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'Don't buy a Melbourne apartment off the plan' says burnt buyer

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'Don't buy a Melbourne apartment off the plan' says burnt buyer

Sep 25 2015 at 4:16 PM 

Standing defiantly in front of the South Yarra apartment development that cost her $51,000, Joan Carville has a simple message for her fellow property investors: Don't buy a Melbourne apartment off the plan.  Carville, a working mother of two in her late fifties, learned the hard way about the dangers of buying in Melbourne's inner city apartment market, where cries of "over-supply" continue to reverberate.

In 2011, she lost her entire $37,000 deposit and racked up more than $14,000 in legal fees after failing to settle on a tiny $375,000 studio apartment. She had bought the unit off the plan two years earlier, on the advice of her financial adviser, but fell foul of unforseen changes to lending rules.  "Buying off the plan is very risky. Your circumstances can shift and change, but when it comes to settle, there is no wiggle room to negotiate," she told the Australian Financial Review.

 

With a glut of apartments hitting the Melbourne market over the next few years – 21,000 were approved in the past 12 months – and lenders once again tightening up their lending to investors to meet APRA requirements that annual investor lending growth be no more than 10 per cent, more investors risk not being able to settle their contracts, a point highlighted byWestpac chief economist Bill Evans in a speech in Sydney this week

"The issues about pre-sales is a real worry," Evans said. "Someone commits to a pre-sale and in two years they go to the bank and say, 'Can I have my money now?' and the bank has no obligation to give them the money."

Phillip Almeida, a director at investment firm Performance Property Advisory (PPA), who advised Carville to cut her losses in Melbourne and invest elsewhere, said the firm was currently advising many other clients – unable to settle due to valuations coming in 10 and 15 per cent lower than purchase prices or because of the tighter lending rules – to forfeit their deposits and buy elsewhere. 

"A number of clients have been referred to us but unfortunately it's mostly after they have signed contracts. These contracts are prepared by high-end law firms and are very difficult to get out of," Almeida said.

 

Carville ran into trouble after her mortgage lender, a big four bank, changed its rules on financing apartments under 40 square metres. The bank wrote to tell her she would need to pay a 20 per cent deposit rather than the 10 per cent she had put down.

Unable to raise the additional $37,500, she said tried unsuccessfully to negotiate with the developer, Ryssal Three, owned by the wealthy Stamoulis family.  "The developer would not negotiate.They sent me a threatening legal letter telling me to settle. I felt bullied."

On the advice of Philip Almeida, she bore the heavy financial loss, dusted herself off and regrouped.   In 2013, she bought an apartment in a small art deco block in Bellevue Hill, Sydney, where she has benefited from the surge in values in the Sydney market. Her apartment, which she bought for $550,000 and rents out at $550 a week, is now worth more than $700,000.

But, she hasn't forgotten the lessons of her off the plan Melbourne disaster: "I have talked so many people out of buying off the plan, many the same age as me, but also the friends of my children."  Her advice: Be smart, do your own really thorough investigations and make sure your financial adviser is not taking kick-backs.

The Financial Review contacted the Stamoulis Property Group for comment, but they did not respond.   Ashley Williams, director of Evolve Development and a board member of the UDIA Victoria, defended the right of developers to keep the deposit if a buyer failed to settle.

"There are genuine costs for a developer if they have to resell an apartment and if buyers pulled out of their contracts en masse because of a change of sentiment – as happened on the Gold Coast post GFC – the consequences for the developer could be dire," Mr Williams said.

A spokesman for Consumer Affairs Victoria said if buyers want to end a contract because they have changed their mind, they would likely to lose their deposit.   "Buyers should exercise caution when buying off the plan, and seek legal advice before they sign a contract of sale. They need to make sure they understand the terms of the contract before agreeing to purchase a property," he said.

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