Buying off the plan refers to purchasing a property that is yet to be built or is under construction. Buyers typically commit to buying an unbuilt house based on the developer’s plans, drawings, and other specifications before the property is completed.
The purchase is generally made through a contract of sale, which outlines the terms and conditions of the purchase. The buyer may be required to pay a deposit, with the remainder of the purchase price due upon completion of the property.
It is debatable whether purchasing an off-the-plan property is a good idea. Buying off the plan generally requires you to provide a 10% deposit. The rest of the money is payable on completion. This could give you ample time to arrange your finances for a house. There’s also potential for capital growth, especially when purchasing in a high-growth area.
Off-the-plan properties may also be eligible for some government grants, making it easier to finance your purchase. These include the First Home Owner Grant (FHOG). On the other hand, the collapse of some high-profile building companies last year highlights the potential risks of buying off the plan.
If you buy a property that hasn’t been constructed yet, there is a possibility that it won’t turn out the way you imagined. There could also be delays in completion, or the construction company may go under, and your house won’t be built at all.
Buying off the plan: How does it work?
There are many ways to buy an established home, such as at an auction or a private sale. Yet, if buying an established home is not your preference, it’s also possible to purchase a house or an apartment from a builder while they construct it or even before construction begins.
Generally, purchasing an off-the-plan property requires a 10% upfront deposit with the remaining price paid upon project completion. If you’re looking for a home loan, you may need pre-approval before you sign up to purchase the property. Not all builders require you to have pre-approval, and you could apply for a mortgage closer to completion. You can generally borrow up to 80% of the property’s price unless you’re a professional eligible for a low-deposit loan.
What are the advantages of buying property off the plan?
1. Potential for capital growth
One of the main advantages of buying off the plan is the potential for capital growth as the property is built. As property prices generally increase over time, buying off the plan can be a good way to secure a property at today’s prices and potentially benefit from future price appreciation.
2. Property customisation
Another advantage is the ability to change certain features of the property to suit your preferences. For example, you may be able to choose the fixtures and fittings, layout, and colour scheme of your new property.
3. Potential savings
Buying off the plan may also turn out to be cheaper than buying a comparable established property. Builders may sell units at a lower price during the early stages of development, which could save you money if you’re willing to wait until the project completes. Buying off the plan could also make you eligible for grants like the FHOG and stamp duty concessions in some states.
4. Reduced maintenance costs
One potential advantage of buying off the plan is that you are purchasing a new property that has yet to be lived in and may have fewer maintenance issues. In addition, many new properties come with warranties or guarantees from the developer or builder, which may only cover specific maintenance issues for a period of time.
However, it’s important to check your contract for the exact conditions. If you’re purchasing an apartment or townhouse, you may have to pay strata levies to cover maintenance and repair costs for the common areas of the building. In addition, some developers may limit their liability for maintenance issues by including clauses in the contract of sale that place responsibility for maintenance on the buyer after settlement. Reading the contract of sale thoroughly can help you better understand the maintenance costs associated with the property you’re considering.
What are the disadvantages of buying property off the plan?
1. Property valuation may be inaccurate
One of the significant disadvantages of buying off the plan is the uncertainty around the final valuation of the property. As the property still needs to be built, it can be hard to accurately predict its value upon completion. Changes to the market conditions or the developer’s plans can also impact the property’s final value.
2. The final product looks different
There is also the possibility of changes to the plans or specifications during the construction process. In some cases, the final property may not match the original plans, which can be disappointing for buyers. Most contracts for off-the-plan purchases allow builders certain flexibility in terms of construction. To avoid this, consider drawing up an unambiguous contract listing inclusions such as equipment, fittings and fixtures.
3. Construction delays
There can be potential delays in construction, which can cause frustration for buyers. Delays may occur due to factors such as bad weather, regulatory approvals, or construction issues. To protect yourself in such a situation, it’s worth checking for a sunset clause in your sale agreement.
A sunset clause is a provision included in the contract of sale. It sets a specific date by which the construction of the property must be completed.
The purpose of a sunset clause is to protect the buyer’s interests. For the buyer, it ensures that they are not left waiting indefinitely for the completion of the property. They have the option to terminate the contract and have their deposit refunded if the property is not completed by the specified date.
If the sunset clause is triggered and the property is not completed by the specified date, the contract of sale is typically terminated, and the buyer’s deposit is refunded. However, in some cases, the developer may try to take advantage of this clause by deliberately prolonging the construction process. After invoking the sunset clause and cancelling the sale contract, the developer may sell the land or development to someone else at higher prices. To avoid being cheated while purchasing off the plan, read reviews of the builder and speak to their clients about their experience
Should you buy a property off the plan?
The decision to buy a property off the plan depends on your individual circumstances. While there are potential risks involved, buying off the plan could also be a way to secure a property at current prices and benefit from future price appreciation. Understanding the pros and cons of buying a property off the plan could help you make an informed decision. If you’re considering this option, carefully review the contract of sale and seek legal advice before committing to a purchase.
It could also help to speak with a mortgage broker about financing an off-the-plan property. Complications can arise like the property’s value changing during the construction period. If this happens your loan-to-value ratio (LVR) could differ at the time of settlement from when you paid up your deposit. If your LVR increases, you may need to pay an additional deposit or pay for Lenders Mortgage Insurance (LMI) to secure a loan. A mortgage broker can explain this process to you and help you plan your purchase better.
By Vidhu Bajaj,
Hashching Content Writer