Buying ‘off the plan’ generally means purchasing a property that is not yet built. It might also involve buying a vacant lot in a planned subdivision.
Unlike buying an existing property, a purchaser’s decision is based on plans and designs as opposed to a finished product. Developers may have display homes for prospective buyers to inspect, complemented with extensive marketing campaigns.
As with any property investment, there are pros and cons when buying off the plan, and key considerations to help prospective purchasers minimise risk and make informed decisions. Some of these considerations are discussed below. The information is general only and we recommend seeking advice from an experienced professional before entering an agreement for any property transaction.
Key Contract Terms
Off-the-plan contracts are complex with various conditions. Your legal advisor can review and explain these and may be able to negotiate more favourable terms, where feasible. Specific provisions found in most contracts for off-the-plan purchases include:
Settlement Date
Unlike existing properties, contracts for off-the-plan purchases do not have a fixed settlement date due to the uncertain nature of construction work. Completion is typically expressed as ‘x’ days (usually 14-21) after the issue of an occupation certificate (or equivalent) and registration of the title. Purchasers should ensure this will be sufficient time to get organised for settlement and finalise financing arrangements.
Sunset Clause
Construction work is unpredictable, and to protect buyers from being locked into an agreement indefinitely, off-the-plan contracts include a ‘sunset date’ which sets a deadline for completion of the property and registration of the title. If the sunset date expires, the purchaser can rescind the contract and is entitled to a refund of the deposit.
Variations
Provisions allowing for certain variations are typical in off-the-plan contracts, although they are generally restricted to what is ‘reasonable’. For example, the developer may need to vary the size/area of land during the construction process, but this will typically be restricted to no more than 5% of the original plan.
Tolerances for variations in design, fittings and finishes are also typical. Supply shortages and other factors can impact the availability of products and materials which may differ from the developer’s display home or the original plans. Generally, there are limitations on these variances to ensure that the purchaser gets substantially what was offered.
Contingent Conditions
In some cases, a development may not even proceed and there will be conditions in the contract about this. In such cases, a buyer will be entitled to have their deposit refunded but may have missed out on other opportunities in the interim.
Financial Considerations
Borrowing
Conditional finance approval for an off-the-plan purchase means that the money will not be loaned until the property is built and a valuation carried out of the finished product. Your financial position will also need to be re-evaluated to ensure you can service the loan. A change in the market, interest rates, or your finances/employment, etc., can impact finance approval.
Deposit
While your deposit may be tied up in a trust account for some time between signing the contract and settlement, purchasers may be able to earn interest on these funds in the interim. Alternatively, a deposit bond or bank guarantee may be accepted.
If you pay a cash deposit the contract should stipulate who is holding the money and whether it is being held in an interest-bearing account. Always seek legal advice if a request is made to release the deposit to the developer before the sale is settled.
Stamp Duty
Some states and territories offer exemptions or concessions on stamp duty for the purchase of certain properties such as off-the-plan dwellings. You should check with your property professional regarding any specific concessions available to you.
Market Fluctuations
When buyers choose to buy off the plan, they are often hoping to benefit from rising property prices. In an ideal scenario, the price that the buyer agrees with the developer will be less than the property is worth on completion, providing an instant increase in equity on settlement. However, it is possible that when the property is complete the market may have fallen. When this happens, buyers not only miss out on instant equity but may have difficulty with their finance because the property is no longer worth the price that the buyer agreed to pay.
The Developer’s Financial Position
Construction companies and land developers who become insolvent or go bankrupt during construction can leave a trail of destruction behind them. Product shortages and rising material and labour costs may force a site closure, with a buyer locked into a contract for a home that is not finished and will not be built to completion.
In some states, the builder will be required to have insurance which may provide some compensation for defective work or loss due to a bankrupt builder. You should seek legal advice to see what protection is offered before signing a contract.
Conclusion
As with any decision involving a large financial commitment, there are many things to consider when buying a property off the plan – these are just some. Seeking professional advice is essential to help you understand your legal position so you can proceed with your off-the-plan purchase with confidence.
If you or someone you know wants more information or needs help or advice, please call (02) 4382 2200 or email [email protected].