Buying off the plan - wined dined now sign the dotted line.
Dimitrios Darios
Assistant Relationship Manager with Regional and Agribusiness at Westpac
There is nothing wrong with purchasing a property for investment purposes.
Nor is there anything wrong with purchasing a property off the plan from a property developer who is building multiple residential low rise/high rise blocks.
In addition it is not wrong to be purchasing on land that has been recently released for development in what is expected to be future boom suburbs on the fringes of Metropolitan cities.
What should however prick the hairs on the back of your neck is when the property development is on land that has historically been susceptible to flooding; when the property was once infilled swamp land and during summer becomes infested with insects; and when the property is smack bang in the middle of social housing...for example.
More than likely you will not know anything about that - you would have never been to the suburbs these developments are being build in because you don't live there. You're either new to the market or out of state and have no knowledge of the local market and economic conditions.
You may not have the resources to investigate the relationship between the developer and the person 'helping' you achieve the financial goal of being a property investor. What incentivised them to call you and give you financial advice that purchasing a property off the plan was the best use of your money. Not only that, they will also source the financing for you and also organise the income protection insurance to cover you in the event something untoward happens.
Far more concerning is how these organisations got in contact with you in the first place and the flimsy reasons to establish rapport to take you along the sales process. Its unlikely your local real estate agent gave these people the hint that you were in the market. I also doubt that you signed up to be contacted for that very purpose. They may say that they received a list with your name on it from the Tax Office or you are eligible to invest in a National Rental Affordability Scheme (NRAS) property. Below is a government fact sheet on the scheme.
Now that they have you on the phone and baited you with larger returns on your equity through property investment. How do they get you to agree to and sign on the dotted line, then help you along the way?
In a similar way to how pressure salesmen sell a Timeshare - they will at their expense fly you to the city, put you up for a night, then wine and dine you whilst explaining the benefits of the investment in the rosiest possible terms. You of course have no obligation to promise to sign anything or take their 'financial advice' and they cant 'force' you. However influence and power does not have to be overt to be effective, especially if you feel obligated.
If you dont have cash to make a deposit or contribution for a loan - they may suggest you to borrow up to the maximum lending value ratio (LVR) on your property and pay the lenders mortgage insurance (LMI) to get access to each and every single cent you can.
So now you have the deposit and cash contribution necessary to make the purchase. You can borrow the rest of the purchase price on the LVR (on the lower of the contract of sale or property valuation) of the investment. Farout...now you have borrowed 100% plus fees on the purchase price for a property wow...that may not achieve the rental returns promised and may depreciate if the property market is oversupplied...but I am getting ahead of myself here.
If you dont have access to that they will ask you whether you have significant cash savings in your superannuation and steer you towards the route of borrowing in your self managed super fund (SMSF)...prickly...
Hopefully at some point before signing you have gotten advise from your banker and accountant/independent financial advisor about this venture. You may even bring it up as a negotiating tactic to deter having to make a decision in front of the sales person. Deferring to authority is a fine tactic - stick to it. They may then begin to disparage your accountant or banker (what have they ever done for you? When was the last time they called you? Aren't you sick of their unfair profits?...blah blah conjecture, to make them the enemy).
This doesn't mean to say that the property they 'help' you choose may not be a good purchase. If you have taken the time to research and accept the downward risk in a sober manner that is. Once the salesperson has sold you the house, they will also provide the financial advise, they will organise a mortgage broker to get the finance, they will have their conveyancer/solicitor perform the settlement on your behalf as well at your expense (brokerage/setup fees/stamp duties may cost thousands - budget about 5% for costs) - this is not inherently bad if you have your independent advice and don't feel forced.
But lets say the deal is attractive to you what could you do before you proceed. Talk to your accountant and your bank, get them to look into this for you. You can ask them for their advice on the property you are looking to buy - the bank will have a register of apartments that they wont lend against or give you some insight into the property. Get them to do a company search on the companies involved to understand who the beneficial owners are - this does not require a privacy consent. Although they may not be able to foresee how the market will move the bank can undertake a property valuation on your behalf (but for mortgage purposes) and may share this with you.
In the end it is your choice to proceed or not, you should however seek the guidance of those who have a vested interest in your long term profitability and success - not some wham bam thank you ma'am one night stand style transaction because in the end you could be left with a big responsibility that may not grow in value or give you the promised return and if you tried to sell it, may not be able to pay out your loan debt, let along recoup your initial costs.
Some articles from news sites about some down side risks from off the plan property: