In 2021, when the property market was hot, developers would seldom offer incentives to get deals across the line because there were more buyers than listings so they knew they were highly likely to find another buyer.
Now, in 2022, there has been a change in the market and there are now more listings than buyers which represents a great opportunity for investors to pick up some high-quality deals.
The slowdown in the market has resulted in developers needing to offer incentives to get sales across the line.
From an investor's point of view, this is great because developers now are eating into their margin in order to keep buyers engaged. However, this is done in a way that might not have been seen by a lot of investors.
Traditionally, when buying existing real estate, the purchaser offers a price, the vendor counter-offers, then both parties agree on a price and the deal is done.
This isn't the case for off-the-plan sales because developers usually use fixed-price contracts.
How do you negotiate a better deal then?
The most common way to negotiate a deal in the off-the-plan market is to request a cashback at settlement from the developer. Although the price of the property will remain the same, the developer will pay you an agreed amount back to you at settlement time.
Often, the developer's lender will require the developer to meet certain pre-sales targets before they can unlock their funding. A pre-sale is generally regarded (among other things), as an unconditional sale at full price.
So, developers offering a cashback instead of price discounts ticks this box for their lenders.
Another consideration for developers to make during the sale process is to uphold the development's overall value.
Come settlement time, a valuer comes in and does their valuation which is based on historic sales. So, if the valuer sees a bunch of historic sales below the original asking price, this devalues the relationship and can even put purchasers' finance at risk of falling over.
Purchasers can use this money for whatever they please but savvy investors will usually use the cashback to subsidize the cost of owning that property over the first couple of years.
Let's consider an example:
Assume a property had a 'cost to own' of $150/w in year 1 and the investor had negotiated a $10,000 cashback at settlement.
This makes the annual cost to own $7,800
($150 x 52 weeks = $7,800)
If the investor used this cashback to subsidize the cost of ownership in the first year, they will get a whole year of free ownership plus a little bit more.
Remaining cashback after year 1: $2,200
($10,000 - $7,800)
As a result, the investor has to pour less of their own cash into the property and they still end up with a good quality asset.
There are a number of alternative incentives that developers would consider such as rent guarantees etc. but a cashback seems to be the most common and in a lot of ways, the best value for investors.
Note, that most developers won't advertise cashback's so it's important to work with people who are in the know and can assist you when negotiating a deal.
When talking to the team at Thrive, ask what incentives developers are giving and the advisors should have the insight and knowledge to help you.
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