Warning: Off-the-plan spruikers are back!

Pete Wargent, BuyersBuyers co-founder, has issued a warning about the practice, highlighting how spruikers are taking advantage of the hot property market to lure clients to jump on board and make easy money from off-the-plan deals.

“When housing markets are rising, we tend to see the proliferation of spruikers recommending their ‘free’ services to investors. The model often involves a one-stop-shop of advisors recommending off-the-plan units or apartments to investors, sometimes with rental guarantees and other offerings included to encourage consumers to take the plunge,” explained Mr Wargent.

However, investors are advised to steer clear of these kinds of deals because second-hand property easily loses its lustre.

“What is less promoted is that the advisor is remunerated by lucrative commissions from the developers selling the new stock. The problem is that we know that new units have systematically underperformed from an investment perspective, and when the investor comes to sell, there is an increased risk of loss on resale because they are then selling a second-hand property that has lost its shine and newness premium,” warned Mr Wargent.

Mr Wargent revealed that what the buyer perceives as “free” is actually paid for by developers to advisors in the form of commissions.

“If you’re not paying, you are not the client – someone else is. And that someone effectively pays for the marketing campaign and the advisor’s sales commissions, which are often surprisingly lucrative at more than 5 per cent of the contracted sales price.”

While buying a new unit might be advantageous to owner-occupiers and downsizers, the promise of tax benefits and rental guarantees usually highlighted by advisors to investors is problematic.

Because of this, Mr Wargent reminded buyers why such deals raise a red flag, especially for Australian citizens, who are encouraged to exercise prudence and their freedom of choice: “Non-residents may only be permitted to buy new dwellings, but Australian citizens are free to buy any property, so they shouldn’t be constrained to looking at new units or properties that haven’t even been built yet. Depreciation allowances are useful but should never be a reason to buy a property, and rental guarantees are often a red flag. You should question why they are even required to get a property sold.”

Spruikers target suburbs with unit oversupply

Closure of Australia’s international borders caused immigration numbers to fall, resulting in an oversupply of apartments in the suburbs.

RiskWise Property Research CEO Doron Peleg pointed out that “statistically, buying off-the-plan comes with more risks, including construction defects, pre-settlement valuations coming in lower than the contract price, and ultimately, a statistically higher risk loss on resale. These risks are compounded if you buy into a potentially oversupplied market, of which there are some in all states”.

To prevent from getting ripped off by shady deals, Mr Wargent advised buyers to focus on established properties that offer better opportunities for capital growth at lower risk and to practice due diligence.

“Do your own research, or if you can’t perform your research or find and negotiate on a property, then hire someone independent to work on your side with no conflicts of interest. If you can’t afford that, then improve your research skills, but don’t engage with a property salesperson or advisor who provides their services for free.”