Thinking of Buying Off-The-Plan? Here’s What You Need to Know
Buying off-the-plan, meaning purchasing a property before construction is complete (which may include apartments, townhouses, or houses on vacant land), is an exciting venture. It may allow you to make certain selections or customisations to your property, depending on the stage of construction and the developer’s policies and may come with some potential financial benefits. There are some unique risks, however. In this article I will give you some tips to make the process go as smoothly as possible.
Conduct Thorough Due Diligence
Conducting due diligence is something I espouse often, and for a reason! Conduct proper research on the developer, looking at their track record, financial health, and previous completed projects. Check for any ASIC records, reviews from previous buyers, and whether they have a history of meeting completion deadlines. It is essential to obtain legal advice before signing any off-the-plan contract. A solicitor can review all terms including the sunset clause, cooling-off rights, deposit protection arrangements, and your rights if the property differs from what was promised. The sunset clause specifies the date by which the contract must be completed or settled, after which either party may have the right to rescind the contract. This is one of the most important clauses in off-the-plan contracts as it protects both buyers and developers from indefinite delays.
You also need to research the area’s growth potential and planned infrastructure developments to understand how the location may change between contract exchange and settlement. If you are building the property for investment purposes, market value fluctuations and other housing developments could affect the resale price. Additionally, if buying for investment purposes, you may be eligible for certain tax deductions such as depreciation on the building and fixtures, and negative gearing benefits. However, tax laws are complex and change regularly, so it’s essential to consult with a qualified accountant or registered tax agent to understand your specific circumstances.
Be Aware of Unique Deposit Plans
Like established properties, a deposit for off-the-plan properties is typically due when the contract for sale is signed. While 10% is common, deposit amounts can vary significantly depending on the developer and the specific terms negotiated. Where off-the-plan differs, however, is that the remaining balance is typically not due until settlement, which occurs after construction is complete and the property is registered. This settlement period can range from several months to several years depending on the project. This extended settlement period gives you time to save, plan and prepare your finances while construction is happening. However, you must ensure your finance pre-approval remains valid until settlement, as lenders typically provide pre-approval for only 3-6 months, and you may need to reapply if construction takes longer. It is important to note, however, that some developers require you to pay a higher deposit or make periodic progress payments throughout construction. If progress payments are required, ensure your contract specifies that these payments are only due when certain milestones are certified as complete, and consider whether your deposit is protected by insurance or trust arrangements.
Prepare for Delays
Every off-the-plan purchase, no matter how well planned, has the potential for delays. These delays can arise from various sources including construction delays (due to weather, labour shortages, or supply chain issues), regulatory delays (planning approvals or building certifications), changes to building standards or regulations, developer financial difficulties or insolvency, or disputes over contract terms. Delays can range from a few weeks to several years in extreme cases. As such, it is crucial to have a plan if things do go wrong, and to understand your rights under the sunset clause if delays become excessive.
Set aside a financial buffer for potential delays or unforeseen costs. It isn’t fun, but it may just end up saving your neck! You can also include a contingency plan clause in your contract. These clauses make the sale conditional on certain events occurring or not occurring. Common conditions in off-the-plan contracts include: obtaining finance approval, the property being valued at or above the purchase price, a satisfactory pre-settlement inspection, and in some cases, the buyer successfully selling their current home. Note that developers may be reluctant to accept certain conditions, particularly those related to selling existing properties. If the conditions are not met within the specified timeframe, the buyer can typically withdraw from the contract and have their deposit refunded. However, the specific rights and remedies depend on the contract terms. If delays constitute a breach of contract by the developer, buyers may have additional legal remedies including seeking compensation for losses, though legal advice should be sought before taking such action.
Look Into Concessions
A common reason given for buying off-the-plan is that it may provide stamp duty savings in some circumstances. The availability and extent of these concessions vary significantly by state and territory, and specific eligibility criteria must be met. It’s important to understand your eligibility and apply for any concessions according to the requirements in your jurisdiction. Each state or territory has unique stamp duty exemption laws with very specific eligibility criteria, and these schemes are subject to change based on government policy. Application deadlines and processes also vary by jurisdiction. It’s crucial to talk to your solicitor about this so that you are fully informed and able to take advantage of all possible concessions without wasting time on ones that you aren’t eligible for.
Conclusion
Buying off-the-plan can be a great decision; it comes with potential cost alleviations and the ability to customise your home however you wish. It does, however, come with significant risks like market value drops, construction delays and developer insolvency. When you are purchasing a property that doesn’t yet exist, you don’t have the same ability to inspect the finished product before committing, which creates additional uncertainty compared to buying an established property. Legal counsel is crucial to reap all the benefits and none of the potential hindrances of buying off-the-plan.
If you have any questions about getting the results you want in your off-the-plan purchase, please do not hesitate to contact me. I am here to help.
DISCLAIMER: This article is for informational purposes only and does not constitute legal advice.