Risks in "buying off the plan"
14 May 2011
Strata units are often advertised for sale before construction commences or the building is completed, and sometimes it can be two or three years before the building is completed. Buying a strata unit in this way is known as “buying off the plan”.
Purchasers often believe that buying off the plan before the building is built is a great way to make a good investment because by the time the property is built and ready for settlement the property prices will have increased.
The purchaser does however need to be aware that there are certain risks when buying off the plan, and such risks include:
Prices may go down
Prices may go up on the off the plan unit but they may also go down by the time the property is ready for settlement, and particularly in the current market after the Global Financial Crisis (GFC) and when it is a “soft real estate market“ then it is possible valuations done by the lending institutions may actually come in under the value of the original purchase price.
The unit may not be built as expected
Sometimes the builder may vary the off the plan unit from the original plan. This can be due to a number of reasons including Council requirements to make certain changes, or the Department of Property and Land Management (LPMA) requiring these changes, or simply because the Vendor changes his mind.
Off the plan contracts always contain a clause that the Purchaser cannot rescind (or get out of) the contract where there is a difference between the draft strata plan and the actual strata plan when registered, which is less than a minor variation. The minor variation is specified in your contract and is often about 5%. This means that should the builder reduce your unit by 1 or 2 square metres, it is unlikely you will be able to do anything about it.
Delays are inevitable
Purchaser often get upset when completion of an off the plan property is delayed 6 and sometimes even 9 months from the original expected due date and often blame the builder and want compensation for the delay. Purchasers need to be aware that there is no compensation clause for them in the contract should completion be delayed for an off the plan property. Most contracts specify a Sunset Date (a final date for the building to be completed) and this is often a year or so after the expected completion date anyway so the builder is within his rights. The off the plan contracts also have a clause which allows the Vendor to extend the Sunset Date even further due to inclement weather and strikes etc.
It is possible that you won’t be able to get finance when the building is completed
Sometimes situations change, people lose jobs, or change jobs to one with lesser pay, or the banks tighten up their policies so where you may have been able to get finance when you exchanged contracts you may not be able to obtain finance when the building is completed. Should you not be able to obtain finance in time for settlement, or within a reasonable time thereafter (usually 14 days) then it is possible the Vendor will be able to terminate the contract, keep your deposit and sue you for any damages he has suffered as a result. These are the risks you need to be aware of and be prepared to take when buying off the plan units.
Tips when buying off the plan
Disclaimer: The information in this article is correct as at 14May 2011. This information is not to be taken as legal advice and at all times we recommend you seek independent legal advice regarding your own individual circumstances from your legal representative.
Call us now for a FREE consultation 02 9984 8788.
Strata units are often advertised for sale before construction commences or the building is completed, and sometimes it can be two or three years before the building is completed. Buying a strata unit in this way is known as “buying off the plan”.
Purchasers often believe that buying off the plan before the building is built is a great way to make a good investment because by the time the property is built and ready for settlement the property prices will have increased.
The purchaser does however need to be aware that there are certain risks when buying off the plan, and such risks include:
Prices may go down
Prices may go up on the off the plan unit but they may also go down by the time the property is ready for settlement, and particularly in the current market after the Global Financial Crisis (GFC) and when it is a “soft real estate market“ then it is possible valuations done by the lending institutions may actually come in under the value of the original purchase price.
The unit may not be built as expected
Sometimes the builder may vary the off the plan unit from the original plan. This can be due to a number of reasons including Council requirements to make certain changes, or the Department of Property and Land Management (LPMA) requiring these changes, or simply because the Vendor changes his mind.
Off the plan contracts always contain a clause that the Purchaser cannot rescind (or get out of) the contract where there is a difference between the draft strata plan and the actual strata plan when registered, which is less than a minor variation. The minor variation is specified in your contract and is often about 5%. This means that should the builder reduce your unit by 1 or 2 square metres, it is unlikely you will be able to do anything about it.
Delays are inevitable
Purchaser often get upset when completion of an off the plan property is delayed 6 and sometimes even 9 months from the original expected due date and often blame the builder and want compensation for the delay. Purchasers need to be aware that there is no compensation clause for them in the contract should completion be delayed for an off the plan property. Most contracts specify a Sunset Date (a final date for the building to be completed) and this is often a year or so after the expected completion date anyway so the builder is within his rights. The off the plan contracts also have a clause which allows the Vendor to extend the Sunset Date even further due to inclement weather and strikes etc.
It is possible that you won’t be able to get finance when the building is completed
Sometimes situations change, people lose jobs, or change jobs to one with lesser pay, or the banks tighten up their policies so where you may have been able to get finance when you exchanged contracts you may not be able to obtain finance when the building is completed. Should you not be able to obtain finance in time for settlement, or within a reasonable time thereafter (usually 14 days) then it is possible the Vendor will be able to terminate the contract, keep your deposit and sue you for any damages he has suffered as a result. These are the risks you need to be aware of and be prepared to take when buying off the plan units.
Tips when buying off the plan
- Make sure you obtain a pre-approval from your lender prior to exchange of contracts to ensure you will get approval and have the capacity to service a loan for the off the plan property when is completed.
- Make sure you have some surplus funds available just in case the valuation comes in under the purchase price of the property so you can still proceed to settlement.
- Stamp duty is due 12 months after the date of the off the plan contract, and the Office of State Revenue requires stamp duty be paid within 3 months of this (subject to any Government schemes such as the NSW Home Builders Bonus Scheme which is due in 3 months from exchange of contracts) . This means you have 15 months from the date of the off the plan contract to pay the stamp duty. It could also be earlier if settlement occurs before this. Remember to put some money aside so that you can pay the stamp duty when it becomes due.
- Make sure there is a floor plan in the off the plan contract and a schedule of finishes which specifies all the items you are expecting in the property. If a sales brochures says that you will get an entertainment unit in the off the plan property but this is not in the contract, and the Vendor does not provide it, then it is very unlikely you will be able to get the Vendor to provide one on or after settlement.
Disclaimer: The information in this article is correct as at 14May 2011. This information is not to be taken as legal advice and at all times we recommend you seek independent legal advice regarding your own individual circumstances from your legal representative.
Call us now for a FREE consultation 02 9984 8788.