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.

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Let's say you bought an apartment off the plan back in 2017 at the peak of the market. The apartment sold for $700,000 and the developer required a 10% deposit, or $70,000. Fast forward to 2019 and the market has 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.

What do you do?

This scary hypothetical scenario is becoming increasingly common. In February 2019 45% of new apartments in Sydney and Melbourne ended up being valued lower on completion than they were originally purchased for.

"Unfortunately more and more investors are finding themselves in the position that the contract price of their off-the-plan property is significantly more than the valuation that they receive on completion," said Michael Yardney of Metropole, an investment property expert who generally advises investors against buying off the plan.

"It's not a pretty scenario for any buyer to face, but it's not uncommon either," said Cate Bakos, an independent buyer's agent and property adviser based in Melbourne.

Bakos said 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."

Talk to your lawyer

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," said Yardney.

"Obviously the strongest risk-mitigant is to have a finance clause on the contract," said 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 advised, "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."

I'm considering purchasing off the plan? Is it 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.

"Off-the-plan properties are likely to keep losing value faster than established houses," said Yardney, "and I expect to see more investors being burned after having purchased off-the-plan properties." In many suburbs a large number of apartments are due to be completed soon, which will only make values fall further.

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 it becomes a question of covering the deposit shortfall. You don't need to stress so much about the property's value. Just enjoy your new home and eventually values are likely to stabilise.

It's only when you can't come up with the finance that you find yourself in trouble.

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