What you need to know about Buying Off the Plan Townhouses
New off the plan townhouses are increasingly becoming the first choice for first home buyers, owner occupier and investors. Buying off the plan property is very different to established property offering townhouses to purchasers prior to construction commencing.
Since launching the townhouse development website our clients regularly ask us ‘how do I buy a townhouse off the plan?’ So we thought it would be a good idea to guide you through the process, give you some peace of mind and save you some time and effort.
Let’s kick off with why the way we live has evolved from the family home on a quarter acre block to medium density living. The explanation revolves around three key elements:
- Embrace medium density lifestyle
- Household dwelling numbers
The accumulation of capital – while an advantage for those who already own a property – means the affordability of an off the plan townhouse comes down to you having enough money saved to pay a 10% deposit. Increasingly an individual’s earning capacity has not kept up with mortgage repayments, so you have to spend more on a property than you would have had to say 10 years ago to get a comparable product.
EMBRACE MEDIUM DENSITY LIFESTYLE
We are increasingly time poor and as such want a ‘lock and leave lifestyle’ that is, a lifestyle requiring minimal household maintenance. Why mow the lawn when you can walk to and play in the local park? Increasing work commute time means we are spending more time in traffic or on the train than doing the things we enjoy. Los Angeles, London and Singapore are townhouse living cities. That is, living in a house is a rarity, we are simply heading in the same direction.
HOUSEHOLD DWELLING NUMBERS
Population dynamics are changing. The number of dwellings has had to increase to cater for the increasing number of single households. Divorce, downsizing and aged care rates all of which are increasing mean more dwellings are required to accommodate everyone.
Who can buy a townhouse? Well anyone can, one of these terms will be you
FIRST HOME BUYER
Are you buying your first property? The First Home Owner Grant (FHOG) scheme was introduced on 1 July 2000 to offset the effect of the GST on home ownership. It is a national scheme funded by the states and territories and administered under their own legislation.
Under the scheme, a one-off grant is payable to first home owners that satisfy all eligibility criteria. The Grant amounts vary from state to state and can change, so ensure you have the most up to date amount that will assist your purchase and the criteria to ensure you are abiding by the regulations.
An emotional buying decision reflecting suburb, size and type of the product to house the family but also financial relating to purchase price and affordability. School zones are increasingly becoming a driver for owner occupiers with areas such as Balwyn or Mckinnon. These are tightly held suburbs the advantage of a townhouse within that school zone is that the chances are it will be cheaper than an established house.
Property investors will be driven by the mathematics of the purchase being either rental yield, depreciation or capital accumulation. Townhouse developments reviews all new off the plan, under construction and complete townhouse calculations with our clients prior to purchase, ensuring revenue and expenses such as body corporate and insurance are analysed.
DOWNSIZING OR RETIREMENT
A lifetime of accumulation may require to have ample cupboard space for storage or be close to the lift for ease of carrying shopping bags or golf clubs! Downsizing and aged care buyers often forget how expensive it is to sell their current residence and the cost to enter a new residence. Many times there is not the product to match downing and retirement buyers needs and many prefer to stay in the suburb they have lived in as they know their neighbours, their social and professional network is there so townhouse developments can always assist you to look at building townhouses on your established family home.
INTERNATIONAL BUYER (FIRB)
International purchaser: if you do not have Australian residency you will need to apply to purchase the apartment from the Foreign Investment Review Board (FIRB).
Townhouse developments ensures our client’s receive first priority pick in new off the plan developments prior to public launch. Having said that, you need to be organised with a clearly defined apartment selection criteria and understanding of your financial capacity, so you will be able to ascertain a development’s suitability to make an informed purchase decision.
When searching, many purchasers search for a property first, find an apartment they would like to buy and then go to the bank, only to find out the price is out of their budget. Your bank will be able to give an indication – based on the amount of money saved and your income – of the price point you can realistically afford. Keep in mind your health, lifestyle and spending patterns.
To purchase an off the plan townhouse either for investment or to live in you are required to pay a 10% cash deposit and sign a contract of sale. The remaining 90% of the purchase price is paid at settlement; that is, on completion of construction and certificate of occupancy of the townhouse or townhome.
If you are looking at buying a $800,000 townhouse you would need to have $80,000 (for the 10% deposit) and pay the remaining 90% or $720,000 at settlement.
Once you have a budget, you can determine your townhouse selection criteria. Everyone’s position is different, it is normal to turn to family and friends for advice; however if they don’t own a property they may not be aware of all that is involved in purchasing a new off the plan townhome, nor they are in your current lifestyle and income bracket or have the amount of savings you do.
Remember, it will be one of your largest lifetime decisions, it needs to work for you, not your friends and family.
Your suburb location and size of the apartment is the main price point driver. Keep in mind your first choice suburb to live in may not be in your budget, however the surrounding area suburbs can be a good alternative.
“Location Leap Frog” is the term we use for wanting to live in a location that is tightly held; the zoning or council restrictions may limit building apartments due to height constraints, and therefore may not allow for apartment development which offers limited opportunity to buy in these areas.
Do you require a 2, 3 or 4 bedroom townhouse? Internal sizes of townhouses vary and are calculated per square metre (per sqm) basis, the terrace or balcony is known as external space and is also measured in square metres.
As crazy as it sounds, settling a new off the plan townhouse requires you to be even more organised then when you purchased. It is an exciting time and you are well on your way to reap the advantages of apartment ownership, such as:
- Freedom and flexibility
- Predictability and stability
- Accumulating capital and equity
A quick recap: you have picked your townhouse or townhome for investment or to live in, signed the contract of sale and paid your 10% deposit, and the construction of the development has commenced. Now what do I do? Depending on the size of the building, construction or build timeframe will vary from 12 months for completely off the plan to 2 months if it is under construction and almost built before you can settle and move in or rent the apartment.
Over the course of the construction of your townhouse property you will receive updates with photos and construction commentary from the builder and developer. It is a fascinating and rewarding time to watch one of your lifetime’s largest purchases be built from the ground up.
The settlement process involves every person you interacted with when purchasing the townhouse to ensure the process runs smoothly. The following tasks are required to be completed:
- Final inspection.
- Certificate of Occupancy.
- Settlement time and date confirmation.
- Valuation report.
- Statement of Adjustments.
- Transfer of funds.
- Registration of the title / transfer of land.
- Handover packet.
The handover packet will include your keys, appliance guarantees and other information, such as the appointed body corporate manager. The body corporate will require a number of apartment owners within the development to be on the committee which manages operational matters of the development. The body corporate manager will hold an annual general meeting, which you can attend to be kept up to date with items such as building maintenance.
Effective the day of townhouse settlement, you will need to connecting all services such as electricity and water and commencing insurances. You don’t want to move in in the dark! As a new owner, you will need to book the time and date to move in. This is to ensure a lift is allocated to ensure smooth, stress free day. Depending on the development move in schedule, you may only be allowed to move in on a weekday.
If you are a townhouse property investor, you will need to appoint a rental agent. This will require you to sign a rental agreement with the agent, along with placing an advertisement on various real estate websites.
The rental agent will then hold open days throughout the week to gain interest and take apartment application forms from prospective tenants, who will have to provide information on their current employment status, referees and rental history. You as the vendor choose your tenant from the application pool and then enter into a tenancy agreement.
Your rental agent will provide you with regular apartment inspection reports to ensure the tenant is looking after the townhouse or townhome, along with monthly or fortnightly financial statements.
You will often hear the term ‘vacancy rate’ which is a calculation based on tenanted dwelling within an area and is used as a tool to determine rental demand. A 3% vacancy rate is the point at which a market is set to be evenly balance between landlords and renters, that is equilibrium.
Calculating an off the plan property rental yield by taking your property’s purchase price, and the yearly rent (weekly rent times by 52). Divide the yearly rent by the purchase price and times the result by 100 to get yourself a percentage. This percentage is your gross rental yield. For example:
Purchase Price: $800,000
Weekly Rent: $650
Annual Rental Income: $33,800
Calculation: $33,800 / $800,000 * 100
Gross Rental Yield = 4.225%
In order to calculate the net rental return, you will need to subtract other associated expenses such as the annual body corporate fee.
The body corporate is an annual fee for the maintenance and insurance of all public areas of the building. This may be cleaning the public areas to maintaining the lifts and if the building has a swimming pool or gym, the cost to clean and manage these services.
New off the plan townhouse builders and developers will typically provide you with marketing collateral outlining the position and proximity to amenity, as well as independent research information including demographic and infrastructure data and analysis, that presents all the facts and figures to ensure a purchaser can make an informed decision.
Inclusions, also referred to as fixtures and fittings, includes items such as the brand of kitchen oven to the type of benchtop, be it stone or stainless steel. There is no wrong or right appliance type or brand within an apartment, it will have been chosen by the interior decorator and architect to best reflect the apartment building brand and positioning.
When Purchasing a new off the plan townhouse you will have to choose an internal colour preference – usually from two colour palates – and this will invariably come down to a choice of a light theme and a dark theme. The colour variations will often include the colour of the carpet or floorboards, kitchen bench and splash back to the bathroom wall tiling. If it is a smaller, boutique townhouse development there is sometimes 1 standard colour palate just to make things easier, also local council approves planning permits and one of the considering factors is exterior building colour to match the street surrounds and blend with the area.
Ceiling heights will vary from some rooms: this is due to the air conditioning type, ventilation from kitchen and bathroom, all those pipes need to fit somewhere so it is just something to be aware of and is perfectly normal to see a variance in ceiling heights listed.
Townhouse developments always recommend you review the Contract of Sale and instruct your solicitor to do so also. Items we recommend to check include the inclusion list, and that the floor plan of the marketing material is the same as in the contract of sale. You will need to sign three copies of the contract of sale: a copy will be for your record, the developer and solicitor. Make sure you keep it in a safe place for your records.