Sunday, August 22, 2010

Risks with Off The Plan purchases

There are many risks with purchasing an apartment off-the-plan. These include:
  • the development not actually starting, as some developers commence selling prior to obtaining development approval from the Council and many developers do not have finance prior to selling
  • the development starting late and finishing later than you want (which is not good if you want to move in; but may be good if you are an investor)
  • the development finishing earlier than planned (which is not good if you are not ready to move in, or if you are an investor and planned for a later settlement)
  • the developer going bankrupt or running into financial difficulties during development, and so cutting corners or having another builder take over
  • changes to apartment layout and size, that may be permitted by the contract
  • different quality to what you expected
  • different views to what you expected
  • having no control over the appointment of the onsite manager and caretaker, who could be appointed under a long term contract
  • body corporate fees being low for the first year (to attract purchasers) but then increasing dramatically in year two when the body corporate finds out not enough was budgeted
  • paying too much for the apartment, especially if the market goes down between contract and completion, or if you are buying something "different" and so can't really determine value when you sign the contract
  • not being able to obtain finance when it comes time to settle.
For these and other reasons, the purchase of an off-the-plan apartment should be at lower price than if you bought the same, completed apartment today. You are taking risks, and should get a discount for that risk. Often, however, that is not the case.

There are advantages of buying off-the-plan. You get first pick of apartments, and many of the better designs and locations sell out first. And sometimes the developer does a discount program for the first buyers.

I was reminded of all this by two readers, who sent me emails. One of the emails said:

"Thank you for your blog. You are very positive towards Pradella. I purchased in a Pradella development, and just want to point out a few issues, to give a more balanced viewpoint. First, stage one and stage two of the development are complete. Stages three and four, which can be seen from many of the apartments and the main lobby door, are just one big dirt patch with a low fence. A very ugly view. I have no idea when Pradella will complete the remainder of the development. Second, some features promised for Stage Two have been moved to Stage Three, and are not yet built -- for example, a picnic gazebo. Three, there is no enough visitor parking. This will only get worse when later stages are built. Four, Pradella own the onsite management rights, and the manager is an employee of Pradella. This creates a number of potential conflicts of interest. Five, the onsite manager is pretty hopeless as a rental agent, but Pradella does not seem to care or supervise. Six, there are two body corporates for the development (for each stage), so decision making is harder, especially in relation to defects and issues impacting all owners. Seven, Pradella has not sold all the apartments yet. This is making it difficult for people who want to resell, as they are competing with the developer, and prices have not risen much since settlement. Worse still, Pradella is renting out a number of the apartments, thus competing with the owner/investors in the rental market too. Overall, I am very happy with my purchase, and it is a great development, but I just wanted to point out that the picture is not 100% rosy."

Another reader's email described a situation in a development by Sam Vecchio at Taringa. I will not repeat the email here, as it goes for about 5 pages. It seems that the Vecchio family kept about a third of the apartments for family members and their superannuation funds. So even though the development "sold out", the developer sits on the body corporate and votes down motions. The fact that the developer was keeping apartments was not disclosed to purchasers off-the-plan. For example, it seems that most of the residents want pool furniture, but the Vecchio interests vote against this motion. There are also some issues regarding defects to common property, and failure to do the gardens as set out in the original plans and DA. So the disputes are getting messy, especially because the Vecchios can vote against motions to try to remedy the situation. Vecchio is now developing Rive Apartments near the Breakfast Creek Hotel.

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