Off-the-plan purchase and rebate gone wrong????

[Orlando]

Hi,

I have a query regarding an off-the-plan purchase that is due for settlement in the next few weeks. This is a Melbourne "boutique" apartment (1 bedroom, 1 study, 1 bathroom, carspace, etc.) with a contract price for 340K.

I've paid a deposit bond for 3,430 (1% of 340K) at the end of 2000. The property was due for completion for November 2002 but is now extended to March 2003 with an anticipated capital growth to 400K.

Although the property market seems to have cooled down and I am learning from other investors in the development that valuations for the same property (1 bedroom, 1 study) in the same development have been valued at below the contract price at 330K and 320K.

Although my contract price is 340K, the developer offered me a rebate for 50K, meaning that my purchase price is 290K at settlement which included stamp duty costs and a furniture package.

By allowing for capital growth of this off-the-plan purchase, I was assured that I would be able to get this property at a wholesale price without putting any money down but due to recent valuations, at (80% of 330K) I have to borrow another 28K to top up the loan using my own savings or by using existing equity from my other investment property.

So far, I have received two explanations for this:
1. The Melbourne property market in general is on a downturn and capital growth has stagnated or slowed and banks are now very strict and conservative with valuations as compared to two-three years ago.

2. Some banks/valuers are aware of the rebate scheme with this particular development and are expecting the purchaser to put in "hurt money" and will not allow for capital growth and value the property at only contract price (340K).

To be honest, I'm finding the above excuses very hard to accept. Even if the Melbourne property market is slow, there should of been at least some capital growth (5% p.a) factored over the last 2.5 years, or does this mean this property has been overpriced from the beginning?

I feel that I have been mislead in the fact that with this rebate, there was no need for me to put down any money. On top of that I've had to fork out $14,500 in commissions to the developer for this "bargain". In summary, the damage works out as follows:
Contract Price: $340K

Purchase Price (inc. Stamp duty): $290,000
Commissions: $14,500.00
Loan costs: $2,000.00
Total Loan: $306,500.00


Should I hold on this property and wait for capital gains or should I get out of this deal ASAP? I would really appreciate any wise feedback.

Thanks

Orlando

 

[bundy1964]

Hi Orlando

Do you know what the rent will be in todays market?

Will the rent justify the price of the property?

Would it be cheaper to lose the deposit and walk away from the deal and put it in the experiance bank? Could you do that under the contract?

bundy

 

[lawsjs]

I fail to understand why people think that if something has gone up in the past it will continue to do so. Apartment complexes are marketed not through supply and demand but by what their accountant's team can justify to people. There is no such thing as a developer giving a discount. Developers sell for the maximum price they can. If they are offering a discount it means no-one will pay the price, and in this country particularly valuers are not likely to see that as real. As I have said on another forum, I can offer you a 50% deduction on any of my properties, but I doubt any valuer would see it that way. If you think an OTP purchase is free money then you are sadly going to be very disappointed. Your late completion date is only going to make things worse. The market will be worse then and PARTICULARLY for units. I would guess that in the short term you will lose up to say 30% on the value of it. If you can hold on for 10 years you will do OK, but the rental market is going to be VERY hard. Weigh up very carefully the loss you will make by losing your 10% deposit now vs. what else you could do with the money in the next 10 years. I would favour ditching the unit, but that is up to you... You have learnt heaps and seem to have a quite accurate appreciation for the predicament. I always favour anything old as it is so easy to imprive and revalue. New properties are by design 'improved' and will have to wait 10-15 years for a reno. Esp. if they are in a bunch of other 'new' ones. As I said, ditch and cut your losses, unless you can afford to survive with say 60% of planned rent.

 

[Kristine..]

Orlando

The developer can sue for feasance (performance) of the contract.

Seek paid legal advice before making any decision. Opinion gathering is OK for ideas, but don't act on the advice of bush lawyers (including me!)

The deal may or may not be a raging success at this stage but it seems the preliminary valuations have come back within an operating margin.

If you have kept abreast of the Melbourne apartment market, you would have noticed a widening of the gap between the necessary construction costs (how easy to forget we've only had GST less than 3 years) and the resale prices.

Some areas have eased, others have shown strong growth, other buildings have had so few resales that figures are circumstantial.

It's understandable that you are concerned at coming up with another $30 - $40,000 when you did not expect to. However, if you had bought a 'house & land' package in the fringe developments you would not expect to see any real growth in this early time frame, either.

Growth in capital value is in the early days in the Melbourne apartment market, which in and of itself is still only ten years old. Simplistically, in the ten years since anyone could actually live in the CBD - apart from Captain Janson and various caretakers - the population has grown from 272 people to approx 10,000, not counting Southbank or Docklands.

Orlando, sometimes our best investments emerge as the 'jewel in the crown' from the chaos of circumstances. We bought a Challenge bank building which was actually valued down by the Council for rates purposes for two consecutive years! We tried to auction it and nobody bid! My husband was in despair, as it was costing us almost $10,000 per year in shortfall between rent and mortgage. He was terrified that if we lost the tenant we could lose our house.

Well, we lost the tenant to bankruptcy, but the new tenants are marvellous. We have kept the rent down as a security blanket, which means we are still covering the shortfall. However, in the last two years the property has more than doubled from purchase price, which means in the six years we have owned it, it has averaged 16% per annum compounded growth.

On a $ basis, our 6 years x $10,000 per annum (we borrowed 105%) = $60,000 capital investment, which has created a demonstrated capital growth of around $250,000.

Are we selling? Nope! and we are very glad no one came to the auction, either!

No one can tell you what to do Orlando, but 'feint heart never won fair lady'. If you are serious about investing for the long term, there will be deals like this, which look oh! so easy! at the start, but really separate the sheep from the goats in the long term.

I'd be interested to hear your reflections ten years from now. Be assured, unless we are invaded by little green persons from the outer galatic region, apartment living will be an accepted part of life and that values will have risen as much or as little as the general market or other lifestyle options.

Good luck with your decision!

Kristine

 

[Rolf Latham]

Hi Orlando

While its not going to help the reality of the situation, You are not Robinson Crusoe in this.

I have a number of clients in exactly the same position, many much worse than yours

Much depends on where it is as to hold or sell ?

Ta

rolf

 

[JoannaK]

Some banks/valuers are aware of the rebate scheme with this particular development and are expecting the purchaser to put in "hurt money" and will not allow for capital growth and value the property at only contract price (340K).

It concerns me that the developer has offered you a $50k rebate on settlement, and you intend going to the bank for a loan based on a purchase price of $340k rather than the actual $290k you are really paying for the property.

I would suggest that the developer has done this to simply 'sure' up his development with his lender.

You are right - it is a scheme And of course the banks are aware of it these days- they can be stupid sometimes, but they're always going to find those little loop holes and protect their own butts.

But the fact that you are actually participating in this constitutes fraud, and if the bank requests to see the whole contract, which they do these days because of these schemes, rather than just the front page, i would also suggest that there may be some serious ramifications for you.

Having said that, if the actual purchase price is only $290k, why are you so concerned about getting a loan at $340k? You should only be paying what you actually owe on your purchase.

Although my contract price is 340K, the developer offered me a rebate for 50K, meaning that my purchase price is 290K at settlement which included stamp duty costs and a furniture package.

Also, the banks will not include a furniture package in their valuation - this would be why the other valuations came in less than the contract price - they took off the furniture packages, so naturally a lesser valuation would be correct in this case. Same goes with stamp duty - the bank will not fund your stamp duty obligation.

One other thing to ponder; why on earth would a developer sell anything to anyone at wholesale prices - this would mean that they make no profit themselves. I can't see any developer building something for the love of it - they need to eat too.

 

[always_learning]

1. The Melbourne property market in general is on a downturn and capital growth has stagnated or slowed and banks are now very strict and conservative with valuations as compared to two-three years ago.

2. Some banks/valuers are aware of the rebate scheme with this particular development and are expecting the purchaser to put in "hurt money" and will not allow for capital growth and value the property at only contract price (340K).


I would be asking questions:
Do you think that Melbournes property market has slowed to zero or negative from the point it was at in 2000?
Would you buy this appartment right now for $340K? If not why would I expect a bank to value it at $340K or more? Why would a bank not[\B] fix any borrowings to how much is the property conservatively worth now?"

So I recommned, ground yourself in the reality, write down the issues, the problems the potential solutions. The very act of writing it down reduces worry and stress if any, it incapsulates it! Then from the reality of the situation as it is now work forward from it.

With my first property I was told I paid 10% too much, for a 3Bedroom, Califorian Bungalow on 400m2 land, Offstreet parking near the heart of Seddon (inner west of Melbourne), it may have been worth $80K but I was duped into paying $88K. Ten years latter prices have more than tripled. With property, time heals most wounds. However my word of caution is that the value of the land the house sits on has trippled, the value of the house has not. I would be asking if your unit has something than cannot be replaced, that over time will be more valuable?

 

[Mr Ed]

All,

I think we may begin to start & see more posts like this over the comming months as these OTP properties come due for settlement.

I think orlando is brave hanging out his/her laundry here, but thanks orlando as we can all learn from this experience, (this does not mean simpothy).

I think you are what they call paying for your education right now.

Mr Ed

PS I'd be interested to know who guided you towards this style of dealings, cashback etc.

 

[XBenX]

Originally posted by always_learning
With my first property I was told I paid 10% too much, for a 3Bedroom, Califorian Bungalow on 400m2 land, Offstreet parking near the heart of Seddon (inner west of Melbourne), it may have been worth $80K but I was duped into paying $88K. Ten years latter prices have more than tripled. With property, time heals most wounds. However my word of caution is that the value of the land the house sits on has trippled, the value of the house has not. I would be asking if your unit has something than cannot be replaced, that over time will be more valuable?

Ive told that story (and similar ones) to so many people AL

Its a great story to put things in perspective

 

[Ned]

if the developer is willing to reduce the cost to $290k plus furniture package without you asking (I assume that they have simply offered you the discount), why not see if they will reduce it further.

I'm not sure where your apartment is, but in docklands some of the developers just want to cut their losses and get out. There will be plenty of others like yourself, and if everyone defaults, they (developers) are in trouble, because no new buyers are fronting up.

It is easier for them to ensure that current people (such as yourself) complete the purchase by offering an inducement (discount)

In a sense, they are in the same situation you are - values don't stack up and they could be left holding not just one apartment, but 100's.

It's just a thought, but it seems to be worth asking the question to me.

Ned

 

[see_change]

For those who work countercyclically at what stage and at what price do those who are cashed up move in looking for bargains ?

Are developers going under ?

Are there any buyers around?

How bad is the market in Docklands?

I'm assuming that in the longer term Docklands will be viable . ( I haven't been to Melb Docks since 1976 when I appied for a holiday job ...) . Is this a correct assumption?

see change

 

[sbe]

FYI..

One reason developers will discount at times is so they can get the project off the ground. Banks won't finance until they have pre-sold xx% (usually 10-20%).

By discounting the first sales, they get the ball rolling, and signs with "Stage 1 sold out" help public perception.......


Of course, there are also some dodgey deals - caveat emptor !!

 

[Bill.L]

Hi all,

I dragged up this old thread of apartments as an investment, particularly Docklands apartments, has raised its head again.

Most of the early posts from 3 years ago were more than a little gun shy of them as an investment.

I just received in the mail, the latest 'Investors Club' newsletter (I went to see what they were about a couple of years ago and I am still on the mailing list. I have not used any of their services), in it there is an article on the performance of docklands apartments.

Since 2000, off-the-plan apartments at Docklandshave averaged $539,000 each and total sales of $1.4 billion.
An analysis undertaken by VicUrban of the resale of 144 Docklands apartments found the average capital growth was 5.9% pa and the average resale price was $517,000. Forty percent of these sales resulted in gains of between zero to 5%. A whopping 22% lost value.

Now the above numbers do not make sense to me, it looks like the cap growth is negative not positive 5.9% pa as the article states. However irrespective of this, cap growth of only 5.9% pa since 2000 is very poor compared to many other properties during the boom.

Does anyone have any opinion on this area, or perhaps some better data??
I feel this would be a better thread to post the positives and negatives of this type of investment, rather than hijack someone elses thread.

bye

 

[MJK]

Orlando,

Why don't you get a firm valuation from your financier. If it comes in at 290K then you may be paying a fair price, assuming the developer coughs up the
50K rebate. Cost 290 / value 290 = OK. You may have to front up with some deposit money, but most of us do using equity from other investments. There is nothing unusaul about paying a deposit of up to 20%.

MJK

 

[the_captain]

Hey MJK,

I hope for Orlando´s sake that this is ¨like so 3 years ago¨ for him .

I think Bill.L has bumped this old thread to serve as a warning to others as to the pitfalls of OTP and buying OTP units that are onsold by property marketeers.

There have been some disucssions on this lately and from what I have heard this practice or a similar practice is taking place in Homebush in Sydney, using all the same buzzwords i.e. wholesale, discount...etc..etc.......

 

[MJK]

Ahh,

Thanks for bringing me up to date!

MJK

 

[alexlee]

Quote:
Since 2000, off-the-plan apartments at Docklandshave averaged $539,000 each and total sales of $1.4 billion.
An analysis undertaken by VicUrban of the resale of 144 Docklands apartments found the average capital growth was 5.9% pa and the average resale price was $517,000. Forty percent of these sales resulted in gains of between zero to 5%. A whopping 22% lost value.

Now the above numbers do not make sense to me, it looks like the cap growth is negative not positive 5.9% pa as the article states. However irrespective of this, cap growth of only 5.9% pa since 2000 is very poor compared to many other properties during the boom.

The way I read that quote is that of 144 apartments, 40% (57 units) gained 0 - 5%, 22% (32 units) fell, and the rest (55 units) went up. On average they went up 5.9%, because the gains on those 55 units were greater than the 57 units that fell.

Still, you're right. Cap growth of 5.9% since 2000 is pretty crap, just compared to the median price growth in all the major cities!
Alex

 

[tubs]

Sorry, I dont understand why a rebate of $50k was offered. Surely if you had signed a contract, they would ask for their full settlement.

Unless, they're worried about you defaulting and having to sell on the open market, and getting even less than $290k.