Why I hate off the plan apartments

I’ll come out and say it: my heart sinks every time a client comes to me with an off the plan contract to review.  Why?

First, I like it when my clients are happy at the end of our involvement together.  And once off the plan apartments are FINALLY finished (usually way over the estimated timeframe advised to my client upon signing the contract), clients are rarely over the moon about the result.  Even if the development exactly matches the plans and specifications in the original contract (which is rare), it may not meet my client’s subjective expectation of the property, garnered from the glossy marketing brochures and the well-lit display apartment.  Unfortunately, the feel of a property is something you can only assess once you stand inside and by then it is too late.

Second, when my clients go to sell these apartments, they rarely get the price they want for them.  There are so many of them popping up all over Melbourne and, whilst there are exceptions, supply outstrips demand. Plus because there is little unique about a particular apartment within a development, if one owner in the development decides to sell for cheap, all the other apartments are subsequently devalued.  Given how ecstatic most of my vendor clients are with the property prices they are getting in inner Melbourne at the moment, it makes me sad that my clients trying to offload these apartments don’t get the same results.

Third, contracts for the off the plan developments are always drafted heavily in favour of the developer.  Sometimes I can successfully negotiate particular special conditions in my client’s favour (say, guarantees of particular fittings or a get-out clause if construction doesn’t start within a certain time), but the special conditions with the most potential for unfairness will remain.  I find it frustrating as a lawyer not being able to negotiate a contract as a party with equal bargaining power.

There are exceptions of course, such as when the resulting apartment meets my owner occupier client’s particular lifestyle needs and they aren’t too fussed about capital growth.  Or when the location and features of the development guarantees that they will have a good rental return.

But, generally, I’m cautious when a client brings me an off the plan contract.  I raised my concerns with property investment expert Sarah Ross of Domain Property Advocates and she explained to me why she thinks off the plan developments are generally poor investments. 

Basically, land appreciates while buildings depreciate.  So when you buy an investment property, you should try to get as much valuable land under your apartment as possible (which is called a high land to asset ratio).  This makes your interest directly in conflict with that of the developer who wants to squeeze as many apartments as possible onto their site.

And then there are all the difficulties obtaining finance for small flats, the poor build quality, the investor/owner imbalance in these developments, the false rental guarantees or the risk the development won’t be completed at all.

I asked her what types of property purchases she would recommend instead of an off the plan apartment.  She gave me the following tips:

Don’t buy on a main road, but do look in good side streets within walking distance to transport and shops.

If the property is a one bedroom, look for the bigger ones, that is, over 50 square metres.  If it is less than 50, you might have some issues with the amount of money your bank will let you borrow.

Try and buy something with a balcony or courtyard, or something else that makes the property unique.

Properties built in the 50s, 60s and 70s are ideal, as they were built bigger and were built well.

Look for well-maintained blocks with good car parking access and a maximum of 14 apartments per block. The fewer apartments, the better.

She showed me the following examples demonstrating these principles:

http://www.realestate.com.au/property-apartment-vic-thornbury-119861513

http://www.realestate.com.au/property-apartment-vic-thornbury-119720339

http://www.realestate.com.au/property-apartment-vic-thornbury-119761943

I’m a lawyer, not a property investment guru, so my observations are based on my own experience and may not apply to every situation.  Give Sarah a call on 0428 408 757 if you need specialist property investment advice. 

And when you find something promising, email laura@nestlegal.com.au the contract (before you sign!) and we’ll check it out for any legal issues.