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Buying property off the plan

“Off-the-plan” refers to purchasing a property before it is constructed. In many cases, all you may be able to see is a hole in the ground and some preliminary earth works.

While it doesn’t seem intuitively smart to buy something you cannot see, there are a number of benefits to buying a property off-the-plan; however, these must be carefully weighed against the potential risks.

The benefits

Stamp duty concessions are one incentive for buying a property off-the-plan. Stamp duty is calculated on the value of the land and building as at the date that contracts are exchanged. If construction has not yet commenced, stamp duty is effectively only paid on the land. You can check out the cost of stamp duty in your state or territory by visiting your state revenue office’s website.

If you are buyng a property for investment purposes, there are also tax benefits associated with purchasing off-the-plan. Depreciation tax savings are greater on off-the-plan purchases for example, as the newer the building the greater the depreciation savings. Your accountant or financial adviser can give you further advice on buying property as an investment.

The ability to lock in the price you will pay for the property can also be an attractive option. The price of the property can be locked in at the time of exchange of contracts and by the time of settlement, the buyer hopes that the property will have increased in value.

By buying a property off-the-plan you have the option of customising finishes and tailoring the property to suit your needs. Finishes and fittings can be selected along with input on design and floor plans.

Time may also be an advantage for a buyer. For example, a buyer may benefit from having time to sell another property in order to raise funds to complete the off-the-plan purchase.

The risks

Buyers only have the plans of the developer and the location of the building site to consider if the apartment, once built, will be a place they would want to live in or to own and rent out as an investment. So there is much greater uncertainty with an off the plan property purchase than buying an apartment you can walk around and inspect before committing to purchase it.

It may be that once the development is completed you simply won’t like it. Once completed it may look completely different to what it appeared to be like on paper. In a recent case, the purchaser of a unit in a high-rise development was disappointed to discover that the local council was refusing to issue parking permits to residents in the tower because of parking congestion nearby.

One risk with off-the-plan purchases is that it may not turn out the way you had envisaged. Most contracts allow the seller to make “minor” changes without needing any permission or consultation with you. What constitutes a “minor” change for the developer may not always be considered minor by you. For example, the unit size may end up smaller than originally promised. While the Contract may say the size is 110m², you may find it is only 103m² when completed. Contracts often specify an allowance of 5% or 10% variance in size and unless the variance is greater than the specified percentage, you often have no remedies. Purchasers also need to be aware that developers may measure the size of an apartment from the outside of the building. This is another reason why the finished size may not be what you had been expecting.

Off-the-plan contracts are usually quite lengthy and complicated, include onerous clauses for the purchaser and are designed to protect the seller, who is often the developer of the property. For that reason you will usually end up paying more for legal work on an off the plan conveyance than for an existing property.

Another factor to consider with off-the-plan purchases is that the settlement date is uncertain. The plan of subdivision must be registered prior to settlement taking place and this can be a lengthy and drawn out process. There can also be delays due to building work or for approvals.

You may also find that your own circumstances change during the long lead time between exchange of contracts and settlement. For example, your employment may change and even the location of your work. It may no longer be possible for you to live in the apartment you are purchasing. Or you may have made other commitments that have exhausted your funds. If that is the case, you need to take action early so that you can find another buyer to purchase from you at settlement. Often contracts for sale specify the lead time required prior to settlement for what is termed an “on sale” or sale to a nominee to take place.

Fluctuations in the property market are another very real concern for off-the-plan purchasers. Purchasers can be caught out in circumstances where during the time between exchange of contracts and settlement the value of the property declines. In these circumstances the lender will rely on the valuation at the time of settlement. If the valuation is less than at the time of exchange, fewer funds will be offered by the lender. This means that purchasers relying on finance to complete the purchase may need to contribute more of their own funds. This may not suit all purchasers.

Buyers should always investigate their finance options at the beginning of the process of buying an off the plan property. This will make them aware of the potential issues that could arise should valuation issues arise just prior to settlement.

Buyers are often not aware that lenders will not fund their purchase if the property is too small. Generally the property needs to be greater than 50m² in size, however this varies between lenders.

Can I get out of the Contract?

It can be very difficult to find a way out of an off the plan purchase if you find yourself caught up in some of the scenarios set out above. So please consider your circumstances very carefully before committing to what is essentially a higher risk than purchasing an existing property.

Buying property off-the-plan can be a very rewarding option for both investors and owner-occupiers if care is exercised, risks are recognised and plans are put in place to deal with them.

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