Would I Buy A Property Off The Plan?

A few years ago, a mate of mine referred a mate of his to get some advice. He was interested in building a property portfolio, in particular buying property off the plan (OTP).

When we met, Steve (not his real name) was in his early 40’s. A really nice guy and a very proud husband and father of four young children. He absolutely adored his family and was more concerned about getting his kid’s future set-up than his own retirement.

In between our 1st and 2nd meeting, Steve joined a property group. They provided mentoring and also acted as buyers agents. By the end of his first meeting with them, he had secured two properties off the plan, both based in Brisbane.

At our 2nd meeting, Steve asked me what I thought. In general, buying OTP can be a very effective strategy but I was more interested to find out what he had been told.

This was the cut and thrust of his conversation with them…

The Benefits of Buying OTP

Steve was told both properties were in good locations, not too far from the Brisbane CBD. And because they were OTP, settlement was not for another 2 years. Both offered the following benefits:

• 24 mth settlement meant the properties should appreciate in value during the interim
• Both properties included rental guarantees therefore managing any vacancy risk
• He could claim the depreciation on each building, especially in the first 5 years, and receive some good tax benefits which would help his cash flow.

Steve was also told the properties were being offered at a ‘discount’ because the buyer’s agent was able to negotiate a special deal with the developer. Therefore it was important to make a decision quickly because there were only a couple left and there was a lot of interest from other prospective buyers. (If so, why didn’t they buy on the spot like Steve?)

Steve was convinced he had found the bargain of a lifetime. I had told him that from my experience, properties were usually only offered at a discount in a flat or falling market. Straw hats in winter.

How Did It Finish Up?

When it was time for Steve to settle, this is what happened.

Because both properties came with rental guarantees, he actually bought them at a premium, NOT a discount. I.e. the rental guarantees were built into the price of each property. Proper due diligence would have flushed this detail out.

In addition to this, the properties had dropped in value and the bank refused to offer the 80% finance he was relying on

Consequently, he couldn’t settle on one and had to forfeit the property. This incurred a penalty of $50,000 and failure to pay it would have resulted in a law suit. He also lost his deposit of $40,000.

Unfortunately for Steve, his wife never really understood how it all worked but consented to the line of credit taken against the house to secure the properties plus pay the penalty.

As for his kids, those dreams were set-back at least 5 yrs.

But Steve is not on his own. Jane is a subscriber to the Moowsletter and a degree qualified and certified practicing valuer of 25 years. Earlier this week she was telling me how many properties that were bought OTP in 2013 and have not appreciated in value during the interim because buyers paid overs for them.

But desperation does that to people.

And before I get another call from a real estate agent because I have said something they don’t agree with, let me be clear. I am not against buying property OTP.

For mine I would only buy OTP at or near the bottom of a market and be doubly sure I was well acquainted with the developer.

Have a great week and I’ll see you next winter!

Adam