Why is buying off the plan such a bad idea?
Written by Veronica Morgan
Ten reasons why you should never buy off the plan

I bought my first property off the plan back in 1994. When I say “off the plan”, it’s only technically true. The building was almost complete and I was able to walk through the available apartments before I chose one and bought it. I wasn’t required to make a judgement based on artist impressions, a sales suite and some fancy marketing. Back then, buying off the plan risks were a lot less than exist now. It usually meant you got a bit of a discount because buyers knew they were taking a risk while at the same time helping the developer to reduce their risk. It’s a very different proposition these days.

For years I’ve been warning people about the risks of buying off the plan. It’s risky for a whole host of reasons and you’ll pay more for a brand new apartment than you will for an equivalent established one: it simply doesn’t make sense. Then, on Christmas Eve in 2018, an entire building’s worth of unlucky Opal Towers apartment owners found out just how risky buying off the plan can be. 

Yes, it’s an extreme example. However, as we’re starting to discover, not an isolated case. In June 2019, a twelve year old building called Mascot Towers started sinking and on a cold Friday night all occupants were told it was unsafe to sleep in their own beds. Since then there have been more and more defective buildings coming to light.

Read on and you’ll get a sense of how widespread the defect issue is. If that’s not enough to convince you of the risks of buying off the plan, there are other dangers that you need to know about. These can also have a severe impact on your financial, physical and psychological well being.

1. You can lose money!

Buyers pay a premium when they buy a brand new property. This means, a bit like when you’re buying a brand new car, the minute you use it, it starts to lose money. Ultimately with property we hope that it starts to appreciate at some point, but how long should you allow for this to happen?

In Brisbane City Council, unit values in nine areas recorded compounded annual losses over the ten years to June 2018.* Some forecasters predict this could continue for the next ten years. This is what happens when there is an oversupply of unit stock, predominantly built for an interstate investor market. If a first home buyer unwittingly bought one in order to get onto the property ladder, they could be trapped there for a very long time.

Research conducted by BISOxford showed that between 2011 and 2016 nearly half of new apartment resales in Melbourne sold for less than the original purchase price. The rest of the Melbourne property market was booming for half of that period. By early 2019 that figure had risen to 66%. In Brisbane 48% of new apartment resales were sold at a loss over the same period. And in Sydney between 2015 and March 2019, 23% had on-sold at a loss.* 

To be fair, no property is risk free and it’s not only brand new apartments that lose money. Corelogic produce a quarterly Pain and Gain Report and most of the time around 10% of residential property that sells in Australia does so at a loss. The important thing to note is that the largest segment of loss making sales is made up of the second sale of brand new apartments. This is why this tops our list of buying off the plan risks.

In the Pain and Gain Report, there is no distinction between new and existing apartments, however there is a correlation with the widening of the gap between loss making houses and loss making units and high levels of unit development. From 2013 that gap has noticeably widened in Brisbane and Melbourne. In fact, in Melbourne a unit is 4.5 times more likely to sell at a loss than a house is. In Brisbane, units are 5.5 times more likely, with more than a third selling at a loss in the June 2019 quarter, beaten only by serial offenders Perth, Darwin and regional WA. In Canberra, units are 7.4 times more likely to sell at a loss than houses. Sydney’s gap isn’t so dramatic, probably due to its apartment construction boom starting later. However, now it’s widely accepted that there are areas of oversupply in Sydney and that gap has started to be visible and growing.

2. Settlement risk

I’ve recently heard from a number of different sources* that nearly 50% of valuations of brand new apartments at settlement are coming in under the contract price. Some have been valued as low as 75% of the sale price. Those buyers need to scramble around to make up for the shortfall, putting them well and truly behind the eight ball at the beginning of the game. They could face years of negative equity - where they owe the bank more than the unit is worth. First home buyers who thought they had saved up a 20% deposit have had to pay mortgage insurance or borrow money from parents in order to settle. Some haven’t been able to manage it and have lost their deposit and face the possibility of legal action.

Loan pre-approvals usually only last for three months, which clearly isn’t long enough for an off the plan the plan buyer. What a lot of people don’t consider is that their situation might change in the intervening time between signing the contract and completion of the building. What if you get made redundant, have a baby, or get an opportunity to take a year off to study? Over the last couple of years banks have changed their lending criteria, which meant that many buyers who previously qualified for finance were unable to borrow nearly as much money as before. Banks also change their policies regularly and may limit their exposure to certain postcodes, specific buildings or high density areas. It’s easy to get caught out, which is a good reason why you should never buy off the plan.

When the building is finally complete, you won’t get much notice when the developer wants to settle. They may give you two weeks, which in many cases is not enough time to reapply for finance, so you’d better have your ducks lined up well in advance! This is one of the risks of buying off the plan that can easily catch buyers out.

3. Are you getting what you’re paying for?

When you buy off the plan, you’re buying a dream which has been artfully rendered by architects and graphic designers and sometimes brought to life in a display suite. You don’t usually get to see what you are actually buying until some years have passed and you’re within days of settling. 

If a well known architect’s name is being used in the marketing, you can’t be certain that they have been involved throughout the entire project. It sometimes happens that the architect comes up with the original concept but that’s where their contribution ends. In the absence of detailed design drawings, the sub contractors are left to interpret the plans and some experts believe this is a major contributor to building defects. 

Buying off the plan risks include getting less than what you expected. There will be a provision for variations in the contract of sale. It will allow for a 5% reduction to the apartment size, for example, and probably for a substitution of the appliances you think you’re buying if the developer sees fit. The builder might encounter some unexpected hurdles and your terrace shrinks because a big boxed-in pipe has to run along it. Or what looks like a coffee table on the floorplan could turn out to be a column in the middle of your lounge room. I’ve even heard of an additional level being added, turning what was previously a penthouse into a sub-penthouse.

Sometimes apartments are offered for sale before the plans have even been approved. You might think it’s going to be completed in two years, but delays in getting the approval could add years to your wait time.

4. Do you know what you don’t know?

Often buyers have a false sense of security. They don’t know what can go wrong with a building. They think brand new is lovely because nobody else has used the oven or soiled the toilet. 

They often think they’re covered by a warranty and in many cases they are not. In NSW there is no home owners warranty if the building is higher than three stories. Ask most buyers if they’re aware of that and you’ll find they didn’t have a clue.

“Years of stress, years of financial pressure, and just trying to navigate the maze that is building defects, where everybody else but the owners understand the rules of the game.” Karen Stiles, Executive Director, The Owners Corporation Network.

Buyers think someone in authority (whether or not they’ve ever heard of a building certifier) checks the quality of workmanship. They’d be astounded if they knew that a certifier only inspects 10% of the job. These aren’t even spot checks, the builder arranges the inspections! The certifier then checks that the right certificates exist, but who’s to say these have been issued correctly in the first place? All of this happens after the work is complete, there is nobody checking how things are being done along the way.

This is why it's essential to get a building inspection prior to settlement, even with a brand new property. 

5. How many buildings have defects?

In a recent report called “An examination of Building Defects in Residential Multi-owned Properties”, Dr Nicole Johnston from Deakin University analysed 3227 defects across 212 buildings in NSW, Victoria and Queensland. The results were alarming, “85% of all the buildings analysed had at least one defect across multiple locations.” 

Based on this report, we could draw the conclusion that New South Wales is the riskiest state in which to buy a new apartment. A whopping 97% of buildings included in the report had at least one defect in more than one place. Victoria looks positively glowing by comparison at 74% and Queensland follows at 71%. 

This report looked at a selection of buildings where defects had manifested within the statutory time limit within which the owners can commence legal proceedings. The time limits vary according to the severity of the defect and the state in which the building is located. Many defects don’t make themselves known until after these limits have expired. The upshot is that while the 212 buildings analysed in the report might be a significant sample size, that number is a drop in the bucket in terms of the amount of people impacted by poorly constructed buildings.

6. Water, water everywhere and not a drop to drink

It’s commonly understood that water causes the majority of building defects. It finds its way into buildings through perforations in waterproof membranes, skylights, garden beds, balconies, flat roofs, showers, you name it - water will find the path of least resistance. And when it gets in it causes all manner of problems - rust, mould, peeling paint, termite infestations…

Sometimes the damage can go undetected for long periods and when discovered, the rectification process can take months, even years. First you have to work out the cause and who is responsible. Then you have to try to get those who are responsible to address it. It could require legal action. There might not be a warranty. What a nightmare!

When we interviewed Karen Stiles, Executive Director, The Owners Corporation Network on the podcast, she shared stories of owners who have had to find ways to live with water coming into their apartments while they waited for the defect process to run its course. One couple even had to build a channel through their living room so their home didn’t flood every time it rained.

7. Hidden risk of fire

In her report, Dr Johnston noted that the second most prevalent defect was related to the fire protection construction system, totalling 13.6% of defects in her sample. What is alarming about this (pardon the pun) is that many of these appear to have been discovered by accident. A lot of the fire protection hardware is concealed behind walls, so a defect is often not discovered unless an investigation is being conducted for another defect (water leaks, for example) AND the person conducting that investigation knows enough to be able to recognise that there’s something amiss. How many defects remain undetected (another pun, apologies!)?

The only way some apartment owners will know their fire protection system is defective is in the event of a catastrophe. This is simply horrific to contemplate, especially when they’ve bought in good faith.

8. Defective materials

One defect that has been responsible for dozens of deaths is flammable cladding. Fancy having buildings clad in a product that actually assists the spread of fire in a part of a building that typically has no fire protection - the exterior. 

Who would think that our homes could literally be death traps? If you had ever thought that government regulators protect consumers from defective buildings, then this issue should disabuse you of that notion. The regulators have not prevented this product from being used. There are hundreds of buildings that are still wrapped in it. It’s so prolific that the rectification cost is in the billions of dollars in this country alone.

Flammable cladding is not the only panel we need to be worrying about in our buildings. Did you know that if a glass panel has too much nickel in it, when the weather warms up or cools down, it could explode? Neither did I! Dr Johnston’s report points to this being a problem that’s on the increase. These panels are often used in balcony balustrades. It’s a miracle nobody has been hurt, let alone killed.

When we interviewed Inner West Council Building Manager Kerry Hunt on the podcast, she gave us another instance of a dodgy product - non-compliant electrical wiring from China with casing that breaks down. Hundreds of thousands of kilometres of the stuff is in use behind the walls of our homes. I don’t want to even imagine the problems that could cause. 

These examples beg the question, what else is being used in the construction of our buildings that can harm us? Until we can be confident that our regulators have this in hand, we should be staying away from off the plan purchases.

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9. Physical and psychological well being 

It doesn’t take a genius to imagine just how devastating it would be to find yourself trapped in a situation where you’ve lost money, it’s unsafe to occupy your home, you bring out the buckets every time it rains, you have to instigate legal action, mould makes your kids sick or someone is injured or killed due to your home not living up to its job of providing you with a secure and safe place in which to live.    

“Housing quality has been positively correlated with psychological wellbeing… Factors that reduce housing quality such as: structural deficiencies, cockroach and rodent infestation and, dampness and mould adversely affect people’s psychological health.” Dr Nicole Johnston, Deakin University

Dr Johnston goes on to say that there has been very little research into “the health risks associated with various building defects and the psychological and financial impacts for occupants (owners, investors, tenants) and committees managing the rectification process.” 

Individual apartment owners and owners corporation committee members often have no idea who to turn to when they encounter problems in their buildings. Strata managers often don’t have the necessary experience. When Karen Stiles unwittingly bought into a dodgy building and encountered more stress than she could have imagined, she found support in the Owners Corporation Network. This ultimately led to a new career when she joined as Executive Officer, where she gets to help other strata owners and educate the community about the risks of buying into new buildings.

Dr Johnston’s research included interviews with people whose lives have been impacted by building defects. The most discussed physical side effect was sickness due to mould. There were numerous references to stress created by financial pressure, falling property values, protracted rectification processes, legal battles, avoidant behaviour of developers and builders, an inability to sell and the burden of responsibility weighing heavily on the minds of committee members. In short, nobody likes to be trapped and that’s what can happen, at least for a short period, if you end up owning an apartment in a building with major defects.

10. Take them to court! 

“What other product do you have to litigate to get it replaced if it's wrong? A car? It gets recalled. A vacuum cleaner? Gets replaced. A $10 toaster? You get a new one. Why is it that with a million dollar, or a ten million dollar (or some of them in Barangaroo going for 65 million dollars), why is it that you have to litigate to get what you paid for?” Karen Stiles

Under the current system, buyers end up carrying the can. The developer owns the property for a relatively short period of time and therefore doesn’t share the individual owners’ concerns about the ultimate life of the building. There might be a statutory period within which they shoulder the responsibility, but is two years enough when Mascot Towers started sinking after 12 years?  

In the absence of home owners warranty insurance, when things go wrong, owners have to litigate. Litigate who? It’s common practise for developers and builders set up $2 companies and wind them up when the job is finished, so there is nobody to sue.  

To add insult to injury, in the unlikely yet possible event that all of your neighbours go broke and you’re the last person standing, you could end up wearing the liability.*

Have I scared you off yet? Good! If I haven’t, I give up - go and blow your dough. As for our governments, those who want new apartments to be built because our growing population needs somewhere to live and our economy needs the activity - yes you, politicians - sort out the system so there’s no incentive for developers and builders to cut corners and our buyers have protection when needed. Only then should buyers have the confidence to buy a brand new apartment. And only then will we consider that buying off the plan risks are small enough to take a chance on.

* Reference sources include Corelogic, Ben Kingsley (Empower wealth), Greville Pabst (WBP Property Group), Jennie Tonner (Cremorne Conveyancing), Rob Broadhead (20/20 Fire Protection)

How ready are you to buy your first home?

Veronica Morgan & Meighan Wells 

Veronica & Meighan are both licensed real estate agents who exclusively help buyers. Together they have nearly 40 years experience as property professionals.

Veronica is principal of Sydney based Good Deeds Property Buyers and is also co-host of The Elephant in the Room property podcast as well as Location Location Location Australia on Foxtel and author of Auction Ready: how to buy property at auction even though you're scared s#!tless!

Meighan is the multi award winning principal of Brisbane based Property Pursuit, chairperson of the REIQ Buyers Agent Chapter & a regular media commentator.

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