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One way to dip your toe in the property market if you want to buy a brand new property is to buy off the plan. This involves entering into an agreement with a developer when a property has yet to be built.
It has its pros and cons but if you are considering buying off the plan there are a few things you need to get across.
“When you purchase the property, it doesn’t exist so you are relying on descriptions and a variety of other items that are being requested to approve – carpets and fittings and these sorts of things,” says chief executive officer of the Real Estate Institute of New South Wales, Tim McKibbin.
“And because you don’t actually see the property, the end result may not be what you had envisaged. But…you do end up with a new property.”
What Does Buying Off The Plan Involve?
Buying off the plan involves entering into a contract with a developer before a property has been completed or in many cases before construction has even begun. There are usually two ways you can do this:
Buying an apartment
You will need to pay a deposit, usually around 10% of the purchase price and no more than 10% in some states like Victoria, up front and pay the remainder when construction starts. The value of apartments may be slightly more volatile than that of standalone houses, meaning that there is a higher chance the value of your apartment has changed in the time it takes for it to complete construction.
Buying a home off the plan
The process for buying off the plan for an apartment and standalone are essentially the same, in that you will need to pay an upfront deposit and the remainder upon completion.
There are usually increased protections for buyers when buying off the plan for both houses and apartments depending on the state. For example, in NSW off-the-plan buyers have a 10 business day cooling off period whereas buyers of already constructed homes usually only have 5.
In Victoria you are not required to pay a deposit of more than 10% of the purchase price and if the subdivision for the property is not registered by a time specified in the contract, or a default time of 18 months, the purchaser has the right to end the contract and get their deposit back.
Pros of buying off the plan
There can be benefits to buying property off the plan. Depending on what the property market is doing, in some cases it may be cheaper to purchase property off the plan if the value rises during the years of construction. But this is hard to predict if you don’t have a crystal ball—and none of us do. Here are some more concrete pros to buying off the plan.
Deferring stamp duty
Many states will allow off-the-plan buyers to defer their stamp duty for 12 months after they sign the agreement or until the property is completed, whichever comes sooner. In some states, like Victoria, there may be an off the plan duty concession.
Time to arrange mortgage
You will need to pay the deposit to secure the agreement but depending on when completion is planned for, you may have some time to organise a mortgage with a lender. Essentially you have more time than you would purchasing an already established property which may also be useful if you expect financial windfalls in the coming months.
More control
You may have more input in the building process and be able to choose some finishings and fittings but this will depend on the developer.
Cons of Buying Off The Plan
McKibbon says when it comes to buying off the plan buyers have to do a lot of due diligence.
“It is very important to become immersed in the data,” he says. “Because there have been instances where people have made assumptions about aspects of the property, which were inaccurate.”
The property doesn’t exist yet
Essentially you are buying an idea based on a developer’s sketch or simulation and not something you’ve been able to inspect in real life.
Developer could go bust
Unfortunately this does and could happen. There are additional protections for off the plan buyers but there is a real chance you could lose any deposit paid so make sure you do due diligence on the developer.
Value could fall
Just like values can increase, they can also fall and you could end up with a property upon completion that is worth much less than what you paid for it.
Checklist for Buying Off the Plan:
- Get a firm completion date from the developer.
- Clarify the sunset clause. Developers are generally unable to use sunset clauses to end contracts without an order from the Supreme Court (unless the purchaser agrees).
- Clarify how much input you will be able to have around fittings, soft furnishings, paint colour etc.
- Ask for a proposed schedule of finishings if it has not been provided.
- Research the developer’s history.
What if Something Goes Wrong?
In many states off-the-plan buyers have more consumer protections than buyers of existing property, as per the longer cooling off period in NSW cited above.
Also in NSW, From 1 December 2019, deposits and other installment funds paid under an off the plan contract must be held in a trust or controlled money account during the contract period to protect the funds in the event of a developer’s insolvency.
Off the plan contracts in Victoria must include a clearly visible warning notice that a substantial amount of time may pass before the buyer actually owns the property.
Check the consumer affairs or fair trading government departments in your state for possible recourse specific to off the plan property purchases.
Frequently Asked Questions (FAQs)
Is off the plan a good investment?
Just like any property investment this will depend on a multitude of factors, including what the market is doing, where you have purchased, interest rates and so on. Be aware that some banks are hesitant to lend for off the plan properties during downturns, because the value of the property may change by the time it is completed.
Can you negotiate price when buying off the plan?
When it comes to negotiating, there are no special rules when buying off the plan so it’s always worth asking. The best way to do this is to get in early and make an offer as soon as the apartments are listed for sale. While most off the plan properties are listed at a certain price, if it’s a buyer’s rather than a seller’s market you may be able to secure a discount.
Is it cheaper to buy off-plan?
It depends on what is happening with valuations in general. For example, if the price of your property rises during construction then—yes—it will be cheaper. On many occasions, the opposite will happen and buyers will end up settling on a property that is worth less than what they paid for it due to market falls and other factors. Buying apartments off the plan in generally cheaper than buying established homes and units, however, that is due to the scarcity factor: you can always build new properties but established homes, especially period homes, are often worth more because they are unique. So while buying off the plan may appear cheaper at first, be aware that it could be costly further down the track in that your capital growth will be limited.
