Some properties are advertised for sale before construction has begun or before construction is complete. In either case, when someone buys such a property, it is called buying Off the Plan.
There are certain issues that may arise when buying off the plan since the buyer enters into a contract without having been able to inspect and assess the finished property.
However, there are also several benefits that come with making an off the plan purchase that the buyer will have to make a judgment on, depending on their circumstances.
We see off the plan purchases in our work all the time. This article brings together some of our tips and advice to people that may be looking to buy off plan: advantages, disadvantages and things to keep in mind as you consider your options with your legal or financial advisors.
Advantages of buying Off the Plan
One of the main benefits of buying off the plan is that buyers are often able to secure the property at a discounted price. This is because buyers pay the current market value for the property, even though in the future it may increase in value when it is completed.
Further, a buyer has more flexibility in customising properties that are bought off the plan. They are able to choose different colours, finishes and layouts that the developer can incorporate.
This can include removing a fourth bedroom, creating a larger kitchen, adding an office room and/or choosing certain fixtures and fittings. New properties often also reflect today’s living preferences, making off the plan purchases suitable for most lifestyles.
Moreover, buyers can secure a high value asset for a low initial capital outlay or deposit. Usually, a 10% deposit is made to secure the property; however, the balance of the purchase price does not need to be paid until the property is completely built.
This provides the buyer with time to sell their existing home without the need for a short-term loan or to organise other methods of finances.
Finally, there are several tax advantages associated with buying off the plan as incentives for both investors and first-time home buyers.
The buyer can claim depreciation on their tax for items including fixtures and fittings if they are purchasing the property for investment purposes.
In any particular case, however, we recommend that a buyer first consult their accountants or legal advisors to find out whether they are eligible for this advantage, as legal regulations are constantly changing
Potential disadvantages of buying off the plan
An off the plan purchase essentially entails buying a property ‘on paper’ without having viewed the property. As such, the completed project is unknown as the buyer does not know exactly how the property will look when signing the contract.
The precise quality and standard of fixtures and fittings is also unknown before construction is finished. This carries significant risk as the final product may not live up to the buyer’s expectations. To avoid disappointment, the buyer should study the Schedule of Finishes attached to the contract and ensure clauses are within the Contract to cover finishes of equivalent quality and value in the event the same finishes cannot be provided.
Another disadvantage is unknowns that are impossible to foresee: such as developers going bankrupt before completing the project, or delays of several years that may be caused by a plethora of reasons. This occurs when the buyer enters into a contract but the settlement doesn’t take place for years. In this case, the buyer also then does not know if the final price will be below or above the market value at that time.
To mitigate the risk of the developer going bankrupt, it is important to do your research of the builder and the development. This involves checking their licence and history to ensure there are no substantial proceedings against them.
The buyer may also not be able to get the financing they expect if the construction of the property is not yet complete. While banks do offer pre-approval for off the plan buyers, there is no guarantee that the bank will provide a loan until the property is complete.
Banks may not be willing to lend the same amount of money as the buyer’s income and circumstances may have changed, or the valuation could be lower than the purchase price.
In any of these situations, the buyer needs to come up with a larger-than-expected down payment. Additionally, the interest rates at the time of settlement could be very different from those prevalent at the time of purchase.
In order to prevent finances from being left last minute, the buyer should stay in touch with the lender throughout the process and continually update in the event of a change in circumstances.
There is also a risk of defects if quality expectations are not met. Although there are usually clauses in the contract which deal with defects, specific attention should be given to make sure that the buyer’s rights and interests are protected following completion and that provisions are made for dealing with disputes. This is so that the buyer does not have to resort to initiating time-consuming and costly legal proceedings.
Purchasers also frequently complain that they are putting aside a 10% deposit for many years. However, vendors often need the full 10% to convince the banks, financiers and mortgagees that the buyer is genuine in case the vendor cannot proceed and the bank needs to complete the project.
The importance of sound advice
Given the unknowns associated with purchasing an off the plan unit, it is imperative that purchases get sound legal and accounting advice based on their unique circumstances and the particular contract or development in question.
We regularly consult to and advise clients on the legalities of off the plan purchases and help them think through the commercial opportunities and legal risks involved.
If you have questions relating to buying off the plan, DF Legal is here to help. Get in touch with us here or on (02) 9774 3175.