The Hidden Dangers of Buying Off-the-Plan: Why Easy Isn't Always Better

The Trap of Doing What’s Easy: Why Buying Off-the-Plan Can Be Risky

Buying a property can be a complex and challenging process, and for many first-time buyers and investors, the idea of buying off-the-plan can seem like an attractive shortcut. The appeal is simple—pay a deposit, wait for the construction to finish, and move in or rent it out. However, what appears easy and convenient may come with hidden risks. In this blog, we’ll explore the potential pitfalls of buying off-the-plan and why it’s important to approach this seemingly straightforward option with caution.

What Is Buying Off-the-Plan?

When you buy a property off-the-plan, you’re essentially purchasing a home that hasn’t been built yet, relying solely on the developer’s plans, marketing materials, and artist impressions. Typically, you commit to a contract and pay a deposit (often around 10%), with the remainder due when the project is complete, which could be months or even years down the line.

At first glance, this process may appear simple and stress-free. There are no inspections to worry about, no bidding wars at auctions, and no existing properties to manage. However, as Warren Buffett once said, “What’s easy is rarely profitable. What’s profitable is rarely easy.” This sentiment rings true for off-the-plan purchases, which can carry more risks than many realise.

The Issue of Supply and Demand

One of the fundamental concerns with off-the-plan properties is the risk of oversupply. Developers often launch new projects with dozens or even hundreds of similar units, creating an oversupply in the market. According to basic economic principles, when supply exceeds demand, prices tend to fall. This scenario can make it difficult to sell or rent out the property at a competitive rate, leading to potential financial setbacks.

For instance, between 2015 and 2019, data from CoreLogic showed that inner-city off-the-plan apartments in Melbourne underperformed compared to established properties. Many units experienced little to no capital growth, and some even lost value upon resale. This was a clear case of supply outstripping demand, leaving investors with underperforming assets. Those who opted for the easy route of buying off-the-plan found themselves grappling with properties that didn’t live up to their financial expectations.

Market Volatility and Future Value Risks

Another significant risk associated with buying off-the-plan is market volatility. When you sign the contract, you’re essentially betting on the future value of a property. However, numerous factors can change between the purchase and the project’s completion—interest rates, government policies, and broader economic conditions can all impact property values.

As economist John Maynard Keynes put it, “The market can remain irrational longer than you can remain solvent.” Even if you’re confident in the long-term potential of your investment, short-term fluctuations can cause serious issues. A notable example occurred in Melbourne’s Docklands and Southbank areas in the early 2010s. Investors who bought off-the-plan faced an influx of similar properties once the projects were completed, resulting in prices that were often lower than the initial contract value. Many buyers struggled to secure financing or had to sell at a loss.

Financing Challenges and Bank Valuations

Financing an off-the-plan property can be tricky, especially when the final property valuation does not align with the contract price. When construction is completed, lenders will conduct a valuation to ensure the property’s market value matches what was agreed upon. If the market has declined or if there’s been an oversupply in the area, the valuation may come in lower than the purchase price—a situation known as a "valuation shortfall."

Michael Yardney, a financial strategist, addresses this in his book What Every Property Investor Needs to Know About Finance, Tax, and the Law, highlighting how low valuations are a common problem that can disrupt even experienced investors’ plans. When a valuation shortfall occurs, buyers need to make up the difference with additional cash, often catching them off-guard and creating unexpected financial strain.

Lack of Control Over Quality

When buying off-the-plan, you're relying on the developer to deliver what was promised. While this sounds straightforward, there’s always the risk that the final product won’t match your expectations. Developers can make changes to layouts, finishes, and materials during construction, often without consulting the buyers. This can lead to disputes, especially if cheaper materials are used to cut costs or if the design differs from what was originally presented.

Quality concerns in high-density developments are not uncommon, and disputes over defects can be costly. According to the Australian Bureau of Statistics, construction disputes are prevalent in such projects, and fixing these issues can be an expensive and time-consuming process. Buying off-the-plan requires a lot of trust in the developer, but even reputable ones can face challenges that may affect the end result.

Limited Capital Growth Potential

One of the main reasons people invest in property is to benefit from capital growth. However, off-the-plan properties often struggle to deliver this. Unlike established homes, which tend to appreciate over time, new properties can depreciate in value, much like a car that loses value the moment it’s driven off the lot.

As Warren Buffett advises, “Price is what you pay, value is what you get.” Off-the-plan buyers may be paying a premium for a brand-new property, but these often lack the intrinsic land value or scarcity that drives capital growth. Established properties in desirable areas tend to have stronger fundamentals, making them a more reliable choice for long-term investment.

When Buying Off-the-Plan Can Make Sense

This isn’t to say that buying off-the-plan is always a bad idea. There are situations where it can work, such as when you’re buying from a reputable developer in a tightly held suburb with limited new supply. If you have a long-term perspective, understand the risks, and have the financial flexibility to manage potential valuation shortfalls, it may be worth considering.

The key is to focus on quality. As Warren Buffett famously put it, “It’s better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Applying this principle to property means prioritising well-built homes in areas with strong demand, even if it requires more effort than simply picking the easy off-the-plan option.

Conclusion

Buying off-the-plan may seem like a convenient and straightforward way to enter the property market, but it comes with significant risks that shouldn’t be overlooked. From the dangers of oversupply and market volatility to financing challenges and quality control issues, there are multiple factors to consider before making such a commitment.

For prospective buyers and investors, it’s essential to look beyond the surface appeal of ease and convenience. Doing thorough research, understanding the long-term fundamentals of the market, and carefully evaluating the developer’s track record can help you avoid the pitfalls of buying off-the-plan. Remember, what seems easy today might cost you more in the future.

Ultimately, making informed, strategic decisions will put you in a better position to achieve your property goals and build the future you’re aiming for.