What is an off-the-plan purchase?
Strata Units and retirement village homes/units are sometimes advertised for sale before the building has been constructed or construction of the building has been completed. Normally, the buyer is unable to physically inspect the property because it has not yet been built, so they have to rely on the plans (architect, building, etc.), the contract of sale (off-the-plan contract), schedule of finishes and other warranties contained in the Contract or under the law.
As a result, there are a number of issues of which you should be aware when buying off-the-plan because you are entering into a Contract to buy a property without first having been able to view and assess the finished project.
Benefits of buying an off-the-plan property
There are a number of benefits of buying a property off-the-plan which include:-
- Often buyers are able to secure the property at a discounted price. One of the advantages of buying off-the-plan is that you will pay the current market value of a property, even though it is completed in the future and may increase in value;
- Buyers are able to secure a high-value asset for a low initial capital outlay. A deposit is made to secure the property (usually 10%) however the balance of the purchase price does not need to be paid until the property has been built which provides buyers with time to organise their finances and/or to sell their existing home without the need for bridging finance;
- Increasing property values. If the market experiences growth, the property purchased off-the-plan may have increased in value when the building is completed (often one-two years later);
- Tax advantages. If the property is being purchased for investment purposes, the buyer may be able to claim depreciation on their tax for items including fixtures and fittings. It is recommended that buyers consult their accountants to find out whether they are eligible;
- Customisation. Often a buyer has greater choice including different colours, finishes and layouts which the developer may be able to incorporate, such as removing the third bedroom, creating a larger living area or putting in a media room or even merging two apartments into one large one or choosing certain fittings and fixtures;
- Brand new. You get a property that is brand new which would normally mean less outlay for repairs and maintenance within the first few years.
- Life style. newer units are built to reflect today’s taste and preferences such as open plan living areas, larger balconies and amenities such as pool, gym and concierge services.
Cons of buying an off-the-plan property
There are a number of cons of buying a property off-the-plan which include:-
- The final product is unknown. Buying a property “on paper” without having viewed the property is a significant risk. When signing the Contract the buyer does not know exactly how the particular property will look when construction is finished nor the precise quality or standard of fixtures and fittings. Sometimes the fixtures and fittings are different from how the buyer imagined, or what they were like in a display unit at the time of sale. The finished product may not live up to your expectations in terms of for example aspect, quality etc. due to uncertainty between Vendors and Purchasers;
- Delays of several years. Buyers often complain that they have entered into a Contract however the settlement doesn’t take place for several years and therefore they do not know if the final price will be above or below the market value at that time;
- Developer’s Insolvency risk. There is always a risk that the developer might go bankrupt or insolvent before completion;
- Expected financing may not be available in the future if the construction of the property is not yet completed, your bank may not be able to offer unconditional bank approval to you before exchange of Contracts. The bank will mostly offer pre-approval for off-the-plan buyers. However, pre-approval is not a guarantee that the bank will give you a loan until the property is complete. At the time of settlement, when the property is completed, banks may not be willing to lend the same amount, the valuation may be lower than the purchase price or the buyer’s income and circumstances may have changed. In all these circumstances, the buyer would need to come up with a larger down payment than expected. In addition, the interest rates at the time of settlement may be very different from those prevalent at the time of purchase;
- Defects can be extensive. There are usually Clauses in the Contract dealing with defects however, particular attention needs to be given to ensure that the buyer’s interests and rights are protected following completion and that there is provision for dealing with a dispute without the buyer having to resort to commencing legal proceedings which are costly, time-consuming and stressful;
- Unexpected issues. The Vendor may register By-Laws that give exclusive use of the common property to certain Lots. Other buyers in the developments may have been unaware of this, and not expected that the building would have, for example, communication towers, signage or exclusive use of the roof garden. The Vendor may also allow the right to change the By-Laws and often pets are a major issue;
- Unit entitlement. At the time of entering the Contract, the unit entitlement (i.e. the proportion used to calculate levies) may not be known and this may be unfair. The lower the unit entitlement, the fewer levies that have to be paid however the less say that the Lot owners will have at the meetings of the Owners Corporation; and
- Deposit. Buyers often complain that they are putting aside a 10% deposit for many years, however, sellers may need the full 10% deposit to convince the financiers, mortgagees and banks that the purchaser is genuine in the case that the Vendor is unable to proceed and the bank has to step in and complete the project. Rockliffs can recommend ways of addressing this issue.
The conditions of the Contract should be closely analysed. It is imperative that a buyer seeks legal advice prior to exchanging Contracts (i.e. paying any monies towards a deposit and signing the Contract which is then exchanged with a Contract signed by the Vendor by either the agent or the Vendor’s solicitor). If you do not seek legal advice until after Contracts have been exchanged, you will jeopardise your bargaining power to negotiate amendments to the Contract to protect your interests.
In summary, buying off-the-plan involves you paying for a property where the finished product may be different from your expectations. In these circumstances, caution should be exercised and legal and other advice obtained before signing any documents or paying any money.
If you are interested in further information or advice concerning buying off-the-plan property, please contact the experienced Property & Conveyancing team at Rockliffs Lawyers today.