How to reduce your risk when buying ‘off the plan’

Buying a property off the plan can be cheaper than buying an existing property if you’re buying in a rising market. In theory, you pay a deposit to lock in a price and the value will have gone up by the time you pay in full at settlement, several years later.

But it doesn’t always work out that way. A lot can change in the two to three years between putting down your deposit and the settlement date. Let’s take a look at what can go wrong and what you can do to help avoid it.

1. Change in personal circumstances

• You might lose your job, become ill or acquire other unforeseen financial responsibilities and no longer be able to finance the purchase.
• It’s difficult to anticipate problems like these, but you can reduce your risk through careful planning that includes taking out health/income insurance.

2. Change in valuation

• If the developer has overvalued the property, your lender may give you a valuation at the time of settlement that is less than the contract price. While you are locked in at the original contract price, banks will only lend you an amount based on their valuation. If you can’t fund the shortfall, you will lose your deposit and will have also defaulted on the contract, which puts you at risk of potential legal action by the developer.
• If the property market turns during construction causing values to drop, you may have similar lending woes, as well as making a capital loss on your purchase.
• To minimise the risk of a change in valuation affecting your property’s value or your ability to borrow, do your own research on current market values and forecasts so you have a more accurate idea of what the property is worth – and don’t get sucked in to paying too much.

3. Problems with the developer

• If the developer goes bankrupt, you could lose your deposit as well the opportunity to have invested that money elsewhere.
• A bad developer can also lead to poor quality work, from small issues to major building defects, that can lower the resale value of your property.
• To reduce these risks, put your deposit in a trust account to protect it, and thoroughly research your developer – only go with one that has a solid reputation.

4. Changing economic climate

• Changes in the economy can affect interest rates and job security.
• These are difficult to forecast but try and keep your finger on the pulse and ensure you have room in your budget for several rate increases.

To discuss your situation, contact your Mortgage Choice Broker today!