What method do I use to buy or sell my property?
Rent money is dead money. Property always goes up. You know them all. We've heard them at every BBQ for the past 20+ years. Us Aussies are property obsessed. For many, owning an apartment or house is not only about having a home. It is also the main (and often the only) way we intend to build lifelong wealth. Whether or not we use the term, it's not just a home, and it's our biggest investment.
This strategy has worked well so far for homeowners in Australia. Mostly. For the past 20+ years, property investment has been a brilliant trade. Sure, there are a few leveraged-to-the-hilt investors who've lost their shirt trying to flip 3-bedders in Karratha, but they've been the exception. It's been mostly good news.
Understanding the different ways you can buy real estate is an important step when buying a property. Here is a look at the four main methods and a deep dive into buying at auction and via private treaty, the two most popular ways to buy in Australia.
A standard residential property transaction is known as a Private Treaty sale. This is when the vendor or homeowner sets the price they would like to sell their property for, and their real estate agent negotiates individually with prospective buyers to achieve a sale as close to this price as possible.
Also known as a ‘private sale’, this selling method requires the vendor (or seller) to set a price from the start of their campaign.
This enables them to receive and consider offers from prospective buyers throughout the time the property is listed for sale on the market. Through this method of sale, the owner can choose to extend their campaign.
As a prospective buyer, you can submit an offer through the properties real estate agent to the owner and potentially negotiate the price.
Once the offer has been accepted by the owner, there is a cooling-off period. This is where certain conditions must be met in order for the sale to go through, such as obtaining finance or a sound home inspection.
Private Treaty Vs. Selling At Auction
There are pros and cons associated with both private treaty and auctions. Auction campaigns can allow the agent to create competition amongst buyers potentially pushing the sale price up. A private treaty can allow the vendor greater flexibility in determining the asking price and negotiating terms with purchasers individually.
Other key differences between auction and private treaty are timing and cool-off periods. The auction date generally sets a deadline for buyers to determine their interest and if they choose to bid they do so unconditionally, that is, there is no cool-off period when purchasing at auction. Private treaty, on the other hand, provides buyers and sellers more flexibility in when to place or accept an offer.
To decide the right sale method for you, it’s very important to get the advice of local experienced real estate agents. They will have insight into how most homes are sold in your area and which method is generating the best results. Our agent comparison tool can help put you in touch with the top performing agents in your area.
How Does Selling by Private Treaty Work?
The typical steps for selling by private treaty include:
- The seller or agent lists the property for sale at a predetermined price.
- Buyers make offers on the property.
- The seller or agent negotiates with buyers for the right price and contract conditions.
- The seller and buyer agree on the price and contract conditions.
- Contracts are exchanged and reviewed by conveyancers or solicitors.
- The seller and buyer sign the contracts.
- The buyer pays a deposit.
- The cooling-off period begins.
- The cooling-off period ends and the contract is binding.
- If the buyer decides to cancel the contract within the cooling-off period, they forfeit a percentage of their deposit.
Pros and Cons of Private Treaty
Private treaty is the most common way to sell in Australia, but it comes with both pros and cons. You may find that the disadvantages don’t suit your individual needs. In this case, an auction might be your best bet. Learn more about the pros and cons to see if a private treaty sale is right for you:
The private treaty gives the seller more control over the sale.
Sellers will have more time to consider offers from potential buyers, which helps avoid hasty decisions.
Sellers have more flexibility when they are not in a rush to sell. They can extend their sale deadline indefinitely, which removes any pressure.
Potential buyers are not aware of what other interested parties are offering. This encourages them to put in their best offer.
Despite the lack of competition, private sales can be much faster than a sale at auction. Auction campaigns can last upwards of four weeks. In contrast, a potential buyer can put in an offer immediately after a property is listed for private sale.
Fast private sales can be cheaper because sellers avoid auctioneer costs.
Listing a property at the wrong price can lose potential sales. Finding the right price needs research and can often involve trial and error.
Setting a price that is too low may mean sellers miss out on the potential return on their investment.
Fluctuating listing prices usually put potential buyers off. If the price is reduced, it may look like you are desperate to sell. If it’s reduced too many times, potential buyers may think there is a fault with the property.
Cooling off periods only applies to private sales. This means your buyer could back out at the last minute.
Without the element of competition, property listings may become stale and potential buyers may disregard the property. This means that private sales can also be much slower than auctions.
If your home takes some time to sell, frequent inspections can disrupt your life and become quite inconvenient.
How to make a private treaty/ private sale offer
Negotiating the deal is at the heart of a private treaty sale and given that most people only buy and sell a handful of properties in their lifetime, it is understandable that most buyers feel uncomfortable with the process.
To help you put your best foot forward, here are our top tips on making an offer and negotiating a private treaty sale. For more information download our Buying a Home Guide.
How to successfully make an offer and negotiate a private treaty / private sale purchase
- Ensure you have thoroughly researched the market and spoken at length to the Sales Agent and worked out what the property is worth and the right amount to offer
- Ensure you have pre-approval in writing from your lender and have done your financial due diligence to ensure you can still afford the repayments if the interest rates change or you are unemployed for a period of time
- Although it may be a good idea to make an offer slightly below the asking price so you can negotiate upwards, don’t go unreasonably low either
- Deliver a signed contract with a cheque for the deposit to the agent and send an email to both the agent and the vendor’s solicitor. They are legally bound to advise their client of your offer
- By attaching a cheque to a signed contract, you can make your offer much more appealing
- Never sign a contract unless you have had the appropriate legal advice from your solicitor or conveyancer. An offer isn’t legally binding, but a contract is, so making sure you know what you are signing is paramount
- Know the maximum amount of money you are prepared to pay for the property and stick to it
- Speed can be important. If you love property and have done all of your due diligence, be ready to make an offer quickly as properties are often snapped up in a few days after hitting the market
- Ensure your building and pest inspector is on standby to inspect the property if your offer is accepted
Buying at Auction
In Australia, auctions are becoming increasingly popular. They’re a very effective method of selling your home, as the buying community knows you’re committed to making an immediate sale. All property types can be and are being, sold via auction and auction houses.
The main difference of an auction is that there’s a time limit on selling negotiations. This creates urgency from prospective buyers if the property is in high demand, resulting in a selling price that’s driven up by the competition. However, if there are only a few people interested in the property, there’s less of a chance that the auction will ‘take off’, meaning a lower selling price. Sellers are also free to consider incoming offers before the auction takes place (with the exception of some mortgagee & deceased estate auctions). Below, we’ll talk you through the advantages and disadvantages of auctions.
An auction is a public sale conducted by a licensed auctioneer and is governed by strict rules. There is a reserve price, which is essentially the minimum the home will sell for - if bids surpass the reserve and you are the highest bidder, you have to sign the contract right there and then.
Auctions are a very popular buying method in Australia, as there is a chance of snapping up a property quickly at a good price.
Before the auction day, you can make a pre-auction offer to the owner through the real estate agent. This is where you can submit an offer of how much you are willing to pay for the home. However, in order for your offer to be successful, it needs to be an amount that will attract the owner’s attention.
You will need to register your bid on the auction day to begin bidding on the property.
In most instances, the owner will have set a minimum reserve price they are willing to accept for the property. If the bids do not meet or exceed this price, the property may be passed in, or ‘withdrawn’. Should this happen, there could be an opportunity for you to negotiate a sale with the owner.
Some sellers allow part of the deposit to be paid at the end of the auction with the rest on a specific date. This will need to be identified in the contract.
Properties sold by auction are not subject to any conditions, which means you will need to complete an inspection prior to auction day and have your deposit cheque ready to go at the time of sale. Unlike private treaties, auctions do not have a cooling-off period. This means you need to be sure this is the property you want to buy.
Advantages of selling by auction
- Among the advantages of a sale by auction is that it doesn’t automatically shut out potential buyers in the same way that having a set sales price can. If a buyer’s budget is $950,000, chances are that they won’t even consider a property listed at $1 million. With an auction, however, there are no list prices. As a result, more potential buyers often wind up walking through the property, some of whom could fall in love with it and figure out a way to come up with the extra money.
- In an auction scenario, it’s harder for the buying public to determine true market value because it’s difficult to compare other properties when they’re not fully aware of your sale price expectations.
- People bidding are buying with terms and conditions determined by you as the vendor.
- Hidden sale price/expectations. You as the vendor are protected by the reserve price. Having a reserve price that stays strictly between yourself and your agent means that it’s harder for the interested buyers to research the market and have a solid understanding of your properties value.
- You have the opportunity to set the reserve together with the real estate agent after assessing the bidding strength of the potential purchasers. This determined in part by information collated during the open-house inspections.
- You get to control how much is spent on the marketing plan by choosing how much the auction is advertised to the public.
- Competition amongst buyers. The bigger the group of bidders the higher the perception of interest in the property and the faster the competition stands to grow. With a perception of ‘missing out’ – buyers often bid above what they’d consider in a listed sale set-up.
- Sense of urgency. Being that there is a set date for sale, this will encourage bidders who may otherwise procrastinate their decision because they’re well aware that the aim of the game on auction day is to sell then property.
- Direct contact with most potential buyers. If the property doesn’t sell at the auction, you’ll be put in direct contact with the most likely buyer and can enter further negotiations. If the property is not sold at auction the agent will typically either pass on the details for the highest bidders are contact them on your behalf to enter negotiations seeing how close they can come to your reservation after the auction day.
- The property is usually exclusively held by one real estate agent/auction house for a fixed period of time (normally four to six weeks). Marketing is usually intense over this short period of time, with either no price or a possible price range advertised.
- An early sale can occur when a buyer feels ‘pushed’ to make an offer to buy the home before the auction day. Usually, because they believe competition on auction day will be too fierce.
- The sale contract is usually deemed ’unconditional’, meaning the sale will conclude on settlement day rather than waiting for the buyer to receive finance or further inspect the building.
- Homes with unique features often do well at auctions as they may attract more competition between bidders.
- If more than one person wants to buy the property, the competitive nature of an auction can cause people to bid higher than they originally wanted to spend. This can result in large profits.
Disadvantages of selling by auction
- Sometimes, properties are “passed in” on auction day and, despite the owner still intending to sell over the coming weeks, it can upset or eliminate some potential buyers.
- Bidding is a fickle process and if for whatever reason, bidding is slow, this can send an incorrect message about the true value of the home.
- Some potential buyers don’t like the competitive nature and immediacy of the auction process and won’t even bid.
- Now that auctions are highly regulated, many states require that buyers must formally register. Some potential buyers may not like this process and will not sign up.
- Marketing and advertising campaigns for auctions can be quite expensive.
- If you’re in a hurry to sell, an auction offers the best chance of selling by a specific date, but there is no guarantee the property will sell or that you will receive the price you desire.
- Auctions don’t always necessarily offer you the best sale price, as the winning person only needs to bid marginally higher than their competitors. You’ll never be sure that they offered the maximum amount they were willing to pay.
- Most real estate agent auction contracts provide the agency with sole selling rights until the auction and then for a period of time afterwards. This then locks the vendor in with one agency for a defined period of time. In the event your property does get “passed in”, it’s a good idea to prepare for this by only giving the agency a specific period of time to retain exclusive selling rights after the auction (one month, for example).
Sale by online auction
Sale by online auction is relatively unchartered territory in Australia, but some groups are beginning to experiment with it, piggybacking off of what’s happening in the United States.
The principles of an online auction are exactly the same as a traditional auction. The only difference is that instead of being at the property in person on auction day, buyers participate virtually from their computer or mobile device. In some cases, buyers also have proxy bidders who are present at auctions on their behalf. For that reason, online auctions are typically used by foreign investors who aren’t able to be present at auctions themselves.
Pros: Online auctions are a great way to bring home sales into the digital age, allowing buyers to participate no matter where they’re physically located.
Cons: As a buyer, there is an element of risk involved. After all, it would be a shame to miss out on a property due to a connectivity issue or some problem with your device.
Tender and expression of interest
These two selling methods are quite similar to the private treaty, but they are usually associated with premium properties. They are more formal and both require written offers passed through the agent to the owner.
Expression of interest
In an expression of interest or tender campaign, buyers are invited to submit their best and final offer by certain closing date, at which time the vendor chooses the most suitable offer. Akin to a slow, blind auction, buyers can also set terms and conditions.
An Expression sale takes the best parts of a private treaty ‘for sale’ and an auction campaign and blends them together. The main features are:
Like an Auction, your property is advertised with a deadline for the sale. This means offers to purchase must be made by a specified time and date creating urgency among buyers
As in a private sale, offers can have flexible terms to purchase
The property will generally be advertised on the market for 5-6 weeks to allow potential purchasers to view the property. The Expressions of Interest campaign will close on a specified day and time. If there are purchasers keen to buy, the agent will ask them to complete an Expression of Interest. The fixed closing date motivates interested buyers to act and encourages competition between them.
The Agent will provide a list of recent comparable sales to purchasers to show them the value in your property.
Each potential purchaser will need to put forward their best and final offer (in writing) on a contract of sale. As well as a price that the purchaser is willing to pay, conditions of sale will be added to the offer, including settlement dates, finance conditions and inclusions and exclusions of the sale.
The buyers have only had one chance to secure the property with an EOI sale so you can be assured they are putting their best offer in.
After Expressions close, offers will be discussed with you by your agent. It’s important to know that the offers are only shared with you, they are not disclosed between purchasers or anyone else.
If an acceptable offer is not forthcoming, you can opt to negotiate with the highest offers or you may consider placing your property on the market as a private treaty sale.
You are not bound to accept any offer during the campaign.
What are the advantages of an Expression sale vs Auction?
Where a unique high-value property is concerned, an Expression campaign will indicate the true value of the property through the competitive nature of the offers process.
Auctions require a 10 per cent cash deposit and an unconditional contract where an Expression sale can be subject to finance or other conditions. An Expression of interest campaign opens the market for your property to more buyers who cannot meet the strict auction conditions of sale.
An Expression sale only requires one interested buyer who puts forth their highest offer confidentially, whereas an auction will usually require multiple parties to bid against each other to bring an acceptable result. Auction bids usually start at a lower amount as buyers test the market to try and secure a bargain.
The Expression will lead to a higher price because in an Auction the highest bidder will stop once the lower bidder stops. In a tender sale, this cannot happen as the buyers must submit the highest price they are willing to pay because they don’t know what others are bidding.
The closing date creates a sense of urgency as with an auction, but the private nature allows the accepted price to be kept discreet.
Expression of interest campaigns can help realign vendor expectation with the market. If their expectations are too high, it's an expression of interest and the buyers are advised what their expectations should be.
In this type of situation, vendors use the spirit of competition to their advantage by inviting secret offers from interested buyers. Selling by tender can be beneficial in that it allows the seller to offer a broad price range, rather than advertise the home with a pre-determined price.
There is some risk involved in selling by tender as well, which is why it’s important to work with a qualified real estate agent who has experience with this particular type of sales process. You can view local real estate agent details side by side for comparison by registering your details at LocalAgentFinder – and start thinking about whether or not this type of sale would work for you. Because selling your property is a big step at any stage in your life, weighing all options carefully can help you maximise your profits with as little stress as possible.
A tender is essentially a type of closed, silent auction. When selling a home by tender, the seller will accept tenders from prospective buyers and consider these various offers at a pre-specified date. The offers are presented in sealed envelopes, which are kept secret from other buyers. This means that prospective buyers will remain unaware of what prices competitors are submitting. Before this process begins, the home is first marketed to prospective buyers at inspections. Interested parties can attend these inspections before submitting a written tender by the specified due date. Sellers are not allowed to accept any offer before the pre-specified deadline has been reached.
Buyers do have a few bargaining tools on their side. For example, they can make a conditional offer, such as making their purchase subject to a building approval certificate. These terms and conditions are included by the seller’s solicitor in an official tender document.
After the closing date, the seller and their real estate agent will go through all of the submitted tenders. With their agent’s advice, the seller can choose the tender that’s most favourable – depending on the price offered as well as the terms and conditions. There’s no obligation to choose one of the tenders that have been submitted. If none of them is found to be acceptable, the real estate agent can go back to the potential buyers to see if any of them will be willing to change their conditions or offer a higher price.
Although selling by tender has gained popularity in recent years, this practice is nothing new; it’s been used for centuries as a way to sell a property. One of the reasons it has become prominent again recently is that it helps sellers make a quick sale by a certain deadline, without drastically dropping their price to do so.
The advantages of selling by tender
There are many potential advantages to selling by tender:
Because there is no listed selling price, buyers can’t compare your home to others on the market. The sale price of the home is usually kept secret, so complaints about an overpriced home are less likely.
With all bids kept fully confidential, potential buyers cannot base their offer on what others are bidding. This can lead to the winning tender being significantly higher in price than other offers. The amount of the tenders may far exceed seller expectations.
Control over the sale process
You assume control over the sale process since you don’t have an obligation to sell to the highest tender if you are not satisfied with the price or conditions. You also have the option to extend the tender deadline as you see fit. The seller retains control over the selling process. They don’t have to accept the highest tender, but knowing this figure can also open up the doors to future negotiations.
Increases property profile
A targeted marketing campaign can generate significant interest in your property. Since interested buyers are required to submit their “best, highest and final offer”, this can stimulate competition and lead to a higher sales price. Sales and marketing efforts can be optimised with an intense campaign that aims to put the property directly on buyers’ radars, to make them aware of the home’s existence before the closing date. This specific closing date also means that sales and marketing campaigns don’t last for long periods of time, which saves both time and money. The seller has control over how much money is spent on the marketing campaign, by limiting the amount of time that the tender sale is to be advertised.
Indicate market value
If you’re uncertain about the market value of your property, a sale by tender can give you a better understanding of a buyer’s perceived value of your property. For sellers who don’t have a clear idea of what the property is worth, this tender bidding process can help indicate true market value. This is useful for unique properties that don’t fit into the market in a neat compartment.
If there are numerous interested buyers in the property, the competitive nature of a sale by tender can motivate buyers to bid higher than they normally would. The discrete nature of a sale by tender means that interested buyers cannot base their offer on other competing offers, which can lead to higher offers as there is no ceiling on the asking price. A sense of urgency, as identified by the closing date, may also encourage interested buyers to raise their offers. If there are several bidders who are interested in the property, the competitive nature of the tender situation can cause them to bid higher than they normally would.
A wider pool of buyers
As the majority of tender transactions are completed in cash, your property may appeal to a broader range of buyers, such as buyers who may not otherwise have qualified for pre-approval with a lender. Unlike other sales, all tender transactions are completed in cash. This makes tenders different from auctions, which rule out buyers who don’t already meet lender criteria for pre-approval. This opens the door to a wider selection of potential buyers.
An attractive alternative to auction
A sale by tender eliminates the perceived stress that is associated with a public auction. Another advantage that a tender has over an auction is that it only requires one interested party, whereas an auction requires at least two bidders to drive up the price. Sellers also tend to feel less pressure when they are selling by tender because they don’t need to make immediate decisions like they would in an auction.
Higher Bid Prices
A tender process tends to lead to higher bid prices than auctions because in an auction the highest bidder will stop bidding once the weaker bidder quits. In a tender sale, there is no point when this can happen. The highest bidder will have to throw out the highest price they’re willing to pay, because they don’t know what others are bidding. There is no ceiling price that can be put on a sale by tender, meaning that the sky’s the limit when it comes to the potential price of a property.
The disadvantages of selling by tender
There are numerous potential benefits to choosing the tender process. Yet there is also a certain degree of risk involved. To minimise this risk, it’s helpful to choose a real estate agent who has lots of experience with selling by tender. You will also want to think about the following potential disadvantages:
While the confidentiality of a sale by tender may drive up offers, the reverse is also true. If buyers don’t know the market value of the property, you could face lower bids. The confidentiality provided by this selling process can drive up bids since the buyers are unaware of what their competitors have offered. However, this can also backfire and lead to lower bids than the expected sale price, because buyers will have no idea of the property’s true market value.
If the tenders submitted are unsatisfactory, it’s possible to negotiate with the interested buyers. This can be a long and drawn-out process, taking a longer time than the seller initially hoped for.
Higher marketing costs
Because an intense advertising campaign is necessary to make buyers aware of the closing date, marketing costs can be high in a tender sale.
A targeted marketing campaign is usually required to create awareness of the property, which could affect the closing date and increase marketing fees. Because the advertising campaign is often shorter than for auction or sale, it’s possible that fewer potential buyers are made aware of the property.
If there is no price guide, buyers may assume that the property is priced beyond their reach and may not consider the property altogether.
Like any selling strategy, it’s best to weigh the pros and cons carefully and have a discussion with your real estate agent to determine if selling your property by tender is right for you.
Buying off the plan
When you buy property off the plan, you are paying for something that hasn't been built yet. The home can end up slightly different from what you were told. However, it does offer you a lower price point than many other properties.
One of the important considerations you will need to make when buying a property is: should you buy an established home or is buying off the plan a better idea? While the excitement of being the first person to live in the home and the flexibility to choose your floor plan and colour schemes may be appealing, there are also some common pitfalls that you need to be aware of if you intend to buy off the plan.
There’s a lot of uncertainty and bad press surrounding off-the-plan developments, so people often ask for my take on them.
Firstly, we'd like to explain what buying off the plan means. Then, we’d like to explain the pros and cons, so that you can decide for yourself whether buying off the plan is a good idea – because, as with most things in real estate, buying off the plan is neither good nor bad.
Rather, it’s a good idea in some situations, but not in others.
What is ‘buying off the plan’?
Buying off the plan is when you sign a contract to buy an apartment that is yet to be built. Without a physical property to inspect, buyers base their decision on plans and artistic renderings of how the apartment might look, in addition to information about the project and developer.
What are the advantages of buying off the plan?
Lock in a price
One of the advantages of buying off the plan is that you will pay the current market price for a property, even though it will be completed in the future. The main advantage to buying off the plan is that you agree upon a purchase price before the building is completed, and generally only need to offer a small deposit. In theory, this means that you could pay a lot less for a property than it’s worth at the time you move in, as property prices could increase significantly during the time it takes for your developer to build the home.
Securing a high-value asset for a low initial capital outlay
While a deposit is made to secure the property (usually 10%), the entire payment doesn’t need to be paid until the property has been built. This provides you with time to organise your finances and if required sell your existing home without the need for bridging finance.
Increase in property value
If the market experiences growth, the property you purchase off the plan today may increase in value when you settle two years later.
If purchasing for investment purposes, you may be able to claim depreciation on your tax for items like fixtures and fittings. It is important to consult your Accountant to find out if you are eligible.
Stamp duty savings in some states
State governments (in certain states) offer bonuses and reductions in stamp duty for buying off the plan which can save you thousands of dollars. Firstly, buying off the plan means you could save a lot of money on stamp duty, as most states offer greater discounts on newly constructed properties and, if a buyer signs a contract before construction begins, stamp duty will only apply to the land value, not the finished product.
Seven-year builders guarantee – Newly built properties in Australia come with a 7-year builders guarantee which means structural or interior building faults must be repaired by the builder.
It’s a fairly logical assumption, given how property prices generally tend to go up over time. And it’s also not the only advantage to buying off the plan.
Secondly, because they’re brand new, these properties will be more energy-efficient and in better condition than a lot of older homes, meaning you likely won’t need to shell out as much on repairs and utility bills in the months and years ahead.
Offer buyers more time
Thirdly, buying off the plan gives you a bit more time to get your finances in order, as you’ll generally only need to put down a 10% deposit to secure the contract, and can use the extended construction time to save up the outstanding balance.
Finally, if you’re an investor who plans to lease out the apartment, buying a brand new property off the plan allows you to maximise the tax deductions available to you via depreciation.
What are the risks associated with buying off the plan?
For every upside to buying off the plan, there’s a potential downside.
For example, let’s look at the main advantage of buying off the plan listed above:
Falling property market – That the purchase price agreed in the contract could end up being a lot less than the value of the property when construction is completed, thanks to the natural propensity for prices to increase over time. There is a risk that you may pay too much for a property if the market falls between the exchange of contracts and building completion. If this does occur you may find it difficult to secure finance for the full amount.
As you might have guessed, the exact opposite is also a distinct possibility. That is, a buyer could agree to pay a lot more for a property than it is worth by the time they move in, if property prices drop during the time it takes to build the apartment. And so, if you’re someone who’s looking to buy and sell a property fairly quickly, buying off the plan is probably not a good idea during a market downtown.
A developer might go bankrupt
In addition to researching the current market conditions, buyers need to do their due diligence on the developer before they sign a contract, as the biggest risk they face when buying off the plan is losing their deposit if the developer goes into administration during construction. Many buyers fear the developer could go into liquidation before the project is completed. You need to ask what the options are if this occurs; will you get your money back and what guarantees do you have?
Prospective buyers should ask the developer for evidence of past projects, contact people who have previously bought apartments from them, check for negative media reports, and, if possible, visit previous projects to assess the quality of the developer’s work.
The sunset clause expires before the project is completed
A sunset clause is a statement in the contract of sale that effectively puts a time limit on the contract’s validity. Should the developer fail to complete the project by the date outlined in the sunset clause, the contract is declared null and void and the deposit returned to the buyer. The clause is meant to protect the buyer from excessive delays. But, in recent years, some developers have purposely run over the time outlined in the sunset clause, so that they can terminate the contract and attempt to resell the apartment for a higher price. Simply put, it’s yet another reason to interrogate the developer’s reputation and past history before you sign a contract.
As many builders do not allow you to see the property until construction has completed, there is a risk that what you envision is not what you will receive. The quality of work may also not meet your standards.
Rising Interest rates
Interest rates could increase before you settle on the property which is problematic if you wanted to fix the term of the loan at the current interest rate.
Too Many Fingers in the Pie
I’ve seen far too many off-the-plan properties with large commissions built-in for middlemen, marketing budgets and salespeople, meaning the investor pays well over its true underlying value.
Don’t be lulled into a false sense of security just because you’ve been told a number of pre-sales have already occurred.
You’re likely to find many are at inflated prices to overseas buyers who are unable to buy established properties, have little knowledge of the local markets and have unique motivations for buying a property in Australia such as a desire to emigrate in the future or place their money in a more stable country.
Another major issue with buying off the plan is the possibility of excessive speculation applying downward pressure on prices. It’s a problem that predominantly affects investors, but it can also negatively impact other buyers, by pushing up their loan-to-value ratio.
It’s often an issue, as speculators like to get involved in off-the-plan schemes because they can see there is a quick profit to be made: Sign a contract in 2015 to buy a two-bedroom apartment for $500,000 and then sell in 2018 for $600,000.
This is not an unreasonable calculation to make, as, in this case, the property value will have needed to increase at just below 7% per annum to reach $600,000 in three years – which is not too dissimilar from the price hikes experienced by most Australian cities during the recent property boom.
However, many speculators come unstuck as they forget a basic economic principle: that price is a function of supply and demand.
Before you sign the dotted line
- Visit the property site and check the location. If there are other constructions in the area, it may affect your view.
- Carefully inspect the display home, models and plans. Investigate the fixtures, fittings and finishes.
- Research the market conditions and speak to an expert to determine the property prices.
- Research the developer. You may wish to:
- Ask how long they have been in the industry and how many properties they have built.o
- Visit your developer’s previous work, inspect the quality and speak to previous clients to determine their satisfaction with the property.
- Ask questions to determine what is covered as part of the purchase price, for example, what fittings, floor coverings, painting and decorating are part of the package and what is additional.
- Discuss your expectations for the property with your developer and have them written into the contract to avoid disagreement with the developer at the completion of the project.
- Obtain guarantees of their financial status written into the contract if possible, to avoid encountering financial complications with the developer. Ask to see the developer’s balance sheet to determine their financial strength as there is a risk that if the developer goes into liquidation before the property is finished you may lose your deposit and other costs.
- Carefully review the contract with a legal professional. Take note of:
- The completion date.o If there are penalties if you withdraw from the contract.
- If you can visit the site during construction.
- If you can make changes to finishes and fixtures.
- What happens if the developers run into financial problems and what happens to your deposit?
- What happens if faults are identified post-completion?