What should you consider when buying off-the-plan?
With the boom in construction around the country, it’s no surprise that a number of buyers are considering purchasing property off-the-plan.
Purchasing off-the-plan is a great way to save on price, as well as benefit from grants and concessions. You’ll also be the first person to live on the property, so you can truly call it your own.
It sounds like an outstanding deal, and it can be — as long as you’re aware of the risks and do your research before signing on the dotted line. Not doing so can open you up to a raft of risks that could cause undue financial and personal strain.
So what are the considerations you need to keep in mind when buying a property off the plan? We explore the key ones below.
Are you taking advantage of the benefits available to you?
One of the biggest upsides of buying off-the-plan is that you get to take advantage of concessions and grants, particularly if you’re purchasing your first home. These include the First Home Owner’s Grant and stamp duty concessions.
Each state has their own rules and regulations, so check with your broker or your state/territory revenue office:
- ACT Revenue Office
- State Revenue Office Victoria
- Revenue NSW
- WA Department of Finance
- NT Territory Revenue Office
- State Revenue Office Tasmania
- Queensland Government Homes and Housing
Are you aware that your expectations may not align with the finished product?
When you purchase off-the-plan, you make your decision based on a display home or even a collection of images that have been rendered by graphic designers and architects. While these may look stunning, in reality, the final layout, size and finishes may differ significantly from what you first imagined. This isn’t to say that it will look better or worse — but it’s important to be prepared for the fact that your expectations for your new home may not align with the reality when it’s built.
On top of this, with an existing property, you can inspect the home and return to view it at different times of the day. With an off-the-plan property, you won’t get to walk through the specific home you’ve purchased before signing the contract of sale. This makes it tricky to visualise the lighting and the view, or get a sense of noise pollution.
That’s why it’s important to check through the specs outlined in your sale contract, and match them back to the marketing material. Ask as many questions as possible in the early stages, from the types of fittings and fixtures used to where your apartment will be located in the building.
Who is the developer?
The developer that’s building the property plays one of the biggest roles in whether the process is smooth sailing, or whether there’s bump after bump in the road. While it’s impossible to anticipate issues or delays that may come up along the way, you can give yourself a little more certainty by working with an established developer.
Make sure to do your due diligence when researching the developer:
- Look at recently completed projects by the same company
- Read up on reviews from tenants or buyers who live there
- Check and see how their older properties are faring. What’s the condition like 2, 5, or even 10 years down the track?
Note: if your developer becomes insolvent before completing the project, you may not get your deposit back. Check your contract carefully to ensure you understand the terms before signing anything.
Are you prepared if your LVR changes?
Your loan-to-value ratio (LVR) is the amount of money you’re borrowing with your home loan as a percentage of the total value of your home. As a general rule of thumb, you need an LVR of 80% or more — in other words, a 20% deposit — when purchasing a home if you want to avoid paying Lender’s Mortgage Insurance (LMI) on your mortgage.
When you buy an existing home, your LVR is calculated based on an official valuation of your home. However, this process is a little more complex when buying a property off the plan, as the price may have increased or decreased in the time between signing the contract of sale and settlement.
Here’s an example:
- You agree to purchase a property off the plan for $600,000, with an estimated construction time of two years.
- You have a deposit of $120,000, which means you need to borrow $480,000. This puts your LVR at 80%.
- Once the property has been built, its value has increased to $650,000.
- Although you’ll still only need to borrow $480,000, your LVR will decrease to 74% of the total property value.
- This means you may now have more difficulty securing your loan, or you may need to pay Lender’s Mortgage Insurance (LMI) on your loan.
On the flip side, if your property value has decreased, you’ll have a higher LVR.
Are you aware of the benefits and restrictions outlined in your contract of sale?
Some developers have very strict conditions in the contract of sale, which may affect the construction process and the finished product. These conditions are often more complex than contracts for established homes, with many guidelines favouring the developer. There may also be restrictions that limit you from being able to make changes to your property or sell the home before construction is completed.
Here are some questions that are worth asking the developer before signing the contract:
- Can I make changes to the finishes, such as in the bathroom and kitchen?
- Do I have the option to choose the appliances and items, such as floor and wall tiles?
- Can I visit the site during construction?
- What are my rights if the construction is delayed?
- Can I sell the property to someone else while it’s in the construction phase?
- Can the developer make changes to the design of my property? Do they need my consent to do this? What are my rights if the design changes?
It’s also recommended to seek advice from a property lawyer or licensed conveyancer before signing your contract of sale.
Do you know your rights and safeguards?
There are a number of protections and statutory remedies designed to safeguard buyers who purchase a home off the plan. Understanding them can give you an upper hand should anything go awry during the construction process.
For example, protections and statutory remedies in NSW include:
- Disclosure statements. Vendors need to attach a Disclosure Statement to the contract with key information and provide draft documents like a plan, proposed schedule of finishes, and draft by-laws.
- Notification of changes. Vendors must notify purchasers of changes that will adversely affect the use or enjoyment of the property being purchased.
- Cooling off period. Off-the-plan buyers have a 10 business day cooling-off period, which is double the length of time of buyers purchasing an already constructed home. If you pull out of your contract during this period, you’ll forfeit 0.25% of the purchase price.
- Deposits. Your deposit and any instalments paid in an off-the-plan contract need to be held by a stakeholder (such as the real estate agent) in a trust or controlled money account during the contract period. This money is only released during settlement.
These vary from state to state, so be sure to check with Fair Trading in your state or territory.
Are you planning to work with a broker?
Working with a mortgage broker can help you save a lot of stress and headache when it comes to buying a property off the plan. A broker, such as Rateseeker, can help you secure the best loan for off-the-plan properties, as well as advise you on any grants, benefits, and pitfalls to be mindful of along the way.
** General Advice Warning
The information provided on this website is general in nature only and it does not take into account your personal needs or circumstances into consideration. Before acting on any advice, you should consider whether the information is appropriate to your needs and where appropriate, seek professional advice in relation to legal, financial, taxation, mortgage or other advice.