Whether you are an investor looking to make a profit or a property owner looking to gain some equity, buying off the plan can be a good opportunity.
What does it mean to “buy off the plan”?
When you buy off the plan you have decided to purchase a property that has not yet been built or is currently under construction. Developers will normally have a display suite with a sample of the property being purchased for prospective buyers to inspect. It is important to pay close attention to the dimensions of the floor plan as the display suite is usually at the higher end spec in both sizing and finishes.
Does the buying process differ from an established home?
When purchasing an off the plan property you pay a holding deposit of a few thousand dollars to ensure that the property is taken off the market. You then have 30 days to pay the balance of a five (5) per cent deposit. The remainder of the purchase price is paid upon completion of the building which could be a few months or a few years away, depending on the stage of the development.
Do you need pre-approval to buy off the plan?
It is advisable to obtain pre-approval before paying the deposit and exchanging contracts if the property is nearing completion. Most pre-approvals are only valid for 90 days and should be arranged closer to the property completion. It is also wise to know your borrowing limit before exchanging contracts to ensure you can afford the property. Use the loan repayment calculator for a quick idea of monthly payments.
The construction phase can take up to 24 months. Setting a savings goal and regularly putting aside a portion of your income during this phase will not only put you in a stronger position at settlement but will show the bank your savings history which is considered when assessing your application. Use the savings calculator to find out how much you could save during this period and learn how to create a budget.
Buying off the plan risks
Buying a property off the plan can be fraught with risks because there is a time lag between exchanging contracts and taking possession of the property. In this case you are at the mercy of the market. In a falling market your property may have decreased in value since paying your deposit. Whilst not good news this is of less importance if you are an owner occupier however an investor looking to resell for a profit would be out of pocket.
When interest rates are low, any increase in the rate will not only impact the value of your property but also your repayments. A rise in interest rates can also mean your borrowing capacity is reduced. Use the loan repayment calculator to see how an increase in interest rates may affect your repayments.
Buying off the plan advantages
In a rising market buying off the plan makes sense. You can purchase a property at today’s prices and if the market continues to rise during the construction period when the property is completed it could be worth quite a deal more. This will give you equity if you are an owner occupier or increased profits if you are an investor looking to resell.
Can I get out of an off the plan contract?
As with all contracts you should read them thoroughly or engage an experienced conveyancer before you sign them. It is highly likely that a contract for an off the plan property contains a sunset clause. A sunset clause is the part of a contract which gives the option to buyers and sellers to leave the contract if a particular circumstance occurs. It is commonly found in off the plan contracts but can also be present in contracts for buying and selling established property.
A sunset clause can be invoked by either the buyer or seller once a circumstance such as the time being passed for the completion of the property. It allows the buyer the option to a refund of the deposit and to walk away from the contract if the property has been held up.
Buying off the plan Quick Tip
In a rising market there have been incidents of property developers who have taken deposits from buyers and, intentional or not, delays have occurred in the construction. The developer then cancels the contracts under a sunset clause to resell the properties at a higher price. This leaves the original buyer without a property unless they are willing to pay the higher price. For this reason, it is important to have an experienced conveyancer such as AMC Lawyers overlook your contract before signing to ensure that you are aware of all potential issues.
Buying off a plan can be a good investment for both investors and owner occupiers as there is opportunity for increased returns and equity. However, there are risks and pitfalls such as the potential for the property market falling and the unscrupulous use of sunset clauses by developers. It is in your best interest to engage an experienced conveyancer who can guide you through the contract and ensure the best outcome.