the bleed and reinvest into other assets where I might hopefully recoup that loss,'' she says.

She is now looking at buying an established property in an inner suburb.

Property advisor Hugh Jones of Synergy BSM says capital growth is the fundamental of successful property investment, not tax savings or rental guarantees, which often turn out to be bogus.

''We have studied the relative success of investors who purchased off the plan compared to quality established properties in comparable locations,'' he says. ''In almost all cases, the established investor was far ahead in terms of capital growth.''

Aaron Gadiel, from property development industry group Urban Taskforce Australia, admits that buying off the plan is not risk-free but says there are advantages.

Investors have the pick of the best homes in a new development, they can personalise the interiors and there is an opportunity for capital gain if the market moves up between the contract date and settlement.

''More often than not, property prices have gone up rather than down, fundamentally because there is a housing shortage,'' he says.

But buyers' advocate Mal James says there are too many risks in purchases off the plan, including that investors are financially bound to projects that are often delivered late and, in a few cases, not at all.

''You have no idea what you are actually buying,'' he says. ''Some companies produce projects that are just abysmal and poorly constructed. What happens in 15 years when they have to be pulled down? All you own is a little block of air on the 33rd floor.''