Buying off-the-plan Part 2: lessons learnt

Modern interiors inside One Central Park

Modern interiors inside One Central Park

We recently settled on our investment unit in the $2b Central Park development in Sydney purchased off-the-plan over 36 months ago and there’s certainly been a few lessons learnt.

1. Valuation

With all off-the-plan purchases you’re basically predicting future property prices and the big question is whether your purchase price can be justified at the time of settlement. Rather than normal market forces, the power to determine this is really in the hands of valuers if you’re borrowing to fund the purchase.

If you’re borrowing from any of the big four or other mainstream financial institutions, chances are they’ll be using ValEx which spits out a random valuation firm that’s on the panel to carry out the pre-settlement valuation. Most of the time there is little control from you or even your bank manager on who is chosen.

As you can imagine, out of a large pool of panelists and valuers there are bound be those that are less competent than others.

Unfortunately for us our first valuation came from a graduate valuer who couldn’t even get the measurements right and had no clue what he was doing, comparing a brand new unit to something that was more than 15 years old. Now you don’t have to be tertiary qualified to know that’s not exactly comparing apple with apple!

The result was disastrous with the “value” coming back 20% lower than our purchase price which didn’t make sense when we know most other units within the same development had been valued at purchase price.

Fortunately our bank manager was funding an exact unit eight floors below ours and the valuation was higher. This was enough to trigger a second valuation to be ordered.

Again at the mercy of ValEx, we got assigned to a conservative valuer who valued our unit at 10% lower than our purchase price this time. Not the best of news but not the worst either, at least the gap has narrowed!

What does this mean?

The bank will only lend on the value written by the valuer, being 10% below purchase price,  meaning we’re left to fund the difference.

2. Bank Guarantee

The initial 10% deposit was arranged through a bank guarantee and naturally we had thought those funds will be used towards settlement. Not quite, the bank guarantee cannot be cancelled until post settlement as that’s the only security the developer has if the purchaser decided not to settle .

What does this mean?

We have to fund the 10% deposit from other funds and wait for the bank guarantee to be cancelled post-settlment and the funds returned.

3. Over Supply

Although Sydney’s rental vacancy rate is less than 2% but with an abundance of units coming online at more or less the same time post-settlement, the market (in the particular location) is flooded with options adding pressure to rental yields.

What does this mean?

It takes longer to find a tenant as those in the market are presented with more options than normal. In other words it becomes a ‘renters’ market where they can afford to choose and shop around for the best deal.

So what did we learn from all this…

  • Putting aside rainy day funds has once again proven critical which helped us meet the unexpected expenses, in our case 20% of purchase price;
  • Surrounding yourself with a trusted team of experts. Be nice to your bank manager, solicitor and accountant, it’s them that’ll help you navigate out of a sticky situation;
  • Engage the onsite leasing agent even if they’re more expensive. Being onsite they have the advantage of showing prospective tenants ahead of settlement (and everyone else) so you have a higher chance of securing a tenancy before the flood.

Overall, despite the challenges, we’re still pleased with our purchase and believe the fundamentals which led us to invest in the first place will pay off in the future.

Entrance to One Central Park

Entrance to One Central Park