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.
There are a number of issues you should be of 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” unit
There are a number of benefits of buying a property “Off the Plan” which include:-
1) 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;
2) 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;
3) Increasing property values. If the market experiences growth, the property purchased “Off the Plan” may increase in value when the building is completed (often one-two years later);
4) 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;
5) 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;
6) Brand new. Generally, people like the feeling of “newness”; and
7) Lifestyle- 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” unit
There are a number of cons of buying a property “Off the Plan” which include:-
1) 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. uncertainty between Vendors and Purchasers;
2) 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;
3) Developer bankruptcy risk- There is always a risk that the developer goes bankrupt before completion;
4) 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;
5) 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;
6) 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;
7) 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 this also decreases the amount of input the Lot owners will have at the meetings of the Owners Corporation; and
8) Deposit – Buyers often complain that they are putting aside a 10% deposit for many years, however, Vendors 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 should be obtained before signing any documents or paying any money.
Contact us to find out more or to arrange a consultation with a property lawyer in Sydney.