It is known as selling off the plan if you want to sell a property before it’s been built.

Selling Off the Plan means that instead of doing a walk-through of an existing property, buyers will decide to buy based on the documentation you provide before construction. The documentation might include floorplans, architectural drawings, the artist’s renders and legal paperwork.

Once a more established developer, you might set up a display suite to show off the fixtures and finishes using mood boards or even build an entire kitchen and bathroom.

But because buyers can’t see and touch the actual, final-built product, some don’t like buying off the plan. Others expect to buy at a substantial discount on what we consider the perceived completed value to be. And some people buy and then pull out of their contract.

So why would a developer choose to sell off the plan?

Isn’t it better to wait until you have some shiny new apartments or townhouses ready to show buyers?

There must be some compelling reasons to choose this sales avenue when it comes with some significant drawbacks.

To put it bluntly, sometimes, there’s no other way to get finance approval for your project.

If you want to use one of the big four banks, they’re quite stringent on their finance requirements. They’ll typically ask you to get what they call debt coverage for your project. And that debt coverage can be anywhere between 80% to 120%.

This means you’ll probably only have one or two of your dwelling left to sell as the finished product. And generally, the finished product will attract a higher price point than selling off the plan. This is because you’ve taken most of the guesswork of the purchase – buyers can see exactly what they’re buying and are more confident making a decision.

But what happens if you use non-bank or second-tier banks or people specialising in development funding? They tend to have higher interest rates but are less stringent on their finance requirements. You may be able to commence construction and sell off the plan while the development progresses.

So how do you choose between the big banks and a second-tier lender?

As a developer, you must first weigh up the allure of low-interest rates and the perception of savings that creates real-world costs of selling most of your project off the plan.

You’ll likely have to sell at a discount to secure the low rate.

When you sell off the plan, the bank valuer is always conservative, so straight away, they’re shaving a little bit off the price. Then you’ve got a buyer concerned that what they’re buying off the plan may not necessarily be what they get, so they want to get a discount.

Then you’re typically selling through a project marketer, who specialises in off-the-plan sales and commands higher commissions than their real estate counterparts.

That, and you’re trying to sell a dream. You’re asking buyers to sign up on the promise of what’s to come, which may mean the sales process takes longer, which means your holding costs go up. The big four banks won’t let you start constructing until you have all the required presales.

This means the buyer is not motivated to get in because they don’t know how long it will take YOU to sell the remaining dwellings. So, getting the first few sales is challenging, because nobody knows if the project will proceed.

There are the presales that the bank won’t qualify as a presale. Say what?

The valuer and the bank stipulate that presales should be made to an “informed buyer”. Their definition of an informed buyer is a local buyer familiar with the local market. So if your off-the-plan sales are to interstate or overseas purchasers, they might not count!

Typically, the bank will limit the amount of out-of-area sales, so your focus will need to be on local buyers, and these do not always have to factor all of this in when you’re deciding on the best finance option for your development.

So, while low-interest rates are appealing, you must factor all this in when deciding on the best finance option for your development.

Let’s compare that to paying higher interest rates with a second-tier lender.

• There’s a good chance you can start construction, which means people can see what’s being built. Selling once construction is underway is usually much easier, even if you sell off the plan.
• But there’s a flipside here too. If you hang on to most of your dwellings until completion, hoping to sell for the best possible price, you’ll reach peak debt.
• You’ve already incurred all your costs, from DA approvals to construction to marketing, and you’ve got a huge outstanding loan. And this starts to put pressure on the sales themselves. If the sales don’t turn over in a short time, then the holding costs of the finished product escalate. That pressure can force you to start discounting from the get-go because you’ve got legitimate concerns about blowing out your holding costs.

Risk reduction

Another reason to sell off the plan is to lock in a high price if the market is falling or is likely to head south soon. We want to maximise our sale price, and we know it will take some time to move through the construction process to create a finished product.

Let’s say the market has been booming for 12 months, but the media is starting to talk about a slowdown. You’ve got a project ready to go that’s going to take at least 18 months to complete. There’s every chance the property market will decline when our project gets to the lock-up stage. We are selling off the plan at today’s prices to avoid the possibility of the market dropping. Assuming our construction prices remain stable and we’ve built appropriate buffers for unexpected challenges, our deal is done and dusted from a profitability perspective.

Not only did you remove one of the variables in the current project, but you’ve also gotten some certainty about what funds you have to roll into the next project.

Selling Off the Plan is a risk reduction strategy, and if you don’t need presales to get finance approval, risk reduction is the other key motivator to sell off the plan.