Buying off the plans: Pros and cons

When you buy a house off-the-plans you’re buying a property … but it’s not ready yet.

So you commit to the property today, but it won’t be built for 3-24 months.

When you buy off-the-plans you get all the benefits of a New Build property. Things like:

• Lower deposit for investors (20% vs 35%)
• Paying less tax because of interest deductibility
• Less likely to have to pay tax on capital gains, through a shorter bright-line test.

But you get those if you buy a completed New Build property too (one that’s already built).

So what’s the pros and cons of buying off-the-plans (and waiting)? And how does that compare to buying a New Build that’s already complete?

Here at Opes Partners we help around 450 Kiwis buy New Builds every year. That includes buying off-the-plans and properties that are already complete.

So we see the pros and cons of both strategies every day.

The truth is that buying off-the-plans works well for some people, but is not the right choice for others.

That’s why in this article, you’ll learn the pros and cons of buying off-the-plans, based on experience.

What are the pros of buying off-the-plans?

Let’s start with the pros.

Pro #1 – Property may go up in value during the build

The property market may go up while your property is being built.

When you buy off-the-plans you commit to a price when you sign the contract. This “locks in” the price.

It doesn’t matter if it takes 12 months or 4 years to build, the price will generally be the same.

But the property market can still go up in value during this period.

One investor we worked with signed a contract to buy a $495k house in Rolleston. By the time it was finished, it was worth $850k.

This was during the Covid property boom, so don’t expect that level of gain for your property. But it shows what is possible.

But today many believe that we are at the bottom of the market. An investor buying off-the-plans can get today’s price, but at peak interest rates. This is discussed more below.

And as we’ll see property values can go the other way. The last 12-24 months are proof of that. But, we do often see New Build properties valued higher once they are built.

Pro #2 – Avoid peak interest rates

Most economists agree interest rates are at or near their peak. In 12 months they probably will have moved down a little bit.

To buy a property off-the-plans you generally only put down a 10% deposit, so you’re potentially able to buy at (or near) the bottom of the market. But you don’t have to take out a full mortgage and face peak interest rates.

Pro #3 – Can get a good deal

Developers often need a certain number of pre-sales before a project can start. Why? Banks usually demand it. They won’t lend the developer money unless they’ve sold some properties.

This means developers often charge a little bit less for off-the-plan properties. At least, compared to completed properties.

This is because you can see, touch and feel a completed property, so they are more appealing for owner-occupiers who want a house straight away.

That means developers will often discount properties at earlier stages of the build, so investors can get a good price.

Developers will also often hold on to the higher-priced properties in the development.

They’ll sell them when the build is finished to make a bit more money.

That’s why completed New Builds are usually a bit more expensive than those that are off-the-plans.

Pro #4 – You get the first choice

If you’re the first person to buy in a development, you get first dibs on whatever property you want.

You might choose to get the corner house, because it’s got a slightly bigger garden. Or you might want to choose the property with a garage, rather than only a car park.

The choice is yours.

But if you wait until the entire development is completed, most will be sold, so you’re only able to choose what’s left over.

What are the cons of buying off-the-plans?

But, of course, everything has pros and cons. For some people buying off-the-plans isn’t the right choice for them.

Con #1 – Price can go down during the build

The flipside to pro #1 is that the market can turn the other way.

So, when you come to pay for the property (settlement), you could pay more than the property is worth at that point.

For instance, you signed up to buy a property for $1 million, but by the time you get to settlement and pay for it, it’s now valued at $900k.

This can and has happened, particularly over the last 18 months, because property prices have been falling.

This can take a toll on an investor’s mindset.

Of course, if you buy a completed New Build for $1 million, it can go down in value too, but with off-the-plan purchases it can also take a toll on finance.

Con #2 – Can be hard to get finance

If your property falls in value during construction, it can make it harder to get the bank to lend you money.

This is because the bank then requires you to put in a bigger deposit.

Similarly, the bank can change their lending criteria.

For example, back in 2021 many banks tested your mortgage at a 6% interest rate. Today it’s closer to 9%.

So, when you signed up to buy a property you may have thought “yes, I can get the mortgage approved.”

But now the bank has changed its criteria, maybe you can’t get the lending over the line.

Investors sometimes also run into trouble when they’ve had a life change, or they’ve changed their financial position.

For instance, if you took out a big car loan or bought a bigger house without telling your mortgage broker.

Either way, you’ve got a problem.

If you can’t get lending you risk:

• Losing your 10% deposit
• Getting sued for not following through on a contract.

This is why some people will be better off buying a New Build that is already complete.

You can get the finance approved today, pay for the property and move on.

This is often a good fit for people who are about to have a major life change.

For example, if you are planning to have a baby in the next year. If that’s you, a completed New Build may be a better fit.

This all sounds scary, and in some ways we are trying to scare you. Because if you buy a property off-the-plans then ignore the finance part … bad stuff can and will happen.

But there are ways to mitigate these risks, like getting the mortgage approved from the start. You should talk to your mortgage broker about ways to set up your finance the right way.

Con #3 – The builder does a bad job

When you buy off-the-plans you can’t see or touch the completed property yet.

So you can’t check the quality of workmanship.

This is a risk, because what if the finished property is awful?

Some developers are great and build properties exactly how they say they will.

Others don’t. Those are the ones to worry about.

One way to mitigate this is to look at other properties recently built by the developer.

If you’re impressed, this might give you the confidence to invest.

If you’re turned off or aren’t impressed, this can help you dodge a bullet.

Both are good answers; they help you make the right investment decision.

You can also protect yourself by getting a building inspection, even though it’s a New Build.

They will tell you whether the built property matches what was promised in the contract.

If the answer is “no”, there are legal processes to go through.

Having said that, there are always going to be examples of where things need to be looked at. This is why you have a defects period in your contract.

The key thing for anyone is to be very methodical, and reasonable in your approach.

Should I buy off-the-plans?

The truth is, that buying off-the-plans is not the right fit for everyone, particularly if you are about to have a potential life change.

So, if you plan on starting a family, moving countries, or embarking on a new business … then probably not.

Or similarly, if you’re going to lie awake at night and think: “Oh goodness, I can’t do this because of X reason”.

Then it’s probably not going to be the right fit for you either.

But if you can tolerate the risk that can come with buying off-the-plans, then it could be a great option for you.

There are 3 ways you can buy an off-the-plan property:

1. Jump on Trade Me
2. Go to a developer directly
3. Use a property investment company (this is what we do, here at Opes Partners)

A property investment company is often overlooked as an option. (Sure, I’m a bit biased).

But, it’s a good option for investors to consider. Why? Because you know you’re buying an investment property rather than just a good property.