A Conveyancer’s Guide to Buying Off the Plan
Buying ‘off-the-plan’ means committing to buy a property that hasn’t been built yet, or is still under construction, based on the building plans and designs.
Due to the rising property market, buying off the plan has quickly become a popular choice amongst first homeowners, downsizers and investors.
It can be a more affordable option, especially for young people wanting to break into the housing market and for people trying to buy in pricier suburbs.
Here are the pros and cons of buying off-the-plan so you can be informed about making one of your biggest investments.
What happens before, during and after construction?
There are a few stages of building houses and apartments off the plan. For simplicity, we’re going to generalise these stages into the design phase and the building phase.
If you become involved at the design phase, you may be able to negotiate changes to the plan or provide input for the design. This will depend on the individual developers and the status of the project at the time of purchase. But you could select options for things such as internal colour schemes, feature tiles or additional services like ducted air conditioning.
When everything’s finalised, you’re going to be living in a brand-new house! You won’t need to worry about any wear and tear from the previous tenants because you’re the first and only family to have made this house a home. If this is an investment property, a brand-new home is also very enticing for potential tenants and ensures maximum depreciation at tax time.
One of the biggest concerns with buying off-the-plan is if the final product doesn’t meet your expectations.
This one’s difficult to navigate, as those of us who aren’t architects or builders often struggle to visualise the final product based off drawings and plans. There are undisputed benefits to seeing a property in person before buying it, and this isn’t always an option when you buy off-the-plan.
When a developer is building apartment blocks and multiple houses at once, there are lots of moving parts to consider like contractors, council permits, suppliers and weather events. It’s not uncommon for delays to construction as a result, much like building a new house with a project home builder.
These delays can occasionally drag on beyond the original estimated completion date. Check the ‘sunset clause’ in your contract. This clause refers to the maximum time the developer has to finish the project. If it’s not completed by this time, you are within your rights to rescind the contract and get your deposit back.
Things can also change throughout construction for many reasons, including council or engineering requirements. Check your contract for a provision that gives you the right to pull out of the purchase if the changes are too significant to justify continuing.
Can I save money by buying off the plan?
You could be in the black
To secure this type of property, you usually only need a deposit of 10%. The long settlement time can also give you additional breathing room to save up the outstanding mortgage balance.
Also, in NSW, stamp duty on this kind of purchase agreement can be delayed for 12 months after the date of agreement, giving you more time to save.
The government are making it more attractive for people to buy off the plan. In the 2020-21 Federal Budget it was announced that First Home Buyers are able to buy a new home with a 5% deposit. First time buyers are also eligible for a $10,000 grant to buy a home that’s ‘newly built, purchased off the plan or sustainably renovated’.
If this is an investment property, there are plenty of tax benefits available to you, including depreciation. This allows your accountant to calculate any loss in value due to market depreciation and deduct it from your tax bill.
This can reduce ongoing costs that come with owning a property and allows you to expand your property portfolio quicker. Be sure to check in with your accountant or financial planner first.
Another thing to consider in a rising market, like the one we’re currently experiencing, is that typically the prices are fixed rather than negotiable. This means buying off-the-plan can be a more attractive option that attending a busy open house and worrying about what offers another buyer might be making.
Or you could go into the red
There are some things in life that we just can’t control. What happens if the builder goes bankrupt before constructions finishes and what does that mean for you? It means you’ve wasted 1-2 years waiting to move into a property when you could’ve put that money towards another home or investment.
Another financial setback could be your lender not approving your loan. You’ve handed over your 10% deposit and your lender has offered conditional approval, but they won’t actually loan you the money until construction is complete. Once it’s finished your lender will perform a valuation of the finished product and re-evaluate your financial position.
Because of the time between the lender’s conditional approval and final valuation can be upwards of 6-12 months (or even longer if there are delays),you will need to meet the lending criteria at the time of completion. This is risky as the developer has the authority to seize your deposit because you’re unable to fulfill your end of the settlement.
If your circumstances change, like losing your job or have a baby, there could be options to deal with this scenario (such as re-selling the property or having the agent replace you with another buyer before settlement). We would suggest discussing these options at length with the selling agent.
Will the value of the property change by the time construction is finished?
Capital gains! This is why so many people are jumping on the buying off the plan bandwagon lately. When you commit to buying this type of property, you’re locking it in at the current market value.
If the property value increases during the course of construction, which is looking very likely according to current market projections, the residence would have increased in value, which is a big win, particularly for investors.
On the other hand, property prices could adjust during the time of construction, meaning you’ve paid more for a property than the market suggests at the time of completion.
Whether this situation actually affects your purchase depends on a variety of things. For example, if you’re borrowing less than 80% of the purchase price it may not have any effect on your financial position at all.
There are a lot of benefits of buying off the plan, but there are also risks that need to be considered. Here’s our list of things to do if you’re considering buying off the plan:
Know exactly what you’re paying for
- If possible, arrange a walk-through or drive-by of an existing property, or a property previously constructed by the chosen developer/builder.
- Establish any variations between the property you’re viewing and your future property. Make sure you know which brands are being included for appliances such as the dishwasher or oven and check what alternative brands will be used if the first choice isn’t available.
Seek legal advice
- Get a professional to go over your contract with a fine-tooth comb.
- This includes checking on body corporate requirements.
Research, research, research!
- Research the market. Is the property value expected to rise or fall? What have other developments in the area sold for? This advice is especially directed to investors who are wanting the best possible return on their investment.
- Do your due diligence. Research the developer and the builder’s track record. Check if they’ve gone bankrupt in the past, have any issues with the Department of Fair Trading and read customer satisfaction reviews.
If you have any questions or would like to talk more about your options when it comes to buying off the plan, we’d love to help. Give us a call us on 4910 0522.