Ep 18. The Risks With Buying Off The Plan
If you are thinking of buying something off the plan or a newly constructed property, Michelle explains some risks involved and what to look out for - so you can make informed decisions.
Here’s what you’ll learn from today’s episode:
How developers are making money off new builds
Council and building certifications and how that affects you
Building delays and the consequences involved
Investor versus owner occupied properties
The top things to think about before buying off the plan
Speakers in today’s episode:
Michelle May - Michelle May Buyers Agents
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VIEW TRANSCRIPT
Hi, and welcome to another episode of Buy Your Side, the property podcast to help you buy better. My name is Michelle May and I am the principal of Michelle May Buyers Agents.
So today I want to talk to you about the risks of buying off the plan or newly constructed properties. I get this question a lot.
‘Is there ever a time when it is okay to buy off the plan?’
Let me run you through this because I want you to understand that if you're going to go down that path and I understand why you would because obviously you're buying something brand new, beautifully styled - no one's ever flushed the toilet before! It's very enticing. But I want you to understand the risks involved and then I think once you understand the risks that are there, you can probably make a much better-educated decision on whether to move forward on something or not.
So first of all, let's talk about the people who develop these new properties, the developers' motivations.
First and foremost, they care about making money. They are going to be calculating how much it's cost them, what the return on investment is, and obviously they're going to try and maximise their return by feeding in as many properties as possible in the space allowable. They’ll be pushing sometimes for years to get certain concepts and designs through council and council may push back because there are too many, it's too high density for the area that they are building in, and so the roads to and from will become too congested, et cetera, et cetera. But at the end of the day, these developers are in it to make money, and that's not a bad thing, of course, everyone's trying to make a living, but what they also do when it comes to selling is they calculate the likely value of the property that they're building at the time of settlement, not at the time of the build. So they're actually already calculating a premium for this property, which is why it is very common for properties that are selling second hand a number of years later, very often don't make any money at all, or actually sell at a loss. So this is something to be aware of. Obviously, they have economies of scale, you know, if they're a bigger developer, 10 apartments is a lot cheaper than maybe four or a hundred apartments is even more cost-effective than maybe 50, but obviously they will be cutting corners wherever they can and there are obviously professionals at this. So, obviously be aware that sometimes, the wrapping is better than the actual present itself.
Now, when we're talking through the actual process of building, a number of years ago, the certification process of councils as to, you know, giving the green tick of approval so to speak, throughout the process of building, was made an independent step in the process. So councils actually stopped taking responsibility for this and said to developers, builders, even homeowners, if they wanted to do a renovation, you guys now have to pay for independent certifiers to come in and basically run you through the process and say, ‘yes, this meets the guidelines - yes or no.’ So if anyone's ever watched The Block, for example, you know, they harp on about the waterproofing process and making sure that that's all tickety-boo, in order.
But what that has done is that with the accountability of this certification process, the lines have become very blurred because there is a conflict of interest as far as I'm concerned, when it comes to this because, the builders, the developers are paying for these certifiers to come through. So it is in their best interest to get that tick of approval, which then incentivises this industry to potentially not have the highest standards that are required. And, as an example of this, you know, if you've been in Australia for a while, you only need to think back to Opal Towers or Mascot Towers. Mascot Towers, the building was evacuated in June 2019, but in April 2021, even after two years of trying to fix this building, the owners were actually urged to sell to the developers because it was more cost-effective to completely demolish this building because it was no longer financially viable to fix it.
Now, when the certifiers came through at the time of the build, you know, this was an apartment building with 132 apartments. They didn't check every apartment, they didn't have to apparently, they only went through and picked a number. Not even 10% of that block was checked. And so, there could have been apartments that were woefully inadequate and they were never checked. And so what we are finding now is that these poor owners are going to be selling at around a 70 to 80% loss. Which means that if they have bought a $1 million apartment, which is not uncommon here in Sydney, they would actually only get about $200,000 to $300,000 back in their hands.
Now that means they're left with a substantial loss and a mortgage on something that no longer exists, you know, because the bank will still be holding up their hands saying, 'Hey, we're still here. You still need to pay your mortgage!'
Now with Opal towers, for example, which is located in Sydney, Olympic Park, you know, that was evacuated dramatically on Christmas Eve in 2019 I believe. Now in July 2021, there were still more defects to be fixed. the whole story wasn't over, it's still not over. So that's a very stressful, expensive time to find yourself in. So be wary of that.
Now that's not the only thing that's a risk. The next things to think about are settlement. I've actually had conversations with people who after two years of delays finally got the keys to their apartment and found that the property no longer suited their needs, met their needs, and so they were left unable to move in two years after they were supposed to move in, had rental costs and everything else. And so it is very important to find out prior to signing anything, you know, when are the bills meant to be completed? What are the guarantees around that? And are there any potential payments for you and penalties to the developer and builders, if they deliver late, if they settle late? So that would be in the contract. When you are potentially looking at something off the plan or new, you really need to get a very experienced conveyancer or a property lawyer to look at the contract because these contracts in particular, can be quite tricky because they will have a lot of, special conditions around this and of course, they're all going to be in the favour of whoever is the vendor.
Now, the other thing to look at is surrounding development. So you found this great building that's, you know, it's going to look amazing. But, is it in an area that is earmarked for more development? Is it all vacant land around it? And what are those developments going to look like? Are you potentially going to lose your view, your privacy, or is it the case that you're going to be surrounded by building sites for the next 5 to 10 years? That is something that is hard to imagine, but it's certainly something you need to consider because obviously; dust, noise, continuous interruptions in getting in and out of your building because there's all these trucks everywhere it’s going to hampers your enjoyment of living there and if you're buying it as an investment property it's going to detract tenants from living there.
That brings me to investors in particular. A lot of new developments, medium to high-density developments are attractive to investors, partially because of the depreciation schedule that they can put into play, that is unknown when you buy into a building. If there is going to be a high ratio of investors buying into the complex, what can happen is that there may be a high turnover of tenants. There may be a lack of involvement from these owners in the running of the executive committee, there may be very lacklustre enthusiasm for people taking a seat on the executive committee. And also typically investors like low levees. They are not going to voluntarily increase the levees unless it's in their best interest. So that is something to be mindful of. You can't obviously guarantee who your neighbours are going to be, which is not the case in an established building where you can look through the strata report and see exactly whether people attend the EC meetings, how often they have meetings, how often these apartments get sold and resold re-rented as well, so that is something to bear in mind.
Now, the next point I want to raise is the amount of units in the complex that the developer is holding on to. Because think about this, you will be owning a share of the complex and that is directly related to your voting rights. So the bigger amount of property you own within the complex, the bigger your vote will be. Now, if the developer hangs onto a share of the unit, they may well have the majority of the voting rights and therefore they can do pretty much what they want and run the complex the way they like until they start selling off the remainder of the units. So be careful of that, and that is definitely a question you need to be asking upfront, but it obviously is very hard to determine this because most agents will not be able to answer that question. So again, that is a risk.
Now, this is, I think, quite a long list of risk factors that people don't necessarily, you know, think about when they look at the beautiful display apartment and how it is styled and everything else. But you've really got to look behind the machinations of, is this a good floor plan? Does it have lovely internal light and, ‘oh my God, it's got a secure garage!’. And it's only five minutes from the station.
So as a buyer's agent, these risks in my opinion are very high. And so therefore we tend not to buy anything off the plan ever, or even anything that is less than five years old.
We want strata history. We want to know who lives there. We want to know whether the people who live there are interested and are a great community. When we look at the strata report of these buildings, we look for money - Have they got cash? Have they got money in their admin funds? Have they got money in the capital works fund? Are they up to date with their compliance, you know, with their insurance? Their fire safety, the window safety devices, the pool, the lift, the cladding register. There are so many things that strata communities are actually legally obliged to comply with and that can cause great risks for the people living there, but also great fines if they don't comply.
You know, is there an active and engaged executive committee? The maximum number of EC members is always 9, no matter how big the complex is, how many are on the committee? Is it always the same subjects year in year out? And how often do they meet, you know, is it just once a year, which is a legal requirement or do they meet more often? You can tell a lot by really going through this report with a fine-tooth comb. Do they follow up on building issues? I mean, I've said this before there's no such thing as a perfect property, whether it's an apartment or a house. There will always be things coming up, whether it's waterproofing or plumbing or anything like that.
And of course, the billing code gets updated regularly as well. The 70's builds are very different to they are today with fire doors and everything else, and that's a good thing, but the buildings have to remain compliant to this.
This is a very long list that I think you really should think about before you get all starry-eyed by these new properties.
I don't want to put the fear of God in you, but I think it's important to really go into these things eyes wide open, and hopefully, I've given you something to think about.
So if you have any questions for me relating to strata or property buying in general, as always drop me a line at hello@buyyourside.com.au.
I'd love to hear from you and thank you for listening.