The development processes
Buying into a development will be more common as Australian cities grow. What is often not discussed is the developer and how developers finance and sell their projects. There is a lot of strategic planning involved in selling properties in a development. The stages in which the properties are sold are very deliberate and financially support the entire project.
When a developer seeks the initial funding, the financial institutions often require the first stage to be sold off the plan. The financier may require the first stage to be sold either completely or partially before they lend to cover their risk. Purchasers of the first stage effectively provide a cash injection that assures the bank that there is significant demand and that costs are covered.
The first stage can often be the best stage to buy into because the price may be lower than subsequent stages. Clearly, the ongoing marketing and holding costs for the developer impact the price of the successive stages. The purchaser can often take advantage of the time for completion, the higher price of subsequent stages and less holding costs. If the development is a series of buildings on a flat site the first stage is often when the purchaser will be advantaged.
Conversely, the location of the first stage can be problematic for a buyer. If the development is located on a site where there are distant views of water, city or mountains, etc the buyer should consider what will be built in front of them. Often developers can sell the stages at a premium for the views. However, views do not have a quantifiable monetary value nor are they guaranteed. This means the purchaser could be paying a premium for something they actually will not ultimately enjoy or profit from.
When buying into a development it is essential you investigate the builders. Identifying trustworthy and experienced builders requires thorough research by reviewing their past projects, reading testimonials, and verifying their qualifications and accreditations. Excellent builders are transparent about their history and expertise.
Clearly, the vast majority of developments are completed to the satisfaction of the purchasers. However, as there are unknown elements to buying into a development the buyer must diligently investigate all aspects prior to paying a deposit.
Consumer Affairs Victoria outlines the risks of buying into a development as:
- not being unable to inspect the actual property. Consumers can only rely on an artist’s impression, floor plan and advertising material for information;
- differences in the expected and actual quality of the final finishes;
- unexpected changes to the plans or specifications;
- an uncertain completion date;
- complex contracts;
- limited recourse with the builder if there is a dispute. This is because the developer enters into a major domestic building contract with the builder, you buy the property from the developer;
- property market volatility causing the value of your off-the-plan home at settlement to be less than the contract price and
- potential issues with obtaining finance – for example, if the value of the property decreases or the completion date changes, you may have problems getting the loan approved.
Start by systematically examining these risks before you commit.
More Australians will be buying into development as house prices soar and the population grows. Knowing how developments are sold and what to check is all part of thorough due diligence and worth the effort.