Buying off the plan – What a buyer needs to know?
We have discussed basics on buying off the plan in the previous article titled “Buying off the plan – Good, Bad and the Ugly. The next stage in which you can buy off the plan is when the building is under various stages of construction. Again you may be relying on floor plans, renders, architectural drawings and schedule of finishes but depending upon the size of the project, there may also be a site office featuring some examples of finishes for kitchens and bathrooms. Depending upon how far construction has progressed and the developer, you may be able to visit the site and actually see the proposed apartment layout.
The final stage is where the development is complete or waiting on occupation approval so you can see the physical product that has been built.
The advantages of buying ‘Off the Plan’ include:
More Choice – getting in early will give you more choice as to which apartment you can buy. So you will have a choice of the floor plan, the location on the floor and which level you want if it is a high rise building. Most developers will have a choice of maybe 3 to 6 different floor plans, depending upon the number of bedrooms, bathrooms, balconies and views. Generally, developers will also offer a choice of colour scheme – light or dark cabinetry, floor coverings.
Financial Aspects – at both the stages of where the developer is seeking pre-sales and also when there are the remaining few to sell, the developer may be willing to offer incentives to attract buyers. This may not be in a price reduction but it could be in terms of an upgrade in finishes or even overseas holidays or a new car.
For first home buyers there can be special incentives offered by various State Governments.
There can be considerable savings in terms of stamp duty, depending upon the state or territory. Stamp duty may be levied on the value of the land rather than the completed house and land so significant savings.
Developers may also be flexible in terms of the deposit required to purchase the property. Some may offer a 5% deposit while others may require a 10% deposit. You may even agree on a deposit amount and be able to build your deposit up over a period of time. Apart from the cash deposit, some developers will also accept Deposit Bonds and Bank Guarantees. The deposit should be held in a trust account which may earn interest during the period of construction.
Many developers will offer different levels of pricing so the best price is normally during the pre-sales phase then the price may increase during construction or when a certain level of sales has been achieved. The most expensive price is likely towards the completion of the project depending on the overall sales. Depending upon the size of the development, these final sales are normally the profit margin for the developer.
There is a safeguard in the contracts in the form of the sunset clause. The sunset clause provides a maximum time limit for the project to be completed by – the sunset date. If not completed by this date, the contract is void and the buyer’s deposit is refunded in full.
So while there are significant financial gains that can be made for the purchaser, there are also significant risks, some are an inherent risk associated with a buy now, pay later arrangement.
One of the major complaints by buyers of off the plan apartments concerns the ambiguity of the contract terms. Any contract for an off the plan purchase needs to be very comprehensive, unequivocal and drawn up to avoid confusion. It must be very clear as to what the fixtures and fittings are, insurance and timeframes for completion and settlement, voting rights if the property is to be strata-titled and a process for dispute resolution.
Another common complaint is regarding the quality of the fittings and the finish. The buyer’s expectations are normally quite different from reality. It is important before signing any contract that you have a schedule of fixtures and fittings as well as finishes and if you have been shown examples of these or other buildings done by the developer, take extensive photographs for later reference, if necessary. List the brand, make, model and builders price of the major items that are important to your buying decision. Many developers will use terminology such as ‘or similar’ for fittings such as tapware, tiles, etc. This allows the developer to substitute products from those shown or specified because they can’t guarantee with those products are still going to be available in one or two years’ time.
Another big issue, particularly for people buying before any construction has started, is being able to read plans and visualise the space. This is important for the apartment but also for any car space that is granted with the purchase. Some car parks can have very difficult access or may have reduced height due to pipes or ducting so would not be suitable for four-wheel-drive vehicles. Sometimes plans have to get changed during construction for various reasons so make sure you are aware of any changes. Understand where ducting and columns are to be constructed, where any air conditioning units to be located.
Before settlement make sure that you have proof of insurance because, in some states, developers may be exempt from providing home warranty insurance.
There can also be issues with the developer. The development may not proceed and you may have lost months out of the market waiting for the commencement. You always need to check that the developer has pre-approval before signing any contract. During the period of seeking pre-sales or during construction, the developer could go into liquidation. You may unless you have undertaken the appropriate research, enter into a contract to purchase an apartment from a dodgy developer who has a history of poor quality work or worst still not seeing a project through to completion. This poor quality work can lead to a seemingly endless list of building defects.
In the past, a few unscrupulous developers have used the sunset clause in the contract to void the existing contract, refund the deposit to the buyer and then resell the apartments at a higher price, in a rising property market. Such practice has been outlawed.
There are also a number of issues that can arise as a result of the extended time period from the signing of a contract until settlement. Even though we are currently in a period of low interest rates, interest rates can increase. One or two interest rate increases during this time could result in the buyer having difficulty in qualifying for finance. An inability to raise funds or having the loan approved may result in the buyer having to sell the property to avoid the legal obligation to complete the contract.
There are a couple of banks that will provide long term approvals but they are subject to a conditional ‘on completion’ valuation undertaken 90 days before settlement.
Such a situation can be further complicated if the property market has fallen in the last 12 to 18 months or if the property was actually purchased at an inflated price.
Apart from these financial risks, there are also legislative risks that can occur during this period, particularly if the purchase is based on some tax benefits. In recent years, there have been discussions regarding changes to negative gearing. There have also been some changes to depreciation.
For an investor purchasing an apartment, there is also a potential that at settlement, the rental market is oversupplied resulting in difficulty to find tenants or if found, the rental may be lower than expected.
A potential buyer of off the plan must be diligent in undertaking research. Research must cover the market both currently and what is planned in the area, research the developer and inspect past projects, research the contract and research any government incentives.