Buying off-the-plan certainly has appeal! There is no denying that there are attractive pro’s, but in an uncertain market, can you really be sure that the property you sign up for will be worth as much at completion?
Whilst a glossy brochure may state that an off-the-plan investment property is worth $500,000, it’s your bank’s opinion that really counts, and here’s the rub:
Banks only value on completion.
What if an unforeseen slump in the property market means that the property you bought for $500k is only worth $450k on completion? At a 70% loan-to-valuation ratio (LVR), a $500k property secures a loan of $350k; however a property worth only $450k secures a loan of only $315k. Unless you can cover the $35,000 shortfall you risk being in default at settlement.
Banks have tightened lending terms to investors
Bank lending on property for investment purposes has been in the news a lot recently. The mortgage lending market is dynamic and further change appears inevitable with possible changes to capital gains tax and negative gearing being debated.
What if I’m in default and can’t complete settlement?
These unpleasant scenarios may arise if you’re in default of your contract to buy land:
- you may have to seek finance at higher interest rates or other less favourable terms in order to complete settlement
- you may face legal (court) action to enforce the contract
- the seller may elect to terminate the contract, keep (forfeit) your deposit and re-sell the property. You may be liable for any shortfall upon the re-sale.
With all of the above, “conditions apply”, and you should always seek legal advice if you’re in default or the other party claims you are in default.
Is it all ‘doom and gloom’?
No, it isn’t. Advice from some property industry professionals in Western Australia is relatively optimistic with regards to market predictions for 2016 and beyond, however, it pays to enter into any contract with your eyes wide open.
Having a plan for what you perceive is the worst case scenario is a good start.
If you are considering investing in an off-the-plan project, you should carry out extensive research and seek input from legal and financial experts who are not involved in the scheme.
As your independent settlement lawyers, contact us to book a 60-minute consultation ($385) to review your draft contract.