It's exciting to be a property's first owner. When you're buying off the plan, you get to the select the floor plan and the colours of the walls, but along with the opportunities come increased risks.
One of the most common problems is a blow-out in the time between putting down the 10 per cent deposit and completion. The original 18 months to two years can easily stretch to three or four years.
In that time, lenders may have tightened their lending criteria and interest rates may rise.
And, when the lender does the valuation on the finished apartment or town-house or house, it could be less than the purchase price.
Delays
Graham Hand and his wife, Deborah Solomon, wanted to buy an apartment for their daughter, Elana.
The Sydney parents bought an apartment off the plan and had the layout changed to suit the needs of Elana, who uses a wheelchair.
"We were very pleased with the end result, it's a fantastic building," Hand says.
But the apartment, a restored flour mill in Sydney's historic Pyrmont, was finished behind schedule.
Hand, 58, who is the managing editor of investment newsletter Cuffelinks, says the blow-out was manageable as Elana could stay at home for longer.
But other buyers in the same block told Hand, who wrote a blog post about his experience, how frustrated they were by the uncertainty over when their apartments would be completed.
The apartment was bought in June 2013 and Hand was told it would be completed by the end of 2014. The date kept being pushed out. It was completed at the end of 2015.
"We wanted a new apartment and buying off the plan is the only way to do that," Hand says.
"Buyers have to realise, and I didn't realise, that the completion date is wishful thinking. The period did drag on and other buyers were driven to distraction not knowing where they were going to live."
Slick marketing
Justin Lawrence, a partner with Henderson & Ball Lawyers in Kew in Melbourne, has acted for many off-the-plan buyers.
He says it is easy for buyers to be seduced by slick marketing.
"What I see all of the time is people going to the display suite on the Saturday afternoon and they see a shiny bench top and Miele oven and then go home to their 1980s kitchen," he says.
"And then they bring the contract to me on the Monday and ask for an opinion."
He points out things should be changed in the contact, but they are already emotionally engaged and they may not want to push the point.
"If you are buying off the plan in a tower, the contract can be at least two inches thick," Lawrence says.
"There is the plan of sub-division and the special conditions. And the special conditions can run to 40 pages."
Among other things, the special conditions specify under what circumstances the developer can walk away, Lawrence says.
That's a problem in Sydney. Rising prices there have enticed some developers to rescind contracts with buyers once beyond the "sunset" date ,and resell the apartments for higher prices.
If the apartment is not completed by the sunset date, the buyer or the developer can walk away, with the buyer receiving their deposit back.
Sometimes the developer will ask the buyer to pay more for the apartment. If prices are falling, it is more likely to be the buyers who will rescind the contract. However, it's the developer not the buyer who has most control over whether the project will be finished within the time frame.
Late last year, the NSW government increased consumer protections for off-the-plan buyers to make it harder for developers to trigger the sunset clause and resell for higher prices.
Smaller than expected
Lawrence says it is quite common for buyers of off-the-plan apartments in high-rise blocks to find that their completed apartment is smaller than shown in the plan.
Most contracts say that if there is a "material alteration" in the size of the unit compared with the plan, the buyer has the right to renegotiate the price.
"If the floor space is reduced by more than 5 per cent, then the purchaser really wants to go to the developer and ask for a price reduction," Lawrence says.
"That's especially if the reduction is in the living room and where the apartment is small to start with."
Greville Pabst, co-founder of WBP Property Group, a property valuation and advisory firm servicing the whole of Australia, says it is difficult for buyers see a one-dimensional plan and visualise the size.
The display suites are meant to have a wow factor, he says. Buyers should take the plan home and measure out the dimensions of the apartment, particularly the living space as this is where we spend most of our time.
Pabst says particular attention should be given to ceiling heights as these can affect the feeling of space in the apartments more than people realise.
Developer premium
Rob Mellor, managing director of property researcher BIS Shrapnel is cautious on the outlook for price growth in apartment prices.
"Brisbane is the place that I'm most worried about," Mellor says. He is worried because of the number of apartments being built and those still to come.
In inner Melbourne there has been "minimal price growth" in apartment prices over the past five years, he says.
In Sydney, though prices are rising, the potential problem is not oversupply but that investors make up a big share of the market. "If our sharemarket was to have a good run they are likely to put more of their money there," Mellor says.
"If the capital gains are not there and with gross yields under 4 per cent, investors may not be as keen to buy," he says.
"If I was an apartment buyer I would be waiting, as prices are probably not going to rise much and may even fall," he says.
Pabst says buyers are paying a developer premium for new builds that includes not only the costs of land and building, but marketing costs and a profit margin of 15 to 25 per cent.
"It's a packaged value not a true market value," he says.
And then there can be incentives, such as commissions, paid to mortgage brokers, financial planners and accountants in exchange for successful sales leads, he says.
"These incentives can be between 6 and 8 per cent of the purchase price and these are included in the price paid by purchasers," he says.
Pabst favours apartments in blocks with fewer than 25 apartments. "Scarcity is good," he says. And he likes to see more owner-occupiers in a building than renters because of the "care factor" of owner-occupiers.
Mellor says developer premiums mean there might be a similar property that is two or three years old that can be bought for 10 or 15 per cent less.
NSW and Victoria do provide incentives to first-time buyers of new properties, including those buying a block of land to build a home. There can be stamp duty concessions as well.
There are several restrictions, where the grant, for example, is available only on new properties up to certain values.