What is buying ‘off the plan’
Essentially, buying ‘off the plan’ means purchasing a property before it has been built or completed. Buyers enter into a contract with a developer to buy property in a development which may not be completed for some years. In some cases, you can choose the location of your property within the development and customise it with a choice of floor plans and finishes.
The term refers to the buyer only sighting the ‘plans’ of the development and making the decision to purchase a property based on the location, plans and expected finishes. Often developers will provide digitised imagery, model buildings and showrooms to give buyers and idea of what the finished development will look like.
The benefits of buying off the plan
Discounted purchase price
Buying off the plan has always been seen as a great way to grab a bargain. The theory being that your property accumulates capital growth whilst it’s being built. Also developers tend to offer lower prices and incentives to move stock quickly in order to secure finance for the development.
Often, developers are given approval for finance on the condition that a minimum number of units have been sold. Therefore, developers can discount the ‘off the plan’ price to get those sales across the line. That said, not all developers discount their pricing so you still need to assess the valuation of the property before purchasing.
Buy now, pay later
Buyers can often secure a property by paying a 10% deposit to the developer and may not need to pay the balance until the development is complete, which depending on the size of the development, can take anywhere between 12 months and 5 years.
Buying off the plan means you can lock in the ownership of a property now and take advantage of any capital growth. Traditionally property values increase with time, however it’s not always the case particularly in Sydney’s property market. Some buyers resell their property before the settlement date and cash in on the capital growth, even before the development is completed. It’s worth noting that Capital Gains Tax (CGT) may be payable, so always check with your accountant prior to purchasing or selling.
Customise your property
In some cases, you can choose the location of your property within the development and customise it with a choice of floor plans, fittings and finishes. This is the fun part, selecting all the finishes and getting emotionally attached to your new home. However, keep in mind anything other than standard inclusions will incur additional costs. If selecting more high-end fittings and finishes, make sure you don’t over capitalise on the property.
For those buying off the plan as an investment property, you can claim depreciation, fixtures, fittings and in some states and territories get Stamp Duty exemptions. However, always speak with your accountant prior to purchasing.
Buyers are now protected from ‘Sunset clauses’
Sunset Clauses in some real estate contracts allowed either the purchaser or vendor to rescind the contract if works on an off-the plan property run more than a year over the expected completion time. Unfortunately, some developers were purposely delaying works to invoke the sunset clause, cancel the contract and then re-sell apartments at higher prices, often referred to as ‘Sunset clawbacks’.
Since December 2015, if a developer wants to rescind a contract of sale, they must first seek consent from the purchaser to go through with the termination. If the buyer does not agree, the developer will need to justify any termination and, if necessary, apply to the NSW Supreme Court for permission to allow it to take effect.
The risks of buying off the plan
You might not get what you paid for
It’s essential to review your plans and contract in detail before signing. Make sure the plans, size of the property including car spaces and storage, fittings and fixtures match what is detailed in the contract. Always get legal advice before signing.
You might not be able to secure finance
There are many factors that could alter the outcome of your home loan approval. Buyers should always secure pre-approval for their home loan before purchasing. However, pre-approval for home loans are usually only valid for a relatively short period of time (3-6 months), so renewing your pre-approval during the construction phase and just before completion will ensure you still qualify for your home loan.
Because buying off the plan is such a long timeframe, it’s important that your financial position doesn’t negatively change. When granted your original pre-approval, the lender has done so based on your financial position at that time, so if you lose your job or overextend your financial position, the lender may not renew your home loan pre-approval when it comes time to completion.
Keep in mind lender policies change on a regular basis so there are always risks that the lender won’t grant a renewal of your pre-approval because of policy changes.
Because of the complexity and variations of off the plan finance, it’s wise to speak with Sydney and Central Coast mortgage broker Mint Equity. We can keep you up to date with any lender policy changes that might affect your home loan pre-approval.
You might have paid too much
Recently we’re seeing an oversupply of apartments particularly throughout Sydney. With an increase in new apartments in Sydney, there are concerns that the oversupply will reduce values. For those who have already purchased potentially over valued properties, not only will they have lost money on their purchase, but they run the risk of not being able to secure finance for their home loan. If a property valuation comes in lower than the purchase price the home loan is at risk.
The development may not go ahead
We’ve all heard the horror stories of builders going bust before completing a development, so it’s important that you research the developer and builder and ensure they have a good track record.