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Buying off plan can be a great way to access a new property. It’s a popular way to start property investment, or access a unit or house in an area that is otherwise not affordable. But as the property is not yet completed, it can come with its own challenges. So, what should we consider before jumping in?
What is ‘Buying off Plan’?
Buying off Plan involves agreeing to a contract of sale for a property that is either not completed or yet to be built.
In this situation, information on the property is provided by the plans and documentation relating to the development. You cannot view the property you will be purchasing, although you can sometimes view a display property that is similar to the property that is proposed in the contract.
To purchase such a property, the contract is signed, an initial deposit is paid (usually about 10%), then the remainder becomes due either at settlement or in packages at certain milestones as development progresses. Once the contract is signed, it can be several years until the development is complete and this speculative aspect of buying off plan does come with its own risks and benefits.
Benefits
It’s a popular choice for many buyers, whether you’re an investor, first home-buyer or anyone in between, largely due to the flexibility and new home feel that comes with purchasing off the plan. It can also be a more affordable way to enter the market for the first time. Here are some of the potential advantages of buying off the plan:
Smaller deposit – Buying off plan often requires a smaller deposit, usually 10%, with the rest paid at settlement. This gives first time buyers in particular time to save and minimise their mortgage.
Discounts – Sometimes developers can offer a purchase price discount for purchasing early, usually before construction begins. Or encourage sales with smaller, promotional deposit options.
Bank guarantees – Rather than paying a cash deposit, you can often organise to pay by a bank guarantee, leaving your money to accumulate interest until settlement.
Longer time frame – Settlement being anything from at least 12-24 months away comes with some advantages. Buyers can use this time to build savings and get their finances in order. If market changes act in your interest, it is possible that the final loan amount may decrease as the property value increases.
Access to concessions and grants – There are a number of concessions and grants that may apply depending on the property use and type. Eligible buyers may be exempt from stamp duty, off-the-plan concessions may be available, or you may be able to take advantage of one of the housing schemes such as First Home Guarantee.
Capital gains – Natural appreciation of the property value over time means settlement may see a capital gain. This could mean lower interest rates or an increase in property values. Your LVR may go down, potentially removing the need for Lenders Mortgage Insurance (LMI).
Legal buffers – Some protections are in place for the purchaser when buying off plan. A longer cooling off period of 10 days means either party can pull out of the contract, usually with only a small forfeit. Sunset clauses also apply, providing the purchaser with greater transparency and some ‘consumer’ protections.
Builder guarantee – New builds typically come with a builders guarantee. The features of the guarantee can vary significantly so it’s important to check this part of the contract carefully.
Personal input – Some developments allow some input into certain features of the property. This might include allowing changes to plans or the selection of various fittings and finishes. These allow a personal touch without the necessity of upgrading an older, pre-existing property.
New build – There are obvious benefits to a new property. These can include lower maintenance costs, avoiding any ongoing / previous costs from older builds as well as higher rents if it’s an investment property. They must also comply with new build standards older houses may not, for example, they must meet energy efficient standards, providing a home with a potentially reduced footprint and utility bill.
Challenges
In spite of all these positives, there are definitely some risks involved. Some of these are unforeseeable (who would’ve picked ‘global pandemic’ a few years ago?), but the rest are easier to identify and tend to become more likely the longer your development takes to complete.
Construction Delays – Delays mean the building isn’t completed on time. This may increase costs, particularly if you’re homebuilding and renting while you wait.
Changes in property value – Changes in the market can drop the value in your development significantly, leaving you with less money coming in on your investment or with a property that is worth much less than you paid for it by the time it is completed. This can impact your loan-to-value (LVR) ratio, your interest rate, and your mortgage, as well as your ability to sell on the property.
Post contract changes – Even with the greater transparency that came with the 2019 regulations regarding disclosure, changes can still be made to the development as it progresses. These may result in changes that are unfavourable to your property, making it less valuable, or less desirable for living or renting.
Contractor / developer insolvency – Unfortunately, there is a real chance that a party can go bankrupt and you could lose your deposit. This is just one reason why it’s important to do your due diligence regarding the developer and other parties involved.
Change in personal finances – Changes to personal income over the course of the build can affect the total loan amount, LVR, and likelihood of loan approval by the time settlement arrives.
Property expectations – Buying off the plan is sight unseen, so there is a real chance the property may not meet your expectations or the standards you were promised by the developer. The quality of materials may be lower than expected, the design not as you envisioned off plan, or the workmanship may not meet your standards. Either way it is possible you may end up with a property you are not in love with by settlement.
So, how to get started?
If you find a property development you’re excited to invest in, that’s great! But keep yourself in the best possible position by remembering to do these steps before you sign anything:
- Good investment always begins with research. Research the developer, builder and/or architect, the contract and the plan itself.
- Check with the developer to see if they offer any benefits or discounts.
- Read the contract terms and conditions. Get it checked by a third-party professional and seek help to understand the costs and risk involved.
- Have your finance pre-approved so you are able to negotiate with the developers and settle when required.
- Be clear about what’s required to fix any defects that are identified when the property is completed.
- Make sure you are covered if another party, such as the developer or builder, goes bankrupt before the project is completed.
And remember, while it’s a long road to settlement, the outcome could be a property that meets your needs more than a pre-existing property might – that’s worth the wait!
