Need to know: buying off the plan

By Jacqueline So | 13 Feb 2020

Many buyers, whether shopping for themselves or for an investment, have their vision of a perfect property. Whether they intend to live in it forever or lease it out eventually, there’s something very gratifying about shopping for property with a definitive list.

With established properties, you’re generally buying into someone else’s idea. Even if you renovate, you’re working with bare bones that were not your own, and you have to fit your concepts around someone else’s.

Building new, on the other hand, allows you complete creative freedom with the property, but also subjects you to the myriad headaches of the process, from finding land to engaging the right architects and builders, to managing multiple parties and ensuring the project keeps on course.

Why buy off the plan?

Buying off the plan is the process of purchasing a property from a developer before it is constructed. While it is generally associated with buying apartments, you can buy any type of property off the plan, including houses and townhouses. Since no concrete property exists yet, you’ll be making your decision based on the architect’s plans, concept art, styled sample units and the developer’s track record. 

The fact that the property is still in the concept stage gives you more room to make creative suggestions. However, it can also mean that, for one reason or another, the property never makes it past that stage.

Here are a few reasons why an off-the-plan investment could make sense for you:

1. You have the final say

Buyers of off-the-plan properties are generally offered the opportunity to comment on the existing plans and request reasonable adjustments.

“Where houses are concerned, the main benefit of buying off the plan is that you can be involved in designing the floor plan and ensuring that it is exactly what you want, whether you’re an owneroccupier or an investor,” says Cam McLellan, director of OpenCorp.

2. You can save on stamp duty costs

This is regarded by property buyers as one of the biggest perks of buying off the plan, as some local governments offer discounts on new properties, McLellan adds.

“In many cases, where houses are concerned, you only pay stamp duty on the land if you’re building a house on the land after the land has settled,” he explains.

In other words, you only pay stamp on the value of the land, which is far less than the amount that would be payable on a complete house. You do have to cover the interest during construction while the house is being built, however.

“Compare that to a situation where the builder has to acquire the land first, pay stamp duty to the developer, and is then covering the interest during construction themselves,” McLellan says. “This results in you paying a premium for a brand-new completed house, and then having to pay stamp duty on that premium price as well.”

3. You don’t have to settle right away

At purchase time, off-the-plan buyers typically only need to settle a deposit – usually 10% of the purchase price – since the project is still ongoing. The full balance needs to be paid only when construction is completed, which gives you plenty of time to get your finances together.

4. You could capitalise early on a rising market

If market trends favour you, you could be settling a property in a hot location by the time construction is complete, and its value could be a lot higher than what you paid for it. “In the current market, it’s a good time to be buying off-the-plan houses, provided you can restrict the amount of available land supply in the area that you are buying in. Houses have the land content, which is what drives capital growth,” McLellan advises.

Considerations when buying off the plan

Despite these advantages, buying off the plan can still be a risky prospect. The biggest gamble is that it’s basically like buying sight unseen – new may not necessarily mean better, and you could find that you’ve put your money into a sloppily constructed project at the end of the day.

“Recent cases in Sydney and Melbourne have been absolutely heartbreaking,” says Danny Andrews, owner and director of boutique apartment developer Andrews Projects.

“What those cases have truly highlighted is the need to deal with tried and proven developers who work with tried and proven builders. We’ve seen a recent run of projects have false starts, which is not only devastating for affected buyers but frustrating for quality developers such as ourselves. People buying off the plan need to do their research and ask the right questions: When is construction starting? Has a builder been appointed? Has a build contract been signed?”

Buyers of off-the-plan properties also need to be aware that they could walk into a final product that looks very different to how it was conceptualised.

Losing your deposit is also a potential scenario, if the development does not push through for whatever reason – such as the developer or builder running off, presales quotas not being met, or there weren’t enough funds to see the project through.

“What if the developer or the builder goes broke? You’ve paid your deposit, they’ve used that money and you don’t get it back,” McLellan says.'

“Also, if the lending rules change between when contracts are signed and when finance is required upon completion, your deposit is at risk if you can no longer meet the terms of the contract and get finance approved.”

You need to protect yourself legally by having a lawyer carefully go through the contract. The sales contract for an off-the-plan property is usually longer than the typical sales contract due to additional clauses, so make sure you understand all the conditions before signing.

In one scam that made the headlines recently, developers exercised the ‘sunset clause’ in the typical sales contract in order to void off-the-plan sales and resell at a higher price.

“Legislation is being passed to change this, but, in effect, a sunset clause is a time frame from when the contract is signed that gives either the buyer, but most typically the seller, the right to be able to cancel that contract,” McLellan explains.

This was meant to protect the parties from settlement delays and allow deposits to be reclaimed in the event that a development did not push through. However, shady developers have taken advantage of the clause by dragging out the construction process beyond the stipulated time in order to benefit from rising market conditions in Sydney and Melbourne in recent years. 

Buying off the plan therefore requires stringent research into the developer’s background, as you want to make sure they have a history of being able to complete quality projects successfully – and without attempting to rip you off along the way.

“It’s a good time to be buying off-the-plan houses, provided you can restrict the amount of available land supply in the area that you are buying in”

CASE STUDY: LEE HALLETT

One man who chose to make his start in property investing by buying off the plan is Porsche Centre Sydney general sales manager Lee Hallett.

“I had built and sold a few houses – I knew that property was a good way to make some capital gain. And I’ve got two young children who I want to be able to invest in property one day,” he says.

Hallett also wanted to spend less than $500,000 on his first investment property. He shopped around in Brisbane and Melbourne, as well as in parts of Sydney, but couldn’t quite find anything that appealed to him until he encountered The Paper Mill development in Liverpool, NSW.

“I knew the area because I lived in Moorebank for a while. I knew about Badgery’s Creek and the other infrastructure projects. I also did my research on the builder, so I knew about another development they did in Liverpool before, which was good quality.”

The price tag of $445,000 fit Hallett’s budget as well, and so in 2015 he signed up to purchase a one-bedroom apartment. The decision was not, however, without its risks.

“The suite they had on display was a two-bedroom apartment; we had a onebedroom apartment with a study, so to get a feel for the size was difficult,” he explains.

“It was a risk on our end as we didn’t know the size of the apartment. We just knew what the finishes were going to look like.”

Nonetheless, Hallett’s experience in building houses helped ease his concerns.

“We had built a couple of houses before, so it was quite easy to look at the plan and work out how things were going to go.”

An experienced broker who had worked with Hallett on his principal place of residence helped him get the funds he needed to settle the project, and by the time he settled he was pleased to see that it had generated considerable gains.

“I’ve had over 10% capital gain. It depends on the time you buy and how the property market moves, so I’ve probably lost a bit of that 10% now. But when it settled, the property was certainly worth more than I paid for it!”

Top Suburbs : keperra , coolbellup , new farm , lalor park , berala

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