Off-The-Plan in NZ - what has been your experience?

[donna]

Hi All,

PropertyTalk.com has been approached by a magazine looking to write an indepth article on the pros and cons of buying off the plan property. It is aimed at both home owners and investors. The magazine is keen to get a discussion going on this topic:

Off the plan property?

Have you ever bought an off the plan property in New Zealand? That could be an apartment or standalone house and land package.

What were your experiences (good or bad)?

Do you have any tricks for next time?

With all the recent experience with Blue Chip I know we can provide lots of insight into the pros and cons of off-the-plan property purchases here in NZ.

My own experience is in Australia so I guess that does not count. We want it worts and all - even if we are regurgitating some stuff that has been mentioned elsewhere in these forums - we have an opportunity here to educate our peers on what has worked, not worked, been a nightmare, what to look out for, and why you would do it again.

cheers,

Donna

[studio1]

A deposit bond of some description is always a good idea.

[CJ]

I bought off someone (3 months prior to completion) who bought of the plan.

I am not sure if they had but some of the original purchasers had gone through 3 developers and waited up to 5 years for the development to start.

The person I bought off made money but that would have entirely been eaten into by agent commisssion. They had had $50k in trust for over 2 years (interest bearing though I think).

Note: she sold due to change in circumstance - she had left the country.

It took over 3 years to get the code compliance certificate and that was only through a lot of work by one of the owners (the developing company had liquidated).

[mortgage broker]

It really depends on how the market is moving. When the prices are expected to go down then you could be at risk. The obvious risk is that by the time the property is complete it is worth a lot less then what you have paid for it. Not such a problem to you if you will be living in it, but what about the lender if you are borrowing some money against it?

Lets say it has taken more than six months to complete and the lender asks for a new valuation and its a lot less. They could turn around and say well we can borrow only this much now.

Also it can be annoying when the completed product is different to what you thought you might get, ie different colours slightly narrower room etc.

But in saying all of that I have seen in some people profit hugely, I am sure some of you readers may have, from off the plan purchases, in times where the price jumps up by a tens of thousands and is re sold before settlement. Don't think those days will be back again for a while.

[donna]

Lets say it has taken more than six months to complete and the lender asks for a new valuation and its a lot less. They could turn around and say well we can borrow only this much now.

Yep this happened to us on an apartment in Melbourne. It is a good example of what to look out for in off the plan properties.

The finance pre-approval is subject to an evaluation at the time the $$ are required (settlement) and so it's a moving target where you may be able to borrow more in a good market or less in a downward market.

For us we were only borrowing 80% so we could comfortably borrow more percentage (at the time you could borrow up to 95% on apartments) however it was a wee shock to learn we did need to get more % and many of the apartments failed to settle as many purchasers had already borrowed the 95% of the higher valuation.

This situation is the same wherever as it is a financing situation with OTP properties.

...and of course with the increased percentage of borrowings came the mortgage insurance too so that stung us for more $$.

Cheers,

Donna

[tim360]

From our experience of buying off the plan:
Pros
- Pay today's prices
- Opportunities to onsell prior to settlement for capital gain
Both only relevant to a market moving upwards.

Cons
- Time between deposit being made and completion/settlement of the development. Market can change a lot during this time if it's over a few years.
- Increases in construction costs can be passed onto owners if contract allows
- As the owner of a new apartment in a new complex you have to go through all the teething problems of a new property and new body corp
- Dealing with warranty issues with the developer
- Other construction projects completing at the same time, suddenly your market is flooded with similar stock

[studio1]

all long term contracts should have sunset dates imo.

[exnzpat]

Donna,

I am not sure I understand the term: “Off the Plan Property”. Could you clarify?

[donna]

Off The Plans

Cheers,

Donna

[exnzpat]

Off The Plans

Cheers,

Donna

OK, thanks.

Nope, never done it and I don’t think I ever would. There is so much real estate out there that I don’t see the point.

Though I’m a pretty conservative in my investing ventures.

[Kevynne]

We were going to buy off the plan by putting a caveat over our property through NZ Home Bonds, however a couple of the council depts did not like the plans and so they had to be redrawn. An extension of time was asked for by the developer and with these two changes we were able to cancel the contract. We did not loose one cent apart from just the time it took to view the proposed development sight & sign the S&P. I would not go with any development where they ask for a deposit unless I did not have to borrow the full amount and any deposit money is put into a solicitors trust account of my choosing. I would also not use any professional people recommended by the sales agents (solicitors etc).

[LondonKiwi]

2 Different Experiences

I have two experiences of buying of the plan.

Experience 1 - I bought a property from a developer who was also the real estate agent (more on that later). The property was built to the specification outlined and increased in value by about $85k from the time of signing the S&P and settlement. So the experience was pretty good from a financial perspective. Once completed there was one issue of drainage due to a design fault on the step to the main door. Consequently the water just pooled there. What followed was about 8 months of constant correspondence where we tried to point out this flaw to the said developer / RE agent. He simply said it was leaves in the drain and said the tenants had to keep this clean, although as the water never got the drain that was not the issue. We subsequently discovered the next door neighbour had the same problem and a new step was laid to overcome the problem, all the while the developer / RE agent kept on trying to say to me that it was not a design fault. Needless to say I finally convinced him to fix mine like the next door neighbours and he 'reluctantly' did. What's even more surprising with his approach is that he retained a property in the complex and attends the body corporate so he knew this would be raised at each meeting until resolved! Madness if you ask me!! Like property owners don't talk!!

Lessons Learned - On any completed complex if you have issues check to see whether other owners have similar issues and approach the developer with a common voice to fix.

Experience 2 - I signed for an off the plan property in a great location in Wellington with excellent water views. This was potentially going to increase by 100K in the year or so to build based on my knowledge of the area. I was not even that worried when the development kept running into delays and progress seemed slow. To cut a long story short the developer went bust at the start of this year (about 2 years after I first signed the S&P) and a new developer has bought at mortgagee sale the whole complex. I got my 5% deposit back so my only real loss here was the opportunity cost of not having that money for another property purchase or if you look at in real terms a loss of 100k on paper if the development had completed.

Lessons Learned - Always make sure the deposit is held in the solicitors account and not the developers as you will always get that back if it goes pear shaped.

LK

[mortgage broker]

deposit in a trust account

Also keep in mind that even though you might be putting the deposit into the real estate agents trust account, by law it is able to be released to the vendor after so many days. I think it might be after 10 working days? Not sure.

The best way to protect your deposit is to put a clause in to state that the deposit must be held in the trust account until settlement.

[studio1]

Also keep in mind that even though you might be putting the deposit into the real estate agents trust account, by law it is able to be released to the vendor after so many days. I think it might be after 10 working days? Not sure.

The best way to protect your deposit is to put a clause in to state that the deposit must be held in the trust account until settlement.

The best way to protect your deposit is not to pay one. A deposit bond or bank guarantee means you do not have to pay a deposit over. the deposit bond or bank guarantee is 'secured' over your existing equity, although different providers deal with this in different ways (some will require caveats, bank guarantees will usually use any existing mortgages they have, or funds on deposit are locked up).

The cost to use a bond or guarantee is a lot less than the cost of using cash.

[mortgage broker]

The best way to protect your deposit is not to pay one. A deposit bond or bank guarantee means you do not have to pay a deposit over. the deposit bond or bank guarantee is 'secured' over your existing equity, although different providers deal with this in different ways (some will require caveats, bank guarantees will usually use any existing mortgages they have, or funds on deposit are locked up).

The cost to use a bond or guarantee is a lot less than the cost of using cash.

I feel that there isn't much difference to this and what I have suggested previously apart from paying someone else extra fees and charges. Although you might have other reasons why you think it might be a good idea?