Rise High Investor Weekly Video #31 – Risks of buying off the plan



What Does “Off the Plan” Mean?

Buying off the plan means signing a contract and paying a deposit (usually 10% of the purchase price) for a property that is yet to be built. Settlement typically occurs 12, 18, or even 24 months down the line, making it a long-term commitment with potential uncertainties.

Appeal of Buying Off the Plan

Many people are drawn to off-the-plan purchases because it allows them to secure a property in a desired development and potentially benefit from property value increases by the time of settlement. For example, if you purchase a property for $400,000 and its value rises to $420,000 at settlement, you’ve gained $20,000 in equity. Sounds great, right? But here’s the catch…

Risks to Be Aware Of

While the potential rewards are enticing, there are substantial risks involved:

  • Unconditional Contracts: Off-the-plan contracts are typically unconditional after a short initial period. If you’re unable to proceed with settlement, you could face significant financial consequences.
  • Changes in Personal Circumstances: Your borrowing capacity might be affected by job changes, health issues, or family circumstances like a new baby. Even if you qualify for a loan when you sign the contract, there’s no guarantee you’ll still qualify at settlement.
  • Rising Interest Rates: If interest rates increase during the lead time, it could reduce your borrowing power as banks reassess your servicing capacity.
  • Shifting Lending Policies: Banks can change their lending policies at any time, which might impact how much you can borrow or whether you qualify for a loan at all.
  • Valuation Risk: If the property’s value at settlement is less than the purchase price, the bank will only lend against the lower valuation. You’ll need to cover the shortfall, which could mean finding tens of thousands of dollars at short notice.

Consequences of Failing to Settle

If you can’t settle, the financial fallout can be severe. You could lose your deposit, which is often a significant amount. For example, a $40,000 deposit on a $400,000 property would be forfeited. Worse still, if the developer resells the property for less than your purchase price, they may pursue you for the difference.

Who Should Consider Buying Off the Plan?

Given the risks, buying off the plan is only suitable for those in a very strong financial position with ample cash reserves and equity in other properties. This financial cushion provides a safety net if valuations fall short or borrowing capacity changes.

While buying off the plan can offer advantages, it’s crucial to understand and prepare for the risks. Make sure you’re financially ready and seek professional advice before signing a contract. Property investment should be a strategic decision, not a gamble.