In today’s show we talk to Patrick Bright, buyer’s agent from EPS Property Search. It’s another horror story about buying off the plan. While Patrick admits he has done it he outlines what he has learnt the hard way.
Kevin: Buyer’s agent Patrick Bright joins me. Patrick, of course, is from EPS Property Search.
Good day, Patrick. How are you doing?
Patrick: Very good, Kevin. Nice to speak with you.
Kevin: Good. Nice talking to you, too. I want to talk to you specifically about buying off the plan and what you’re seeing with certain developers enacting the sunset clause. You might tell us firstly what the sunset clause is.
Patrick: A sunset clause is a clause in a contract that says that if a property takes a certain amount of time, it has an expiry date, so if the developer is taking too long, the buyer can actually withdraw from the contract and get their deposit back.
But by the same token, if the property is taking that long – usually the same date – let’s say, it’s a two-year project, and we’re at two and a half years, the seller can say, “All right. I’m going to terminate the contract,” or the buyer can terminate the contract.
Now if the market goes up – and as we’re seeing and it’s been well publicized – several developers have enacted that sunset clause, given the original buyer their 10% deposit back, and then they’ve gone off and resold the property for significantly more money.
If the situation is on the other foot, what we’re not seeing is when these projects are actually worth less money than what the purchaser signed up to buy it for at completion, the developers are making sure they’re completing them within the timeframe, so their sunset clause isn’t being exposed.
It’s a gray area from the point of view of are the developers purposefully dragging the contract out, and in some cases, are they making sure they finish in others? That’s pretty much what we’re seeing happen.
Kevin: Well, you probably would have seen a lot of that happening in the Sydney market with the way that market’s certainly turned in the last year or so.
Patrick: It certainly has. Yes, we have seen a lot of that. That’s what’s been well publicized recently of a number of developers doing that.
Kevin: You can obviously just turn around and renegotiate the contract if you want. Are you seeing much of that happening?
Patrick: Not really. What we’re seeing is they’re saying, “You may have signed up to buy this property at $800,000 two years ago, but now the market has gone up, it’s actually worth $1 million. Here’s your 10% deposit back. I’m going to re-sell it for $1 million.”
The buyer either pays that $1 million, or they end up with their deposit back. You have a number of problems there. You have lost opportunity cost. You’ve missed out on the growth of the market over that time.
Look, off the plan isn’t for everybody. I have personally done it myself before. I haven’t done it for any clients or myself essentially since 2008. A lot of things changed in 2008. Rules affecting foreign buyers in Australia changed and allowed 100% of new development to be sold to foreigners. Previously to that, it was restricted to 50%, so that meant they had to get the sales here.
So you’re having a situation where it’s well known in the industry that foreigners will pay a lot more than the local market, so we’re seeing inflated prices, developers chasing the foreign dollar. They’re getting presales, and then they’re using those presales to influence local market on price.
Even though we’ve had fantastic growth in the last couple of years in Sydney, properties are only just coming in on valuation. That means people were paying 20% or 30% more than they should have a couple of years ago because the foreign buyer is pumping up the market. That’s another concern with off the plan.
You have situations where they have shrinkage clauses, and they’ve changed the size of the properties. There’s a recently well-publicized case of a gentleman who thought he bought a one-bedroom apartment, but they changed the size of it and he ended up with a studio. Now that changes the price significantly. If you don’t have a proper one-bedroom and you’ve now got a studio, you’re talking possibly 20% to 30% of the value of the property.
Kevin: The two major clauses there that would concern any purchaser – or they should – are that sunset clause and that shrinkage clause. Is there any way that you can knock both of those out of the contract?
Patrick: You could if you get a developer that will agree to it. I’m not aware of any that have agreed to it. When I did these off-the-plan purchases for myself and other clients in a different rule environment, we did negotiate with the sunset clause that it was our discretion not the developers. The sunset clause was there but they couldn’t terminate that clause, only we could enact it – to tie them to us, so we had the upper hand there.
But getting shrinkage clauses, they ask for different percentages. Some of them are 5%. Some are 3%. You need to negotiate that. These things are negotiable, but in a strong market, you’re not getting developers being flexible.
This is the problem with access to the foreign buyer like never before, with unrestricted access to the foreign buyer with new products, getting the FIB approval is very simple for these guys these days. They don’t have to be flexible, whereas before, they were flexible because they had to sell to the local market, as well. Now they do sell to the local market but only generally after they’ve sold to the foreign market.
Kevin: It would be pretty wise, with all of these conditions floating around, that you make sure that you engage a lawyer who is a specialist in off-the-plan type purchases.
Patrick: Very much so, Yes. Look, off the plan, as I said before, I’ve done it, but more than a decade ago was the last time I did it. The rules have changed. It is concerning. You do need a lawyer.
I’ve come to the conclusion – although, I didn’t see it that way back then when I was buying myself – that it’s speculating. You’re not investing. If you’re buying off the plan, you are speculating. Let’s just call it what it is.
You’re taking a punt on a lot of things. You’re punting on the market going up. You’re punting on what interest rates are going to be like at the time. You’re punting on how banks are going to value it, which is another issue.
Banks now have changed the rules. If you bought a property off the plan a couple years ago and you go to settle now, in the last six months, we’ve had a lot of changes in the rules. Banks now want 20% deposits if you’re in a capital city. Before, they would take 10%. Regionally, they want a 30% deposit. You look at these things. If you only had 10% required before, where do you come up with the other 10% or 20% if you don’t have it?
Kevin: You don’t.
Patrick: Right. Now you get also a situation where you can default. What happens then is you can’t pay the balance, the developer takes your 10% deposit, resells the property, and can sue you for the difference. If they sold it for 80% of its value, they can chase you for the other 10%. You’re exposed. You’re very exposed. It’s something that’s quite high risk. The deeper you look into it, you scratch your head and you wonder why you’d do it.
Kevin: Certainly a lot to think about there. Patrick, I want to thank you for giving us your time and drawing that to our attention. Patrick Bright, of course, from EPS Property Search and Property Management.
Thanks for your time, Patrick.
Patrick: A pleasure, Kevin.