Buying off the Plan – Good, Bad and The Ugly
Recent years (for at least over a decade), buying off the plan has been a strategy for many over the last decade or so but it is not without its dangers as some people are now finding out. To buy a property after viewing the plans but before construction has commenced. This practice is popular because of the potential savings on stamp duty but inexperienced investors should exercise caution.
So we will have a look at what is Buying Off the Plan, what are the advantages and what are the disadvantages.
This is when the purchaser signs a contract to purchase a property that is yet to be built or subdivided (based on viewing the design, building plans and a schedule of finishes) but there is no physical property to see or inspect.
- The developer will normally use words such as ‘or similar’ when indicating the types of inclusions because they cannot guarantee what type of products may be available in the time that it takes to complete the building.
- During this time, there can be delays in the completion of the project, interest rate increases and the builder could go into liquidation. Drawbacks are that many people cannot visualise room size from a set of plans and the quality of construction and finishes may not be as expected.
- Note an important term called a sunset clause. This is a statement in the Contract of Sale that refers to the maximum time during which the developer has to complete the project.
There are a number of reasons why people buy off-the-plan.
- Firstly, they may have the first choice of which apartment they can purchase. They may also be able to choose color schemes and floor coverings. In some states in Australia, there may be stamp duty concessions.
- Finally, for property speculators, there is the hope the property will be worth more when it is completed than what they sign the contract for in today’s prices. For the speculator, this will depend on the mix of purchasers and the surrounding buildings that may be completed around a similar time.
The speculator is hoping to on-sell the apartment prior to the apartments being completed or shortly thereafter and make a capital gain during that period of time. There is a risk attached to finance for the purchase of the apartment in the future as lending criteria can change between the signing of the contract, and paying the deposit, to completion of the apartments. Our next book entitled “It’s My Time: Residential Investment” looks further at supply and demand for buying off the plan and completed properties.
Possible scams and spruikers
A fraudulent scheme performed by a dishonest individual, group, or company in an attempt to obtain money or something else of value. Scams traditionally resided in confidence tricks, where an individual would misrepresent themselves as someone with skill or authority that is a doctor, lawyer, or investor. After the internet became widely used, new forms of scams emerged such as lottery scams, scam baiting, email spoofing, phishing, or request for help. In terms of property, scams can be associated with investment seminars, rent-to-buy house purchases, selling a house and land packages, selling off the plan apartments and providing rental guarantees. Each of these is legal in their own right; it is the people behind some of these that make it a scam.
An example could be in regards to a rental guarantee provided as an inducement to purchase an apartment. The developer or selling agent may offer a twelve-month guarantee of $500 per week rent but the developer has normally built this guarantee into the sale price of the property. Some rental guarantees finish when a tenant is found regardless of what rent the tenant is willing to pay. If the property is a high rise apartment block, and in an area where there are a number of other apartment blocks being built around the same time, then it may be very difficult to find a tenant after the rental guarantee has finished. At the end of a twelve-month period, if the owner has not found a tenant then he/she will have an apartment with no rental income to meet loan repayments and possibly a poor prospect of finding a tenant unless the asking rental is lowered dramatically to compete with possibly hundreds of other investors or speculators also seeking tenants.
Buying off the plan basically means entering into a legally binding contract to purchase a property – apartment, townhouse or even house land package -before it reaches the stage of final development and occupational approval. Essentially, there are three stages that are covered by the ‘off the plan’ purchase. The first is when the developer is looking for pre-sales in order to satisfy a lenders requirement for finance. At this stage, it is likely to be a vacant block of land or may still have the existing buildings on the property. At this stage, the purchaser is relying on floor plans, renders, architectural drawings, price lists and a schedule of finishes on which to make their decision to buy. This is possibly the riskiest stage of buying off the plan.