Huge risks for off-the-plan apartment buyers
A businessman who lost more than $15 million in an off-the-plan unit purchase is warning ordinary apartment buyers to be aware they can lose much more than their deposit if they break the contract.
Businessman Charlie Caltabiano bought an off-the-plan penthouse on the Gold Coast in 2006.
The penthouse, in the Soul apartment building, cost him almost $17 million – an Australian record at the time.
“The apartment was a four-story penthouse, quite large with its own rooftop pool, its own internal lift,” Mr Caltabiano said.
However, Mr Caltabiano never lived there. He broke the contract and tried to find another buyer.
“We undertook a worldwide marketing campaign to on-sell the apartment,” he said.
“After that campaign, which was not successful, we undertook evaluations and those valuations didn’t match up anywhere near what we were told the penthouse should be worth,” he said.
The property was finally resold last year for just $7 million to a Chinese billionaire.
The developer Juniper Property went into receivership in 2012 but the receivers sued Charlie Caltabiano for the difference and interest.
Mr Caltabiano had already lost his $1.7 million deposit.
After a six month legal battle, the court ordered the businessman to pay $14 million to Juniper, rejecting Mr Caltabiano’s claims the developer’s conduct was misleading and deceptive.
Half of apartments worth less than contract price
Barrister Gavin Handran has acted on behalf of a number of developers suing for damages.
He said many buyers are not aware they can lose a lot more than just their deposit if they break a contract.
“If prices go up, buying off the plan can be seen as a master stroke, whereas in a market that falls buying off the plan can be incredibly risky,” he said.
“There’s been an ongoing series of cases out of the global financial crisis, but it’s something which is starting to fire up again.”
WBP Property Group’s Greville Pabst values properties on behalf of banks weighing up how much to lend buyers.
“We conducted a study of about 1,700 properties that we value off-the-plan,” he said.
“We found that up to 50 percent of cases the value actually came in lower than the contract price.”
He said that, while in some cases prices fell after construction began, most of the time the apartments are just overvalued by the developer.
That leaves buyers scrambling to make up a shortfall in funding, which the bank will not lend.
“Sometimes that funding gap is in the range of 10-15 per cent,” Mr Pabst observed.
“On a $600-800,000 apartment, which is a sizeable amount of money, that difference can be anywhere between $60-100,000.
“Now, if you don’t have that money, well then it becomes a problem for the purchaser, buyer and the bank, particularly if you can’t then settle.”
‘Don’t trust the developer’
Hodges Real estate chief executive Carmel Baker said buyers can be hit with expensive agent fees, three times the regular cost.
“The trick is making sure we do a lot of research. If you’re looking to buy off-the-plan, understand a lot about that development. Make sure you research the developer and the area it’s in,” she said.
This week Macquarie Bank released 120 risky postcodes where investors must put down a 30 per cent deposit.
Sydney prices are still defying a downturn, but there are warnings of a nationwide glut, with Melbourne and Brisbane tipping into oversupply.
Those cities are seeing increased vacancy rates and flagging prices.
CoreLogic says an additional 230,000 apartments will be built in Australia’s capital cities over the next two years.
Charlie Caltabiano wants other potential buyers to learn from his expensive mistake.
“Make your own inquiries, don’t trust the developer, everybody has their own interests – you’ve got to look after your own interests,” he said.