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What if your off-the-plan unit loses value before it’s finished?

When property prices fall, your off-the-plan apartment could be worth less than the sale price, making it hard to get a mortgage.

Buying off the plan means putting a deposit down (usually 10%) on a property that doesn't exist yet. You agree upon the sale price, but the developer won't build the property until after you sign the contract. In a time when property prices are rising, this can mean locking in a good deal early. But if prices fall, you may find your completed home is worth less than you paid for it.

If this happens, your lender may not give you the full amount you need for your home loan. If this happens you should:

  1. Talk to your conveyancer.
  2. Consider coming up with extra cash to cover the shortfall.
  3. Consider selling the property.

When your off-the-plan unit loses value

Let's use a simple example. Say you bought an apartment off-the-plan back in 2017. The apartment sold for $700,000 and the developer required a 10% deposit, or $70,000. Fast forward to 2019 and the market had fallen by quite a lot. Your new apartment is completed, but it's now valued at $660,000.

Now your bank will only agree to lend you 90% of the property's current value, or $594,000. But you owe the developer the full amount you agreed to in 2017, meaning you're short by $36,000.

This is a pretty scary hypothetical scenario. And back in February 2019 it was fairly common. 45% of new apartments in Sydney and Melbourne ended up being valued lower on completion than they were originally purchased for.

"It's not a pretty scenario for any buyer to face, but it's not uncommon either," says Cate Bakos, an independent buyer's agent and property adviser based in Melbourne. Bakos says that most buyers really have two options: "They can either bridge the gap by finding more funds, or they can forfeit their deposit and try to avoid being sued for any additional financial damages."

In 2022, property prices broadly aren't falling in most cities. They're rising. So this is less of a risk. But given that it can take 1-2 years to complete construction of a building, a lot can happen to the property market in that time. So the risk is still present even in a strong property market.

If you find yourself contracted to buy an off-the-plan unit that's losing value, here are your options:

Talk to your conveyancer

You should also talk to your conveyancer or solicitor, who would have helped you with the initial contract and likely understands your legal options better than you do. Talk to them before making any decisions.

"It is always worth asking your solicitor if there is a way out of the contract," says property expert Michael Yardney.

"Obviously the strongest risk-mitigant is to have a finance clause on the contract," says Bakos. "But this is very rare and almost never accepted by any developer."

It's important to understand all your options regardless.

Come up with extra cash

If you're keen to keep the property and avoid legal problems then you'll need to come up with extra cash. Buyers can try to bridge their funding gap by:

  • Using cash to cover the extra. If you've continued saving money since purchasing the property you may need to use some of this money now.
  • Borrowing more money. You could approach your lender and see if it's willing to lend you more. This will depend largely on your financial position (income, expenses and debts) plus the current value of the property.
  • Approaching another lender. If your current lender re-values your property and refuses to finance you then you need to find another lender. This is the kind of situation where a mortgage broker can help.
  • Adding someone to the property title. This might not be possible depending on the law in your state, but you could add another person to the property title and get them to help financially.
  • Getting help. You could also try borrowing money from a family member if that is an option.

Selling up

You may also be able to on-sell the property prior to settlement, allowing you to find another buyer and recoup some of your losses. This will depend on the specifics of your contract and the law in your state or territory.

"For many investors," Yardney says, "the best decision would be to crystallise their loss by selling up and purchasing an investment grade property instead. Unfortunately it is common for investors to make mistakes, it's part of the learning journey we all have to take."

Is purchasing off-the-plan always a bad idea?

Every buyer has to make their own call on a property and do their own research. Even with off-the-plan apartments the individual characteristics of the building itself and the location matter. Many off-the-plan units will still grow in value between the sale time and settlement.

"Off-the-plan invariably carries risk for a few reasons, but it is only fair to say that some are riskier than others," said Bakos. "Genuine comparable sales analysis is mandatory for buyers to have confidence that they aren't paying an inflated price. Obtaining sale prices is a challenge in a lot of developments, but buyers should ensure that they obtain sales data across multiple developments in the same location."

Your personal situation matters too. If you're an investor looking for strong capital gains then you might be looking at the wrong strategy, especially in the current market.

But if you've bought a home off the plan, your motivations are very different. If you're satisfied with the property and wish to live in it then you don't need to stress so much about the property's value. it becomes a question of covering the deposit shortfall. Then you can just enjoy your new home knowing that eventually values are likely to rise again.

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