Property
Buying off-the-plan
Introduction
Being first in on a property development sounds attractive. But does it really stack up?
It is possible to do well by signing up to buy property before it's built and selling it later for a profit. But you have to be careful and thorough and there are a number of risks to consider - from inflated valuations to financing fish-hooks.
We take a closer look at what to watch out for.
A risky business
Some people have done well out of off-the-plan property, where buyers are shown plans and sign up to buy before the property is built.
The theory goes that you get the property at a discount for signing up and handing over a deposit before building begins. When it's finally built, you sell it for a profit.
It's just not that simple. Off-the-plan houses and apartments have RISK written all over them and many buyers fail to realise this.
The risks are greater when you're buying into a multi-unit development like an apartment building, but they're still there for off-the-plan standalone housing as well.
Some of those risks include:
- the property goes down in value before you receive possession
- you buy on the basis of an inflated valuation
- the developer doesn't complete the development - or wants more money
- you get caught by financing fish-hooks
- the contract favours the developer not the buyer
- the developer uses enticements of various kinds such as guaranteed rents.
The Blue Chip lesson
When Blue Chip's empire collapsed, many buyers had paid large deposits on properties that hadn't been built. The money then disappeared into a tangled mass that the liquidators are still trying to unravel.
Most buyers were cold-called and then visited by a salesperson posing as a "financial adviser". They were given a "financial plan" that involved buying property, some of which was off-the-plan.
Although Blue Chip gave buyers "independent valuations", in some cases people paid hundreds of thousands of dollars more than the property was worth on the open market.
Virtually all of the people who signed up for properties were encouraged to use accountants and lawyers hand-picked by Blue Chip.
What these "independent" professionals failed to tell the Blue Chip investors who were buying off-the-plan property was that the contracts and deals were weighted against them. The contracts, for example, didn't have sunset clauses or finish dates and they were often unconditional.
Marketing companies
You'd think that the companies that hard-sell off-the-plan property would be hiding out after the Blue Chip collapse. But our researcher was cold-called three times by companies selling such deals. These companies were LJ Hooker Developments, Iron Bridge Real Estate and Wealth Buy Property.
In May 2008, while researching this article, we also saw emails from companies such as New Zealand Property Solutions advertising apartment "investments" in Wellington's Forte apartment building, which included a one-year rental guarantee.
There are more than 20 companies marketing new apartments and standalone houses. Some of the big names are Merlot Property Investment, Catalyst2, Key2, and NZInvest. There are also many smaller ones such as Home Invest and Secure Invest.
Usually these companies offer buyers an investment plan that shows them making significant sums of money over 10 years or more. They may arrange accountants, lawyers and property managers for the client.