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How buying off the plan works

Buying off the plan can be a great way to buy a new home, but it also means putting money down on a property that hasn't been built yet.

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Buying off the plan means purchasing a property that is under construction or is going to be built soon. If you've ever seen apartments for sale that are just shiny 3D renderings of a building, that's usually an example of an off the plan development. The building doesn't actually exist yet.

If you want to buy off the plan, you'll sign a contract and put down a 10% deposit. But you won't have to sort out the home loan and the full deposit amount until the building is complete.

For owner-occupiers and investors alike, buying a property off the plan presents opportunities and challenges. You could snag a new unit at a good price in a growing market, or you could wind up owning very little for years as construction drags on.

How to buy off the plan: A step-by-step guide

The typical off the plan purchase works like this:

  1. Find an off the plan development
  2. Submit an expression of interest
  3. Sign the contract and pay the deposit
  4. Pre-settlement inspection
  5. Get your home loan organised
  6. Move in

Let's explore each step in more detail below.

1. Find an off the plan development

Find a development that looks like it suits your needs. You may find listings in the usual property sales sites, such as Domain and realestate.com.au. Work out what your needs are in terms of location, size and features.

This is also the time to do some research on the area around the development and to look into the developer itself.

You should visit the company website, review past and current projects as well as their financial performance to ensure that the developer is in a strong position to carry out the intended works.

You should ensure that the builders for the development are licensed and qualified and you can check this on your relevant state government website. What projects have they completed recently? Have they had any problems on other projects?

2. Submit an expression of interest

Developers may reach out to local real estate agents in an attempt to generate interest in the development. Sometimes you may be able to lodge an expression of interest payment; however, it's important to note that this signals your interest and does not guarantee that the property will be sold to you.

3. Sign the contract and pay the deposit

Once you've selected the location and development project, you'll need to sign a contract of sale for the purchase. Before signing on the dotted line, it is paramount that you seek independent legal advice from a conveyancer or solicitor to ensure that the contract contains all the relevant terms for the exchange.

Contracts should include:

  • Cooling off period. In most Australian states, the cooling off period is between 3 and 5 days, meaning you can change your mind about the purchase during this timeframe. However, keep in mind that if you have a change of heart and you decide to withdraw from the purchase, you may be charged a termination fee from the developer which is generally around 0.25% of the purchase price.
  • Project plans. The contract should disclose information regarding the specific plans of the build. This should include proposed plans, floor plans and a schedule for the construction. It's important that you fully understand, and are satisfied with, the level of detail that the developer has disclosed regarding the development plans and the quality of fittings and fixtures.
  • Inclusions. Make sure that you review the inclusions and warranties in the contract of sale to make sure that if the developer makes changes to the planned build, it will not affect you negatively. It's also important to ensure that the contract specifies the cost of upgrading fixtures and fittings if you are not satisfied with the initial ones. Also check to see if there is a dispute resolution process in place in case there are any delays or other issues.
  • Finance. If you're obtaining finance from a lender, you need to ensure the contract is subject to you obtaining the relevant finance. Generally, developers will give you 30 days to obtain finance approval from the date that the contract was signed.
  • Building defects. The contract should include a clause stating that the developer is responsible for rectifying any defects in the construction, prior to settlement.
The deposit

Off the plan contracts usually require 10% deposits. You pay this when you sign the contract. Because buildings take a long time to complete, you could pay the deposit and not move in for another year or two.

You pay the rest of the property price at settlement, although usually it's your lender that pays the money. However, you may want to contribute more to the deposit. A 20% deposit is considered the standard size in Australia. Anything under 20% means you may have to pay lenders mortgage insurance (LMI), which can cost thousands or tens of thousands more.

4. Pre-settlement inspection

When the building is almost finished, you will be able to inspect it. The builder will arrange this for you. This is the time to check the project has been completed to the standard you agreed to in the contract.

Check the inclusion list in your contract and make sure everything is there. If there is anything missing, or any defects, now is the time to get the builder to fix them.

5. Get your home loan organised

Settlement is when you take possession of the property and the money changes hands. Before this, you'll need to actually get your home loan organised.

This means comparing home loan rates and finding a suitable loan.

Some Australian lenders may be reluctant to provide finance for off the plan purchases because the property may be sold for more than it's worth. In an uncertain market, the property value might decline between the signing of the contract and the completion of the build.

As a result, some lenders will require an 80% loan-to-value (LVR) ratio, while others may require reviews of any pre-approvals they issue at the time you sign the contract. It's a good idea to wait and apply for approval 6 weeks prior to settlement.

6. Move in

Once settlement is finalised you can move in – but your builder is not completely off the hook yet. There is usually a 90-day maintenance period where the builder is obligated to fix defaults or other issues.

But not everything wrong can be considered a defect. There may be cases where a feature you identify as a defect falls within the builder's acceptable standard of workmanship.

Should I buy off the plan or not?

The decision to buy off the plan will vary depending on your investment purpose, the amount of risk you’re willing to endure as well as your personal financial situation. You should carefully review the advantages and drawbacks of purchasing off the plan before signing on the dotted line.

Benefits of buying off the plan

  • Lock in a good price before it rises. A key benefit of purchasing property off the plan is that you can pay the current market value for a property, even though it will be completed in the future, and will likely appreciate in value by that time. In a rising market, your unit could be worth more than you paid by the time it's finished (but this is not a guarantee).
  • Choice. If you get in early you have the flexibility to choose your purchase from the range of properties for the development project. For instance, you may be able to choose a property that’s closer to amenities or shops or the one with a better view.
  • Low initial cost. You only need to provide a 10% deposit upfront. The outstanding balance doesn’t need to be paid until settlement.
  • Time. The long settlement period means that you have time to get your finances in order, boost your savings and save for settlement. You may also benefit from capital gains over time.
  • FHOG and stamp duty concessions. In Australia, most states provide a first home owners grant (FHOG) for first home buyers purchasing new dwellings that are valued under a certain amount. This may involve exemptions or discounts associated with stamp duty.

Risks of buying off the plan

  • Prices can fall before construction is finished. When purchasing off the plan, you run the risk of paying too much for a property if the market enters into a decline.
  • Expectations. As many builders don’t allow you to see the property until construction has completed, there is the risk that the quality or layout of the build may not be what you had in mind.
  • Rising interest rates. As with any financial decision, you run the risk that interest rates may rise before you settle on the property, which may be an issue if you made the decision based on low interest rates.
  • Bankruptcy. There is a risk that the developer may go into liquidation before the build is completed, so you need to carefully review the terms of the contract to see what your options would be if this occurred.
  • Rely on good will. When buying off the plan, you must rely on the reputation, honesty and goodwill of the developer which is why it's crucial to research the developer and its financial strength.
  • Change in lender policy. Certain investors may be affected by a change in lenders' policies post the Australian Prudential Regulation Authority (APRA)’s recent intervention. For instance, if you took out a loan for a $500,000 investment your lender may have been prepared to lend you 95% LVR ($475,000). However, an intervention by APRA now means the lender can only lend you 80% LVR ($400,000). This would mean that you need an additional $75,000 to complete the deposit and qualify for the loan – or find another lender that’s willing to lend at a higher LVR.

Example: Arnaud's off the plan property woes

This man is not happy.Arnaud decided to purchase an off the plan apartment in Sydney's CBD for $925,000.

After inspecting the display apartment, he researched the area and compared the price of the apartment to surrounding properties, and was pleased to learn that it was priced under market value. So he consulted a mortgage broker and took out a variable home loan over a 30-year period.

However, the original developer could not finance the construction of the building so it sold the project to another developer. This meant that the construction, which was originally meant to take 1.5 years, took much longer than originally anticipated. Arnaud explains:

"One day we received a letter and they said they had sold the project to another developer. The first developer we trusted because that's who we bought the property from, we checked their registration so we knew we would get something quality. But we didn't know who the new developer would be. Not only is it not going to be finished on time, but you then have to research the new developer and make the decision about whether you want to stay or get out; it was stressful. We were meant to move in by December 2013. Instead we ended up moving into the apartment in July 2015."

Although the developer warned Arnaud that the catalogue was only indicative of the final product, they later realised that the contract did not include a fridge. The developer then sent Arnaud and his partner a letter asking whether they would like the company to provide a fridge, and whether it would be integrated or not, so they had to fork out an extra $2,000, which they didn't think was fair.

Another issue they encountered was that the developer changed the location of the lobby. Arnaud and his partner liked the positioning of the lobby because they felt it would be a nice environment to welcome guests, but the lobby ended up being in a different location which was inconvenient.

Questions to ask your builder before signing a contract

  • Can I make changes to finishes or fixtures in the bathroom and kitchen?
  • Can I visit the site during construction?
  • Where do I stand if construction is altered from the original plan?
  • What are my rights if the design or layout is altered? Can the builder change the design without my consent?
  • What are my rights if there are delays?
  • Is my deposit secure if the construction doesn’t go ahead?

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