Planning on buying ‘off the plans’?

If you walk around central Auckland you will see that a number of apartment blocks are being advertised for sale before the building has even been constructed. Buying ‘off the plans’ continues to be popular as first home buyers look to secure their property ownership dreams and savvy investors see opportunities to make a profit in a market where demand is currently exceeding supply.

Here are a few practical points people will need to be aware of when buying ‘off the plans’:

Advantages:

  • Securing a high value asset for a low initial capital outlay – While a deposit is made to secure the property, the entire contract price usually doesn’t need to be paid until the property is complete. This reduces the need for bridging finance and gives a purchaser more time before having to fund their new property.
  • Price certainty – Purchasers pay the current market price for a property even though the value of the property in the future is uncertain.
  • Increase in property value – If the market experiences growth, the property purchased off the plans may have increased in value by settlement several years later.

Risks:

  • Falling property market – There is a risk of paying too much if the market falls between the exchange of contracts and building completion. If this occurs it may be difficult to secure finance for the full amount.
  • Failed expectations –There is a risk that purchasers may not get what they thought they paid for. The quality of work may not meet expectations and the rent may not be as high as stated in rental appraisals.
  • Rising Interest rates – As with any property purchase, interest rates may fluctuate and depending on the market, purchasers may end up paying a much higher rate. However, unlike the purchase of an existing property, here the purchased property would be incomplete.
  • Bankruptcy –The property developer or construction company may go into liquidation before project completion. It is advisable to know what your options are if this occurs.

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