Stephen: Buying apartments off the plan has a number of risks. Let me just run through
some of the key risks that you can take. The first one is the contract itself.
What are you getting? Most apartment contracts that I have seen that outline the inclusions,
the fixtures and the fittings, the quality of what you're getting, is not specified.
There is nothing to prevent the developer going down to the cheapest supplier and providing
you with the cheapest stuff money can buy. Unless the contract specifies the brands and
the quality that's used, then you could be getting anything. More often than not,
you're more disappointed than pleased.
The next risk that you can take is that developers
are required by their financier to get a certain number of pre-sales. That number could be
50, 60% of the total development. If you're one of the first buyers, you pay your deposit
for your property, and he doesn't achieve the pre-sales. He can cancel the project.
12 months could go by before you've actually been notified that this project isn't going ahead anymore
and, yes, you'd receive your deposit back, but the issue is, it's taking you out
of the market for 12 months. You could have bought elsewhere and profited. That's a real danger
is that if he doesn't reach pre-sales, his contract will allow him to cancel the project.
Assuming, of course, that you're able to get
a contract that has really detailed specifications as to what you're going to get for your money,
and the developer doesn't require pre-sales or has achieved the number of pre-sales,
it's possible that inside that contract he has what he calls a sunset clause. We think
of 'sunset' ... it evokes a nice image. A sunset clause says that, unless this property
is completed by a certain time, it goes to bed. In other words, it's canceled. The developer,
if he hasn't completed the project by a certain point, he can cancel your contract.
What I've experienced in the past is that a project started some two years ago;
the developer has obtained his pre-sales; he has started to construct the property, but for
one reason or another, he's running late. He's not going to make the sunset clause time.
Both parties can agree to extend the sunset period, but the developer has no obligation to do so.
What I've seen happen in the past, over this two-year period, the price the developer
initially sold the properties for and the price of them now is significantly higher.
It's in his commercial interest to cancel your contract and take a new, much higher-priced contract.
There's nothing that you can do to stop that from happening.
There are other issues as well. That is that, what if the developer goes broke halfway through
the project? That happens as well. If that happens, again, your project is tied up.
It stalls - money's got to be found. It normally is insured by the building services council,
but you could face significant delays in having the project from once it's stopped
to get restarted again. That is an issue. Another question you may want to ask yourself
is that, who is buying into the development? What I say by that is that a good mix between
owner-occupiers and investors is approximately 70%/30%, 70% owner occupied, 30% investors.
If you're buying into a project that has 100% investors - and many apartment projects are
targeted just to investors - who's actually buying your unit? I would suggest that you
stay away from any property that has more than a 70/30 mix.
As an investor, I would suggest to you, is that having your apartment complete is not the end goal.
That actually signifies a beginning, not the end. Your journey as an investor begins at that point
What a developer will do is that his building
is now under warranty, and he provides the warranty. What the developers normally do
is that they retain control of the body corporate. They are the dominant partner in the body corporate
relationship. If there is a problem with the property, you go to the body corporate,
who in turn is supposed to go to the developer to fix the problem.
This is a little bit like complaining about your mother-in-law to your wife. That is that
he's in control, there is only a statutory time where he is responsible for the building.
If he has control of the body corporate, he can delay the project until such time as the
statutory period is finished, and the problem now rests with all the owners of the building.
That's another big problem, is the developer getting a hold of the body corporate.
Most of the complaints that come from apartment buildings relate to noise - the acoustics between
the units - and water damage. Some of these things can be extremely expensive to rectify
later down the track.
The trouble with apartments is that, in the real estate field,
it is the underlying land that appreciates in value far faster than
the physical building itself. It's the land component that goes up. It's the land that's
worth all the value. How often do you see, when you go down to the beach, you see this
broken-down old home on a beautiful block of land. It's quite clear to see that example
being put in play. When you get an apartment, the land value is a fraction of what you pay
for the property. It's the land value that appreciates. The potential capital growth,
as opposed to a individual house on its own individual block, is far different than what
it is in an apartment building.
In summary, it's the contract. Remember, it's
written for the developer by the developer to protect the developer, not you, the purchaser.
Don't forget that part. Number two is the land component in an apartment is tiny. It's
the land that grows in value. The third aspect is control. The body corporate controls the
property. You don't.
There's quite a number of risk taking in buying an off-the-plan apartment.
Having said all those things, in some cases they can be the most appropriate type of property
for you, but I'd be very careful going in there that you have your lawyers thoroughly
check your contract, you know exactly what you're getting, you know where the developer
can get out if he wants to get out, and that you can go into this project with your eyes
wide open, so there are no nasty surprises for you later down the track.