First-time home buyers who are actively searching for a property to purchase may have heard of the term pre-selling. Pre-selling is the process of selling real estate properties, including condos and homes before it is built or finished. For first-time home buyers who are still saving up for a deposit, this is one of the best options when buying a property because of the payment terms and conveniences it offers. However, there are also certain risks involved when buying a pre-selling property.
To help you decide whether pre-selling is the right deal for you, here are the advantages and disadvantages of buying a pre-selling property.
Advantages of buying pre-selling properties:
Lower Price
Prices of properties at the pre-selling stage are much lower than if the property were in the Ready For Occupancy (RFO) stage. Because construction has not commenced or the building has not been completed, you are able to purchase the condominium unit or the block of land at a lower price.
Forced Savings
By buying during the pre-selling stage, you sign up for the developer’s in-house financing in which you make a monthly payment and 6 months of lump sum payments for 36 to 48 months prior to the turnover of the unit or the lot. Normally, the monthly and lump sum payments represent 30% to 40% of the purchase price. In the 3 to 4 years, you get to pay a portion of the purchase price and at the same time get to build equity in the process.
Pre-selling allows the buyers enough time to accumulate funding through mortgage loans and forced savings while cashing out only a small portion of the fund toward the purchase of a unit.
Flexibility
Pre-selling properties can be purchased with less money down, and the balance will be paid on a schedule as the construction progresses. This allows you to spread out the costs of the property over time and align it with your budget.
Potential for appreciation
There is an opportunity to build equity when the construction of the condominium units is completed. If buying a lot, prices usually increase by 50% or double in value in 10 years.
Price lock-in
Once you’ve made a reservation, the buyer is able to lock in the price and the desired unit. During pre-selling, you get to choose the unit with the best view, on the best floor, and a parking space close to the elevator. If buying a lot, you get to choose the land with the best location.
Investing with a small down payment
As a buyer, you get to invest with a small down payment on a property that can be worth more in the future at today’s prices. This happens when you buy a condominium unit with a payment plan in which you pay 30% to 40% of the purchase price in 48 monthly instalments. By the time the unit completes, it could have increased in value and you could have accumulated equity on the property. The same happens when you buy a block of land. Land increases in value when more infrastructure and facilities such as hospitals, shopping malls, churches, and schools are built in the area.
Disadvantages of buying pre-selling properties:
Construction timeline
If you are in a hurry to move into your new home, an RFO property may be the better option. However, if you’re willing to wait for the construction of a pre-selling property to be completed, it may be more cost-effective.
Risk
Purchasing a pre-selling property entails a certain level of risk, as the developer may encounter delays or other issues that could affect the completion of the project.
Financing
Financing options for pre-selling properties may be more limited than for RFO properties, and interest rates may be higher.
Hidden costs
There may be additional costs that are not included in the purchase price such as interest, taxes, and other charges which can add up over time.
In conclusion, buying pre-selling properties can offer a great opportunity for buyers looking for a lower price, customization and flexibility in terms of payment. However, it also entails some risks and hidden costs. It is important to weigh the pros and cons and consult with a professional to help you determine if this is the right option for you.
Maria Papa is a senior property and finance expert specialising in home loans, investment loans, and self-employed loans. If you have questions, you can email Maria at mpapa@maverickfinance.com.au.
Disclaimer: Your full financial situation will need to be reviewed prior to acceptance of any offer or product.
