Under-development properties are offered at discounts, but what should Singaporean homeowners look out for before buying one?
Would you buy something you can’t see for another three years? That may sound ridiculous, but Singaporeans oddly think it’s acceptable when it comes to housing. Many developers rush to sell early, so it’s not uncommon to find price discounts for under-development properties. But here’s what you need to look for, before you buy.
What is an Under-development Property?
Under-development properties are still under construction. However, the developers have already started to offer them for sale (they have a time limit in which to complete and sell all the units, lest they incur hefty additional taxes).
Under-development properties are often sold at significant discounts, commonly referred to as early-bird discounts. This is to compensate buyers for two things:
First, you are taking a bigger risk by purchasing under-development properties. You have no guarantee of quality, as you cannot see anything yet.
Second, you are unable to rent out the property immediately. This means you need to service the property loan without the aid of rental income, until the building gets its Temporary Occupancy Permit (TOP).
If you still decide that the discount is sufficient to make up for these drawbacks, then here’s what to look for before buying:
- Check the BCA Conquas rating
- Note the prices and rental incomes of surrounding properties
- Know the terms of the defect-free period
- Ask what happens if there are delays
Check the BCA Conquas Rating
The Building and Construction Authority (BCA) has launched a new website, which lets you check the Construction Quality Assessment System (Conquas) for developers. This is the BCA’s independent evaluation of developers, and the standard of their work.
This helps a little, as you can see obvious red flags – if a developer has a poor reputation, it may not be a good idea to buy, regardless of the discount. But note that the developer’s reputation alone isn’t the be-all and end-all.
During an incident with The Seaview condo, the developer (Mer Vue Developments, a subsidiary of Wheelock Properties) successfully deflected a S$32 million lawsuit for defects onto its subcontractors. This showed that even a reputable developer can – at times – produce properties with defects.
Still, it’s better to have some idea of a developer’s capability than buying in the dark.
Note the Prices and Rental Incomes of Surrounding Properties
Your under-development property almost certainly won’t be priced lower than surrounding units, on the basis of being new. However, you should make sure that the final price doesn’t significantly exceed the prices of surrounding properties.
Remember that you’re taking a big risk, by buying before completion. You could just as easily buy another property in the same area, that’s already built. The developer’s price should make up for this risk, by at least being reasonable (read: within the price ranges of surrounding properties).
If you’re buying for investment, note that your rental income will probably be on par with surrounding units. It could be a bit higher as your unit is new – but not all tenants are willing to pay more rent just for that. Assume the worst, and plan for rental incomes to only match nearby units.
Know the Terms of the Defect-free Period
Most under-development property comes with a defect-free period. This often lasts for at least a month after the property is completed. During this time, the developer is obliged to fix any defects at no cost.
Longer defect-free periods are a sign of confidence, as well as being safer. Remember that some defects, such as problems with the piping, may not be apparent until two or three months later (when your kitchen starts to flood).
Be wary if the terms of the defect-free period seem long and convoluted. For example, some defect-free periods absolve the developer of responsibility, if you put so much as a single partition in the house. In these cases, you may want to hold off on major renovations until the defects-free period is over.
Ask What Happens if There Are Delays
If the development is slowed, what is the developer going to do about it? Are there guarantees involved in the completion date?
This is vital if you’re buying to rent out the house, as an extra six months to a year without rental income could be devastating. Even if you’re an owner-occupier, you need to factor in the potential cost of delays: what happens if you’ve sold your previous house, and then now find you’re homeless because your new condo isn’t complete?
Staying in a hotel for several months can be very expensive, if you can’t move in with anyone else.
If the developer’s answer is just to smile and say “it almost never happens, don’t worry”, you may want to think twice.
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By Ryan Ong
Ryan has been writing about finance for the last 10 years. He also has his fingers in a lot of other pies, having written for publications such as Men’s Health, Her World, Esquire, and Yahoo! Finance.