What is Buying Off The Plan?
Buying off the plan refers to the process of purchasing a property before it has been built or is still in the process of being constructed. This type of purchase involves entering into a contract with a developer, where the buyer agrees to purchase the property based on floor plans, designs, and renders, rather than a finished product.
Definition and Explanation of Buying Off The Plan
Buying off the plan is a type of property purchase where the buyer enters into a contract to buy a property that has not yet been built or is still under construction. This type of purchase is often used for new developments, such as apartments, townhouses, or houses, where the buyer is purchasing a property that has not yet been completed. Essentially, you are committing to buy a property based on the developer’s plans and specifications, with the final product delivered at a future date.
Benefits of Buying Off The Plan, Including Time to Save and Potential Developer Discounts
One of the significant benefits of buying off the plan is the potential to secure a property at a lower price compared to purchasing an established property. This is because you are locking in the purchase price at today’s market rates, which can be advantageous if property values increase by the time construction is completed. Additionally, buying off the plan often provides buyers with the opportunity to customize their property, choosing finishes and fittings that suit their personal taste.
Developers may also offer attractive discounts or incentives to early buyers, such as reduced prices, upgrades, or even covering certain costs like stamp duty. These incentives can make buying off the plan a more affordable option, especially for first-time buyers looking to enter the property market.
Key Differences Between Buying Off The Plan and Established Property
The key differences between buying off the plan and purchasing an established property lie in the stage of construction and the associated risks. When buying off the plan, you are purchasing a property that has not yet been built, relying on the developer to complete the project as promised. This means there is a level of uncertainty and risk, as the final product may differ from the initial plans, or the developer may face delays or financial difficulties.
In contrast, buying an established property means you are purchasing a home that is already built and available for immediate occupation. This allows you to inspect the property in person, assess its condition, and move in shortly after the purchase. However, established properties may come with higher purchase prices and less opportunity for customization.
What is a buying off the plan contract?
This means you are buying a property that has not been built. In most cases, you are making a buying decision based on the developers plans and drawings of what the property will be when construction is completed. Typically, buyers are required to provide a cash deposit amounting to 10% of the contract price. Alternatively, a bank guarantee can be used for the deposit, offering protections during the contract period and playing a role in the home loan process.
However, sometimes at the time of buying the property, the construction might have already started because the developer has decided to put this particular property available for sale as well.
Most of the time, the buying process for off the plan occurs before any construction has occurred.
Recently, an innovative way to pay for the 10% has been developed by Coposit which allows a buyer to buy off the plan without having the full 10% deposit. Instead, you are able to buy with just $10,000 and make up the remaining 10% deposit with weekly payments during the construction process which is usually 2 to 3 years long. This allows first home buyers to enter the market and purchase a property much sooner than usual.
What are the PROS and CONS of the purchase price when buying off the plan?
Lock in the price based on today’s market
Buying off the plan enables you to secure the property in today’s property market so if the value of the property increases over time of construction (usually around 2 years or longer), you will be able to benefit from the capital growth of your purchase property.
This can lead to benefits such as avoiding paying for lenders mortgage insurance or the ability to borrow more towards the purchase price because the loan to value ratio (LVR) is calculated based on the value of the property and not the purchase price.
Time to continue saving
After you have signed the contract to purchase an off the plan property and have paid the standard 10% deposit of the purchase price, you have the benefit of continuing to save towards your deposit while the property is under construction. The deposit funds are held in a controlled money account, ensuring they are safeguarded until settlement.
This means, you are able to purchase a property sooner compared to purchasing an established property, where you would have to settle on the property within a month to six weeks after purchase.
By continuing to save towards your deposit all the way until settlement, this allows you to borrow less, potentially avoid lender’s mortgage insurance or pay a reduced LMI premium. Buyers will also receive updates when construction begins and as various milestones are reached.
Delay your loan approval
Off the plan purchases may suit your particular situation when you are not eligible for finance at the moment.
For example, if you don’t have enough deposit to qualify for a home loan to purchase an established property but you want to secure something before prices increase any further, you can purchase a property off the plan knowing that you will have the construction period to save towards your target to qualify for the eventual loan.
Another example would be personal circumstances such as being on parental leave or your partner is on parental leave which means you may not qualify for a home loan right now, however, you know the return to work date is prior to the property being completed so you can take an educated risk of securing a property first without being able to qualify for finance upfront, however it’s very important you weigh the risks and make sure you minimise and mitigate the risks associated.
Government incentives for first home buyers
First Home Owner’s Grant which provides between $10,000 to $30,000 (varies between different Australian states) when you are purchasing a brand new property off the plan. This is a significant incentive which helps reduce the cost of the property for eligible purchasers. Please note that there are specific price thresholds for these grants so make sure you speak to your mortgage broker or solicitor regarding what you qualify for.
You also get to secure the available grants at the time of purchase should the benefits or eligibility criteria of these grants change in the future. Additionally, there are obligations and concessions regarding paying land transfer duty when buying off the plan properties in Victoria. Current exemptions and concessions apply specifically to first home buyers and those purchasing properties to live in. The level of duty can vary based on the construction progress and property value.
Land transfer duty concession
In Victoria, first home buyers may be eligible for a land transfer duty concession when purchasing properties off the plan. This concession allows certain buyers to apply for exemptions from land transfer duty based on specific conditions related to their living situation and the stage of construction of the property. It is important to check the eligibility criteria to understand if you qualify for these exemptions.
Tax Benefits For Investors
Investors may prefer to purchase new properties because of eligible tax benefits such as greater tax deductions via depreciation of the property. Similar to a new car, the property will depreciate in value and a new property has more depreciation available compared to a property that is 10 years old. The amount of depreciation contribute to the amount of tax deductions you can claim against the investment property.
Convenience and Reduced Competition
Buying a property off the plan is comparatively more convenient than buying an established property. This is because you don’t need to attend open homes on the weekends or after hours to inspect multiple properties, instead, you are able to view the property, inclusions, plans etc digitally or at a display centre of the developer.
There’s also less pressure when purchasing off the plan because there are no auctions when it comes to buying off the plan, the process generally involves you completing an expression of interest (EOI) by paying a nominal deposit, usually $2000 (often refundable, should you change your mind) so you can review the contract of sale and all the terms and conditions involved.
After you’ve done all your research and wish to proceed, usually a 10% deposit of the purchase price is required and the contract of sale is exchanged. At this point, your deposit is not refundable anymore. A real estate agent often plays a crucial role in holding these deposit funds in a trust or controlled money account, ensuring they are protected until settlement.
Personalisation opportunities
Whether you’re buying a house, townhouse or an apartment of the plan, some developers will give the buyer an opportunity to customise certain aspects or features of the property. This is an option that’s not available with established properties, unless you do the renovation yourself.
Newer and Modern Design
Buying off the plan allows you to enjoy a brand new property, offering the latest amenities, energy efficiencies and lifestyle features. It could also be that the design of the property is unique and there isn’t anything available in comparison to it that is established.
Lower Maintenance Costs
Newly built properties come with warranties and generally require less maintenace and repairs compared to older and established properties.
The Off The Plan Contract
Understanding contract terms and purchase price
When buying off the plan, it’s essential to have a thorough understanding of the contract terms and the purchase price. The off the plan contract should clearly outline all the details about the property, including the buyer’s and developer’s obligations. The purchase price must be explicitly stated, along with any conditions or contingencies that could impact the sale. Given the complexity of these contracts, it’s crucial to seek legal advice to ensure you fully comprehend all terms before signing. This step can help you avoid any unexpected surprises down the line and ensure that your financial position is secure.
Disclosure requirements for developers
Developers are mandated to provide a disclosure statement attached to the off the plan contract. This statement is a critical document that includes key information about the property, such as its location, size, and any known defects. The purpose of the disclosure statement is to protect buyers by offering essential insights into the property before they commit to the purchase. By reviewing this document carefully, you can make a more informed decision and avoid potential pitfalls.
Sunset clauses and their implications
A sunset clause is a provision in the off the plan contract that allows either the buyer or the seller to terminate the agreement if certain conditions are not met by a specified date, known as the ‘sunset date’. In New South Wales, developers are legally required to obtain the buyer’s consent before ending a contract using a sunset clause. This provision is designed to protect buyers from developers who might attempt to terminate the contract without their consent, ensuring that your interests are safeguarded throughout the process.
Protections for Buyers
Notification of changes and statutory remedies
For contracts entered into from December 1st, 2019, developers are required to notify buyers of any changes that occur during the development in a ‘material particular’. This includes any alteration that affects the use or enjoyment of the property. If a buyer is materially prejudiced by such a change, they have the right to withdraw from the contract and receive their deposit back. This provision is designed to protect buyers from unexpected changes to the property during its development, ensuring that what you signed up for is what you ultimately receive.
Cooling Off Period and Deposits
When buying off the plan, buyers typically have a cooling-off period of 10 business days, during which they can withdraw from the contract without penalty. This period provides a safety net, allowing buyers to reconsider their decision and seek further advice if needed. The deposit paid by the buyer is usually held in a controlled money account until the property is completed, ensuring that the funds are secure and only released to the developer upon completion.
The deposit is typically 10% of the purchase price, although this can vary depending on the developer and the terms of the contract. It’s crucial for buyers to seek legal advice before entering into an off-the-plan contract, as the terms and conditions can be complex and may not always be in the buyer’s favor. Understanding your financial position and the risks involved in buying off the plan is essential to making an informed decision.
What are the risks of buying off the plan and why should you seek legal advice?
Property value can fluctuate
Just as the value of the property can increase during the construction period after your purchase, there is also the risk that it can go the opposite direction. This can affect your ability to obtain finance if the valuation of the final property is lower than your purchase price, you may need to come up with more savings or have to pay LMI to settle the property. Additionally, the final property may not match the promised specifications, leading to potential discrepancies between what was initially expected and what is delivered.
Construction Delays
The estimated time provided by the builder or developer to complete construction is only a guide. There are many factors that can affect completion date such as weather, government planning approvals or financial issues of the builder. It’s important to assess how any delays may affect your future plans or your ability to obtain finance approval. Buyers of existing property may have fewer protections, such as a longer cooling-off period, making it crucial to understand these differences when navigating property contracts.
Financial Risks
There is a risk that during the construction of the project, the developer or builder may experience financial difficulties and in worst case can lead to bankruptcy during the construction process.
Finance approval issues
During the process of construction, there is a risk that banks and lenders may change their lending policies which may have negative consequences to your particular financial circumstances. In addition, your financial situation may deteriorate after your purchase. It is essential to weigh up this risk and have your mortgage broker or lender stress test your situation against any such changes.
A good example of this is the sharp interest rate increase since May 2021 where it has significantly reduced the borrowing capacity of many purchasers due to interest rates sitting at around 2% in 2021 to now sitting at 6%.
Quality Concerns
The final completed property may not match exactly as described in the proposed plans and drawings which you have based your buying decision on. There is also flexibility in the contract that allows the builder/developer to make certain variations to the proposed plans within certain levels of tolerance.
Unknown Strata Expenses
The ongoing strata levies are only estimated which can vary by the time the building is complete. However, purchasers are protected under recent reforms to strata legislation that developers can be accountable if estimated levies are deemed unrealistic.