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We lost 5% of our savings when starting out with real estate. It felt like a huge sum of Two Thousand Dollars at 23 years of age. This lesson was possible because the banks just wouldn’t value the two properties we were considering in Western Sydney at purchase price!

The First Home Owners Grants (FHOG) and the Stamp Duty waivers are attractive to first time home buyers and the investors love the tax benefits that go with depreciating new property are sold as “saving tax” by various “financial advisors” and OTP property marketers. Property isn’t only about the tax benefits and the grants really don’t benefit the buyers.

Sure, OTP property may be a GREAT investment in a rising market, however when the market is flat which typically has been the bulk of the period in Sydney markets in the last 15 years, it may end up being the poorest of investments – quickly turning goals for financial freedom into financial nightmare.

So who does buying OTP really benefit?

  1. The “financial adviser” / “property broker” / “real estate agent” / “mentor!!” selling you the property are key beneficiaries of OTP sales. OTP property sales command hefty commissions, sometimes as high as 5%! For anybody spruiking OTP property as a wonderful investment, my first question to the middlemen would be, “what’s in it for you?”, “while you are promoting this as the fantastic investment, would YOU, yourself buy this?”
  2. The Developer – developers are the ultimate beneficiaries of the deal on the back of inflated prices

We lost 5%. However, what’s the real cost if you as a buyer go through with the deal?

  1. Paying inflated prices – means missed opportunity and will put you years behind with your goals. If you are paying $400k for a brand new property as opposed to $350k for an established property in the same area means inability to multiply your portfolio as given a flat market it will be years till you are able to extract equity to purchase your next property
  2. Contractual Terms that favour the developer – Developers like to put in put in “sunset clauses” in the contracts for OTP property, such that if the development is not complete by an X date, they are able to cancel the contract and sell the same property to somebody else. This is a risk in a rising market. If you paid deposit for a property, hoping for the development to be completed 18 months later and the market is rising, there is a chance that the developer may delay the completion to facilitate rescinding of the contract and sell the property at a much higher price. Whilst you will get your 10% deposit back, the established properties you could have bought could well be worth 50% more than what you could have acquired them for to begin with
  3. Quality – you are unable to do a building and pest inspection on an OTP property that is far from development completion. Could there be structural issues that you are unable to pre-empt right now?
  4. Bank Valuations – Banks don’t value OTP properties until within 3 months of settlement. Again depending on where in the property cycle you purchase, if the property is bought either in a flat market or at the peak of the market (about to fall/stagnate), what is the likelihood for the banks not valuing the property upon settlement? How will you fund the difference?
  5. Regulatory Changes – Recent APRA changes to slow down the investment lending and therefore slowing the property markets means the banks are assessing investors on rates at 7% plus (approximate) with Principal and Interest repayments as opposed to the typical 4.5%-5% rates on Interest Only repayments. This assessment on a much higher rate could mean changed borrowing capacity for the investors. What is the likelihood of you being able to settle the property if the banks no longer consider you being able to afford the property?

We lost 5%. It’s been the best 5% lesson for us and makes up for a minuscule fraction for where we are now.

Best of luck with your investing goals. Hope you will do your due diligence and seek professional advice before taking any significant financial decisions.

Onwards and upwards!

Property Twins


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4 thoughts on “The 5% Lesson – Off the Plan (OTP) Property”
  1. TheGreenLeaf

    Great article. Buying OTP carries risk, as any purchase and I believe it’s very important to know where, in the property cycle, does the suburb you’re buying in stands.
    Later on, have you bought any other OTP IP in your property journey?

    • admin

      Thank you. Agreed! Haven’t purchased OTP in our property journey yet. We have a running joke that the only time we will buy OTP is when a developer is liquidating. Perhaps one day. Believe there is a lot more value and ability to manufacture growth with established real estate than OTP would offer. Never say never though. The intention of the article is to make people aware to not buy into the hype of OTP being fantastic investments. Sure! But reverse that into saying, OTP are a fantastic investment for the person spruiking it more than the person buying!

  2. Christina

    Hi,

    Great article – it was very insightful!
    In your article you mentioned inflated prices as a cost for OTP. Say I do buy an established property for $350K, I would assume the rental yield will be lower and vacancy rates higher as opposed to buying a $400K property. Whilst the price itself might be inflated, would it really slow down your ability to purchase additional properties after? This almost sounds like the cash flow vs capital growth debate.

    Thanks in advance,
    Christina

    • admin

      Hi Christina,

      Glad you liked the article.

      Established property doesn’t necessarily have a lower rental yield. You can still find established properties with rental yields 5-7% plus. When capital growth happens all property rises. So if you have already paid a certain percentage more – you’ve already paid developer profits and foregone capital growth. Remember you also pay GST built into the price for a brand new property for all the new and shiny fittings..

      Where are you in your investing journey?

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