Planning to buy a property off the plan?
An off the plan purchase takes place where a developer needs to pre-sell units in order to obtain finance for their development. Often you will find that these units are offered at a discount to the market initially in order to get those first sales completed. This can be very tempting, particularly in a bullish, or rising market.
The process is generally to obtain finance approval and then secure your deposit with a long-term bond or cash. The long term bond is provided by a deposit bond insurer, such as Deposit Bond Australia, with a premium charged that varies in line with both the bond amount and the sunset clause in the purchase contract.
The sunset clause is the date nominated by the developer as the date they will have construction completed by. Non-completion at this date gives either party to the contract the right to rescind their contract.
So, what are the risks of buying off the plan?
There are many!
- Most finance approvals last for 90 days, whereas most developments take far longer than this to be completed. This means that your finance would need to be reapproved prior to settlement and there are no guarantees this would be the case:
- Your income could change
- Your expenses could change
- your bank could (and likely will) change their policies
- the approval is subject to a final valuation, which will reflect the current market conditions rather than the conditions that prevailed at the time you purchased the property
- the lender may consider itself over exposed in that particular development and opt not to fund any more units in that complex
If you can’t complete the purchase the developer may take action against you for failing to complete the purchase. You may lose your deposit. In the event that you have used a deposit bond, the insurer may also take action against you for any payments they have to make to the developer.
- Even if your lender does come through with the approval, often the notice that the development is complete is provided with a short timeframe for settlement, meaning your lender is not in a position to settle in time, potentially incurring interest penalties. If you, your lender or broker are not on top of the situation this could be costly. And if your lender or broker is responsible for arranging finance on a large number of units in that complex they may not have the time to arrange finance as quickly as they need to.
- Multiple units in multiple complexes can often lead to oversupply – this can adversely affect rental income as tenants have a choice of units all ready to occupy, all at the same time. It can also adversely affect property values, particularly if there a large number of speculative purchasers who all put their unit on the market to sell the day the property settles
- The property may not be built to the standard you expected
- Remember that ‘sunset clause’? If the value of the property has risen since you signed your contract some developers may delay completion past the date provided in the contract. Then then may resell the same unit to another purchaser to obtain a better price.
But what if you really do want that off the plan property?
- Get sound, legal, finance and borrowing advice
- Do your homework – the more units in the complex, the more likely it is that any rental returns will be diluted and if there are multiple developments in your area at the same time, be even more certain
- Be aware that any finance approval will not last forever – once you have been approved maintain a close relationship with the developer, agent, banker or broker to ensure that you are ready to finalise your loan approval 1-2 months before the property is due to be registered with your State Land & Property department
- Buying off the plan is best suited to buyers with enough equity in cash, liquid investments or property to cover the worst case scenario of the property being purchased reducing in value
- If in doubt, stay out – your chance may come when those speculators sell, or when the developer needs to resell the stock that they still hold, thanks to finance falling through at the last moment