Purchasing a property off the plan presents a wealth of opportunities and challenges to potential investors and owner-occupiers alike. Off the plan developments have been subject to a lot of negative media attention over recent years, however, these developments are not necessarily either good or bad. Rather than asking whether buying off the plan is a good idea, purchasers should be asking themselves whether buying off the plan is right for their own plans and circumstances. In today’s post, we will discuss the process for off the plan purchases and some of their pros and cons, so that potential buyers can make their own initial assessment as to whether buying off the plan will be right for them.
What is buying off the plan?
Buying off the plan is signing a contract and purchasing an apartment that doesn’t yet exist. Without a physical property to inspect before putting down a deposit, purchasers make their decision based on artistic renderings, construction plans, models or a demonstration property. However, all these things are only indicative of the final result, so it is important that the contract is thoroughly reviewed and analysed prior to signing and committing the deposit so that potential buyers know their rights as to the final details of the property and potential changes to construction and design. For example, the developer may have the right to alter the design of the property (such as the floor plans) or the details (such as the materials, fixtures, and fittings used) without a purchaser’s approval. The contract will also have clauses relating to potential delays or setbacks in construction. While for any property contract it is important to understand the fine print, this is even more critical for off the plan properties because you can’t walk in and inspect an apartment that doesn’t exist yet.
What are the pros and cons of buying off the plan?
- Set price: The key advantage of buying off the plan is that the purchase price is agreed upon before the building is completed. This means you will pay market value for the property, with the most likely scenario being that the property (and your capital) will appreciate in value before it is even finished.
- Low capital outlay: You will only need to outlay the deposit when you first exchange contracts, which in most cases will only be 10%.
- Stamp duty concessions: Most states offer concessions on stamp duty on new properties. In addition, stamp duty is assessed based on the value of the contract signed, not the finished product itself.
- Choice: As you will be one of the first purchasers on a development, you will have access to greater choice on the range of properties on the development. For example, you might be able to choose the apartment with the better view, or closer to the building’s amenities.
- Additional time: Because of the extended settlement period, buyers are afforded more time to get their finances in order, as they will only need to provide the deposit at the time of exchange.
- Set price: Just as this is the key advantage to buying off the plan, the opposite could end up occurring – because of market fluctuations, the price agreed in the contract may actually be more than the finished property is worth. In particular, this was seen throughout Australia throughout 2019 with many newly completed apartments, given that they were originally sold off the plan back in 2016 and 2017 in what was a very different market.
- Failure to meet expectations: As purchasers are likely to not be allowed to see the property until it is completed, there is the risk that the final layout and quality of the building will not be what was expected.
- Bankruptcy: The biggest risk is that the developer goes into administration during construction, in which case the purchaser’s deposit is likely to be lost. To minimise this risk, it is important to thoroughly research the developer’s background, by asking for evidence of past projects, speaking with owner’s of their apartments, looking for media reports, and visiting their previous sites if possible to assess the quality of construction.
What is the purchasing process?
The process for purchasing an off the plan property is different to that for an existing property.
- Research: It is critical that potential purchasers do their initial research on the property, its developer and development plan, but also for the suburb and the area. Things to be considered include the potential for growth and trends for the location, how this fits in with an investment strategy or lifestyle needs, and tax benefits and concessions available. Credit checks should also be performed on developers and builders to confirm they’re in a good financial position.
- Visit: This is the time to not just inspect displays, but also to visit previous sites the developer has worked on to inspect their quality. Those interested in buying should ask a lot of questions, and get a copy of the contract to begin looking over.
- Legal advice and signing of Contract: Once you have decided upon a development, it is time to sign the contract. Before this can happen, however, your solicitor will need to review the contract to ensure that it is suitable for execution. This is paramount for off the plan purchases given that you are committing to buy something that doesn’t yet exist. There are a few clauses that your solicitor should pay particular attention to, such as the cooling off period, sunset clause, details on the project plan and inclusions, deposit amount, finance, and regarding building defects.
- Construction: during the construction period of the development, you should receive periodic updates from the developer.
- Apply for finance: About six months prior to settlement, you should apply for finance. In addition, the lender will generally need to value the property once it has been completed and prior to settlement.
- Pre-settlement: The pre-settlement inspection is a critical step. This is the chance for the purchaser to inspect the finished product and raise any issues. Purchasers have a lot of leverage prior to settlement to ensure that any issues or defects are corrected, and can lead to discounts if for example lesser-quality materials were used.
- Settlement: Finally, your solicitor will work alongside the bank and the vendor’s legal team to finalise the transaction.
If you’re considering buying off the plan, you need to take into account a number of different considerations as opposed to buying an existing apartment in order to determine if this is the right decision for your circumstances. If you have any questions about the process or need assistance, please contact our experienced property lawyers today.
Harris Gomez Group is an Australian law firm located in Sydney, with sister offices in Santiago, Chile, and Bogota, Colombia. The firm has expertise in a range of issues, such as business and commercial law, property and development, international law, commercial litigation, and estate planning. With 25 years´ experience in Australian legal and business culture, our team has become an essential partner to many Australian and international enterprises.
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