Off-Plan Property Risk
Off-plan is one of the most lucrative strategies when done well! Most people who don’t understand it, write it off but when you understand the risks of off plan and mitigate against them you stand to benefit from huge returns of your investment.
So what are the risks… I break them down into 3 broad risks which I discuss in this Rant.
Hey, guys, Property Search… Think Gladfish. So what are the risks of off-plan property?
I'm Brett Alegre-Wood, and this is Property Rant. So off-plan property, a fantastic way of making money through property. In fact, I've been doing it for almost two decades now, and certainly, it's been my core strategy for a very long time. And really, I love it, because it means that I virtually am making money off something that I have nothing to do with. But there are risks.
So what I want to do today is I want to just give you the three core or broad-based risks for off-plan property. And when you understand these, yes, there are hundreds of other risks associated with each of these, but it gives you a good framework with which to do your research from.
So the three risks are market, developer, and finance. All right, so let's look at developer. So developer… Sorry, let's look at market first. We'll start with market. So market risk. Now, what is the market risk?
That means, and this is fundamentally the problem with off-plan or the risk with off-plan, is that you are buying and making a purchase decision in this market, but actually you're actually completing on the property in a different market, and whether that be six months, 12 months, three years, even seven years later, that all depends.
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So the reality here is that you've got a time risk. Now specifically, the market risk means that this market can change to this market, and that can mean, for instance, the area might be…prices might be heading down. There can be a whole range of things to do with the market having changed. Lending may be harder, that's more of a finance risk. But the realities with the market risk, how do you hedge a market risk?
So for instance, for simple things, what I do is, as our market starts to get a bit toppy, I then come into the core areas, the core areas with the best fundamentals, rather than going out into the bit more risky places that don't have such established fundamentals. What I might also do is, rather than purchasing something that has three years of potential to build time before I complete on it, and so I can get the growth over that period, I might start to bring that in and rein that in, so rather than doing off-plan three years, I might do it two years and one year and six months. And I actually may get to, and I do get to the point, where I will only focus on stock property, stock that I can buy and complete in the same market. So that's the market risk.
The developer risk. So developer risk primarily revolves around what the developer does. Do they do a glossy brochure here, and then come time to actually do it, the spec drops considerably or the quality of the finishing isn't quite there, that's part of the developer risk. How do you overcome that? Well, you go to good developers with good, solid fundamentals, you know, and have been proven track record, they've got customer service, all this sort of stuff.
So generally, you go to the bigger ones rather than one-man-bands, as the market starts to top out. Now, the other side is what if a developer goes bust altogether? So how do you overcome that? So you got to look at these sort of things.
So this is the developer risk that we talk about, and finally, the finance risk, which is basically, right now, let's say you can get a 75% mortgage, but come time to complete, you're going to get 60%, or maybe it's…you can get 75% still, but all of a sudden now, you've retired, lost your job, got married, something changed in your own circumstances. So it's not just about the finance not being available, but it could be you not being able to get the finance. But it also could be a government new initiative or tax or whatever that makes it harder to get finance.
So all these things have to be taken into account, but they're the three that you need to consider. The market, the developer, and the finance. And with those three, you can mitigate your risks very effectively.
All right, guys, have a great day. Live with passion.