Traps and Pitfalls of investing in property off the plan

We consider what the key drivers are when property sales groups attempt to sell us an “off the plan property”.

“Medium & High Density developments are everywhere”

Have you noticed endless property developments happening around you in recent times? The State Government’s promotion of medium to high density living in suburbs all around Melbourne has led to a flurry of property developments.

These obviously need to be sold and property developers are turning to professional sales groups to assist them with the promotion and sale of these new townhouses and apartments.

We have been approached on several occasions and have been offered between 4 and 9% commission for the sale of these types of property to our clients. Needless to say, we have knocked all of these back and there are a few damn good reasons for this.

“If it sounds too good to be true, then it probably is”

Before I start, I ask that you remember two age old adages. “If it sounds too good to be true, then it probably is” and “If you don’t understand what they are talking about, don’t say yes”

In order to better understand what is happening out there let’s consider some of the key human behaviours that influence how we behave. The groups marketing these properties have made a fine art of studying our behaviours. They do this in order to develop more compelling sales presentations which make it almost impossible to say “no” to.

I believe there are four core drivers that influence us in decision making. They are;

1. Keeping up with the Jones’s
2. The fear of missing out
3. Getting a bargain and
4. Being too scared to say “No”

The first and perhaps most compelling is point # 1. I accept that as humans, we measure our own success in part by comparing ourselves to our friends and peers. If we don’t have an investment property and they do, what are we doing wrong?

Point # 2 is equally compelling. The Jones’s have an investment property and we don’t. If we don’t get one, we will miss out on significant profits in the future. And how difficult is it to not make money in a rising property market…? You don’t really do anything at all. The property just sits there, people pay rent and you make a big lump sum profit in 10 or 20 years’ time.

Point # 3 is also very valid. We all like to get a “Bargain”. That is true but in most cases a bargain is an item we could pay anything between $10.00 and $100.00 for. Towels on special at Myer as an example… Stamp duty savings appear to be significant. The idea of committing to an “Investment” because of a stamp duty savings, in most cases beggars belief.

Point 4. Sales pitches are highly developed and designed with one thing in mind. To get you to say “Yes”. Let’s assume point 1 applies to you and that you have accepted an invitation to attend a property investment seminar. In point 2, the pitch goes through how much property has grown over the last 20 years in value and establishes that it is one of the most effective passive methods of adding hundreds of thousands of dollars to your bottom line in the future. Who wouldn’t want this?

“Save $20,000 stamp duty by spending $500,000 on “off the plan” property”

They then bring out their big guns, Point 3. For a limited time, you can save $20,000 +++ in Stamp duty if you buy now… They will also prove through cash flowing that the property will start bringing in positive cash flow income from day one because of your ability to write off the depreciable assets. By the time this has been done and the audience have whipped up into a frenzy, it takes a strong willed person to break from the herd and say “no thanks”. (Point 4 taken care of)

Please don’t get me wrong. I am a property investor and would in certain circumstances encourage my clients to invest in property as well.
Understanding the difference between these properties (sold off the plan through marketing groups etc.) and property sold through the estate agency network is critically important.