Buying Off the Plan

[Lizard King]

Hiya All

Apologies if this question has been raised before; I seek advice on something we have not done before.

The situation

Venturing into our 6th IP (5 WA, I ACT) but this one is buying an apartment in East Perth (no siree, not one of those pool/gym/sauna high rises) off-the-plan.

The Problem

Need to raise $57K for a deposit by 22/9 - 30 days.
Developer wants us to go Unconditional after 30 days.
Have not approached bank yet as we are already settling on IP # 5 in approximately 6 weeks time.
Excellent location opposite Queens Garden in new EP Precinct getting developed near Trinity College.
Can raise the deposit through a Guarantee, courtesy Deposit Power; however, cost is around $5K.

Our Strategy

To sell before settlement on this one, approx Jan 2009 (Sunset Clause is 30 months from Contract) or settle on it by off-loading a 'poor-performing' IP in our portfolio, depending on how much we can make.

Already $15K ahead, as this is how much the developer has bumped up the price to the public.

The Question

Do you think it is 'worthwhile' to take the risk of going Unconditional without finance on the premise that the property will appreciate (significantly) before completion?

Remember, I will have to pay Stamp Duty (approx $25k) even if I on-sell!

Just some random brain-storming would help.

Many Thanks,

Lizard King

 

[Pablo]

Lizard king

This is just my opinion on the info you have supplied but I think it is a really bad idea to purchase this property with the intent of on selling it before settlement. Allot of people have been burnt by doing this in the past.

My reason for this are:-

- OTP properties are usually overpriced and don't increase in value for years afterwards unless you are in the middle of a boom.
- Developers usually account the capital gains during building phase by upping the purchase price.
- The Perth market is at the peak of its cycle and probably wont see any more growth before the settlement.
- You say you are getting it $15k under the purchase price but are you really? I bet I could walk in there and get the same deal.

Any way this is just my opinion, I am a newbie compared to you, but do a search on OTP and lots of other threads on this subject will come up.

Pablo.

 

[Ausprop]

I just bought one OTP with settlement 2010. As I got in early the list price went up a fair bit on what I paid and the whole building sold out in about 48 hours upon release. with 3 or 4 years inflation and cap growth in between it should be good. Re the Perth cycle, outer areas may be slowing down but I think there is a lot of upside in inner city and beachside locations, to hedge that in for a few years is a real bonus.

 

[Ausprop]

be wary that sunset clause tho... nothing more depressing than going thru with this for 2.5 years only to have your contract cancelled and you have then funded the developers super profit.

 

[Lizard King]

OTP Buying

Thanks Pablo, Ausprop

I can certainly hear what you are saying and take it on board.

I think I need to do the number crunching thoroughly and link them to risks and an escape Plan B. A REA I am dealing with in one oc our props says when buying OTP, consider you will settle and not pre-sell.

That neutralises 1/2 the risk. No 'What If' scenarios.

Spoke to CBA today and looks like they are willing to come to the party.

They can look at using present equity to finance the deposit on my existing security and then look at application in say 12 months.

Still thiMking....


Lizard King

 

[Ahmad Azimi]

Hi Lizard King,

I also recently bought an OTP 2bed unit at Parramatta, Sydney. Since I've bought it developers have also bumped up the prices. Mine would be selling for an extra $25,000 now.

As dealing with OTP properties quite abit I think it's very risky if you buy at the wrong time. Think of the property cycle as a clock. The best time to buy OTP would be between 6 and 12 o'clock. I also believe that Perth is at its peak right now so I would find it very risky but maybe Ausprop might know better since he lives there.

Before you buy ask yourself, if you buy now and the market goes down by settlement time and valuations come low then can you come up with the shortfall? I know property is for long term but you need to think of the short term too.

I agree with Pablo in regards to selling before settlement. You might also get burnt as the Perth market might not be that hot in one and half years time. But to give you some hope as you might know there are also markets within a market. ie. A city might be going through slump but there are certain suburbs that are going through a mini-boom of their own. Such as Avalon a northen beaches suburb in Sydney. A recent Australian Property Monitors figure showed that the median prices of units had gone up by 97% from Nov 06 to May 07.

So you can look into that abit further and I wish you all the best.

 

[timmyboy]

Hi Lizard King,

I also recently bought an OTP 2bed unit at Parramatta, Sydney. Since I've bought it developers have also bumped up the prices. Mine would be selling for an extra $25,000 now.

As dealing with OTP properties quite abit I think it's very risky if you buy at the wrong time. Think of the property cycle as a clock. The best time to buy OTP would be between 6 and 12 o'clock. I also believe that Perth is at its peak right now so I would find it very risky but maybe Ausprop might know better since he lives there.

Before you buy ask yourself, if you buy now and the market goes down by settlement time and valuations come low then can you come up with the shortfall? I know property is for long term but you need to think of the short term too.

I agree with Pablo in regards to selling before settlement. You might also get burnt as the Perth market might not be that hot in one and half years time. But to give you some hope as you might know there are also markets within a market. ie. A city might be going through slump but there are certain suburbs that are going through a mini-boom of their own. Such as Avalon a northen beaches suburb in Sydney. A recent Australian Property Monitors figure showed that the median prices of units had gone up by 97% from Nov 06 to May 07.

So you can look into that abit further and I wish you all the best.

Hi Ahmad,

Where do you see Melbourne as far as an OTP purchase goes?
I'm looking at one that will be completed in 18 months time, but am looking to get all info I can.

Tim

 

[Aimjoy]

Lizard King Hiya All back at ya,

Firstly congratulations on IP #5 - once you get to that number the rest (so I'm told, is easy)

At the risk of repeating what the others have said please seriously consider:

The best time to buy OTP is in a rising market. There is no doubt that Perth is not in that part of the cycle. In general terms it has peaked and should probably come off some. (That being said, there is no such thing as the "Perth market" and you might still get some rise in some parts).

Also you need to consider that if the market does drop by the time settlement comes around (and you have not managed to off-load for a profit) then 2 things may happen - and have actually happened in both SYD & MEL. First thing is the banks get nervous and will only lend 70% LVR on inner city units - this happened in SYD only a couple of years ago. You then have to get additional cash to settle the property. Secondly, of course if you cannot get additional cash and cannot settle and the developer has to sell for a lesser contract value - they sue you for the shortfall - this actually happens.

If the market drops then there will be a number of other "investors" just like you who need to unload in a hurry - guess what that does to property values in the block?

OTP is not investing it is speculating which is a riskier business. You don't know what LVR you can get when it comes time to settle. You don't know what interest rates you will have to pay. You don't know what the valuation will be.

For me - too many unknowns and too many known risks. You should preserve capital at all costs IMHO.

To make money on this deal you have to get everything lined up in a row: Property increases in value, I find another buyer to flick onto at a higher price than I paid, Easy finance at a reasonable interest rate and LVR is still available, The sunset clause does not kick in, The development experiences no build problems. WAY too many things to have to get right to make money out of this!!!

So I would caution you against it. If you want to pick up some bargains wait just a little longer in a high(er) interest rate environment, a possible recession at the end of the share market boom (it has reached the beginning of its end IMHO) and be cashed up for some real bargains.

Just my 2c.
Aimy.

 

[Lizard King]

Risk is Buying OTP

Thanks, Aimy and Ahamed for your really great insight into OTP Risk Management.

Will consider and let you know 'the outcome'.

Really appreciate your time.

Lizard King

 

[Ahmad Azimi]

Your most welcome Lizard King. Also my apologies on making a small error in my above post where i said best time to buy would be between 6-12. It's supposed to be between 6 and 10 as 12 would be the peak of the boom so it's not a good time to buy OTP.

 

[Ahmad Azimi]

Hi timmyboy,

I would consider Melbourne alongside Sydney at the moment as the top 2 cities which will give good returns for the investors. Over the past year I havent heard or red not even one negative review regarding Melbourne.

The vacancies have been very tight. Some inner city suburbs making very good capital growth. The rents have been going up aswell. I think it's a great time to invest in Melbourne. But keep in my mind as far as I know most of the growth has been happening in the inner city suburbs. The only outer suburb which I know of had some good growth is Deer Park in melbourne's west. This should give you some idea. (Hopefully the link works) http://homepriceguide.com.au/snapshot/price/index.cfm?action=view&source=apm

I also found this news article from July this year talking about Melbourne. http://www.news.com.au/business/story/0,23636,22015487-462,00.html#

I forgot where I saved all the stats I had collected but maybe you can do a google and find out abit more yourself.

We recently took up a new commercial project in Melbourne CBD. It's a mixture of retail and offices which will be finished in about 1 and half years time I believe. So I got some stats with that which says that the "Melbourne CBD office market has produced its tightest vacanty rates in five years. Vacant space in the city's towers fell to 5.9 percent in the first six months of 2007, compared with 8 percent in Jan and 7.5 percent last July, according to the Property Council of Australia's six monthly Office Market Report".

According to this the commercial market in Melbourne's CBD is heading in the right direction. Another quote from "CB Richard Ellis associate research director in Melbourne, Glen Lampard, said the Melbourne office market had grown well above long term averages".

"The downward trend in vacancy was a likely senario given that we had forcast a hiatus in costruction for 2007, he said, AXA's new headquarters in Docklands being the only major supply for the year".

We expect this low vacancy rate environment to continue until further projects come on line toward the end of 2008 and 2009 especially with the relocation of ANZ to their new headquarters under construction in Victorian Harbour Docklands".

Thats all I have for now. Hope it helped.

 

[Ahmad Azimi]

Oh and one more thing. In Melbourne if you buy OTP then you pay stamp duty only on the land. For a $400k established property you are looking to pay close to $20k in stamp duty. But for OTP you probably something like $2000.

 

[JIT]

I'm curious to hear if any other more experienced investors are considering OTP purchases in Melbourne at this time in the cycle? (not high rises, but say townhouses, villas or apartments in small blocks)

GSJ

 

[Lizard King]

How Do I Back Off?

OK. After giving careful consideration to this OTP purchase, I am thinking of 'backing off'. How does one back off a Contract?

The Contract is, 'Subject to Finance'.

Does this mean finance for the whole deal or simply the deposit?

Can I get my bank to write me a letter saying finance is declined - as is the case, being an OTP Purchase that they do not fund on Day One, approvals having a shelf life of 3 months only?

As a special condition, I asked that the deposit be made available through a Deposit Bond/Guarantee.

Anybody been in this sort of situation?

Do let me know your thoughts/advice.

Ta,

Lizard King

 

[Aimjoy]

OK. After giving careful consideration to this OTP purchase, I am thinking of 'backing off'. How does one back off a Contract?

One sees ones solicitor for any back outs one may legally use

The Contract is, 'Subject to Finance'.

Does this mean finance for the whole deal or simply the deposit?

The whole deal

Can I get my bank to write me a letter saying finance is declined - as is the case, being an OTP Purchase that they do not fund on Day One, approvals having a shelf life of 3 months only?

You can convince a bank to lie for you?

As a special condition, I asked that the deposit be made available through a Deposit Bond/Guarantee.

Contract is still a contract

Anybody been in this sort of situation?

Buyers remorse - nope - always carefully considered and researched before making my offer.

Do let me know your thoughts/advice.

Ta,

Lizard King

How did it turn out Lizard K??

Aimy

 

[Lizard King]

D Day is 22 September 2007

Hi Aimy

Thank you for taking time to reply to my queries.

D Day is 22 September 2007, when I have to cough up the deposit.

In this instance, the bank does not have to lie, as the fact remains that they cannot fund a project/property that has a sunset clause of 30 months.

I concur that one has to read a contract carefully, but is one not allowed to have a change of heart over a period of time, as the economics of thhe property change, evolve?

Suddenly there is this buzz about money being tight in the market. Bond and cash rates, yields, 2nd tier lenders combined (at least in Australia) with the forthcoming elections and 'global warming' and the continued drought that are sure to nudge interest rate up and is going to make the money market tighter.

Everyone is after your hard-earned dollar than ever before.

Who said property investing is not risky business??

Cheers,

Lizard King

 

[Property Meister]

I too would like to know if I should be looking at any OTP projects in Melb, someone mentioned that they got settlement of 2010, all I can say is WOW that is great!!!!

sorry Liz, I have nothing to add to your situation...maybe when I get more experienece

 

[Ausprop]

"I concur that one has to read a contract carefully, but is one not allowed to have a change of heart over a period of time, as the economics of thhe property change, evolve? "

not sure what you are getting at here - a contract imposes rights and obligations on both parties. it wouldn't be much of a contract if you could walk away whenever you had a change of heart


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"Suddenly there is this buzz about money being tight in the market. Bond and cash rates, yields, 2nd tier lenders combined (at least in Australia) with the forthcoming elections and 'global warming' and the continued drought that are sure to nudge interest rate up and is going to make the money market tighter."

sounds like you are just having a general panic attack. by 2010 we will be thinking about the election after the next, not sure what global warming will to do to your apartment, this credit thing will have long blown over and drought?? who knows what interest rates will be like in 2010 - this is part of the risk / reward for buying OTP

 

[Ahmad Azimi]

Not sure what kind of contract you got yourself into but mostly the contracts we deal with for OTP you can get out of it if the contract hasnt been exchanged.

The client puts a holding depost of $1000 and the contract is ordered for him. He he can take it to his solicitor and if he's not happy with it then he can either apply to change the terms or conditions by the developer or just walk away and get his $1000 back. And the property will be back on the market.

So I'm guessing in your case if the property hasnt been exhanged...meaning you might have signed it but the developers havent yet then you should be OK....hopefuly.

 

[Lizard King]

Developer Signed Contract

Hi Azmi

The Developers have already signed the contract. There was a 3 day Cooling Period, but I did not get the contract till 10 days after it was signed by the Developer ('Photocopying problems').

I was not 'aware' the Developer had signed.

Ausprop -comments taken on board.

Thanks,

Lizzard King