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Financial risks when you buy off-the-plan

Tuesday, October 10, 2017


 

 

Over the course of the last few years, investors had made a lot of money buying properties off-the-plan. The overall idea is simple enough: an off-the-plan buyer can enjoy capital gains before having to service any interest costs. That was particularly the case in Auckland where settlements often got pushed out by lengthy council delays without any increase in purchase prices thus compounding the gain an investor stood to make.

Be mindful that going forward, this may not be the case. The market is changing and investors, in particular, need to be careful. While we have regulations such as LVR controls that were not there during the GFC, it is important to note that rules can change at any time and are indeed more likely to do so in a slowing property market. We are seeing lenders who apply a far more stringent lending criteria than RBNZ rules to buffer themselves against a market crash.

Understanding the attraction and risk of off-the-plan deals

Pre-2007, many purchasers (speculators in particular) profited enormously by locking down off-the-plan properties and on-selling them before settlement. It was common, back then, for buyers to put down as little as $1,000 deposit and stand to make potential profits near the 6-figure region. You can surely see why this strategy was particularly attractive.

But then, the GFC hit. Many people who bought properties off-the-plan during 2005-07 faced actual settlement between 2008-2010. By then, the financial landscape was looking very different. Banks were pulling their LVRs right back from 90% for apartments to the 70-80% mark. When value dropped at settlement, so did the lenders drop their funding (as banks usually fund off the lower of the purchase price and the valuation). The net result was that purchasers had to come up with more deposit funds to complete the deal. Many deals fell through.

Buying off-the-plan deals in today’s market

These days, some banks are still willing to fund off-the-plan deals for properties that are due to be completed within the next 12 months. Not all of them do. It is important to be dealing with the right funder if you are in this space. Projects that are outside of the 12-month window pose a greater risk. What we tend to do for buyers in these situations is to look at getting an initial approval in place. We then keep a close eye on development progress. Once there is more certainty around actual completion, we will look at getting an updated approval about 9-months out, so we buffer the deal against (potential) further delays.

Another point to note is that servicing restrictions have tightened considerably. RBNZ is vocal in its desire for the Debt To Income tool be introduced. It is important to note that while you may have passed servicing a few months ago, you may not be able by the time the property settles.

All in all, while buying off-the-plan can still be a valid strategy, it is prudent to consider the changing financial landscape and how far you can realistically push yourself to see the deal through to the end.

Contact us if you would like to understand more about the risks associated, discuss the validity of a potential off-the-plan deal, or discuss your situation.


 


If you would like to understand more about the risks associated with buying off-the-plan, discuss financial validity of potential deals, or discuss your situation, please contact the team at Kris Pedersen Mortgages and Insurance.

This post is sponsored by Kris Pedersen Mortgages and Insurance, a specialist in rental property financing and risk insurance.


 

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