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The challenges buyers are facing in the property market are in the news constantly at the moment. One option that has become more popular in recent years is buying “off-the-plan” which means buying a property before construction is finished or even before construction has commenced. There are potential benefits for buyers but also additional risks. This article summarises some of the pros and cons.
When buying off the plan, the buyer generally signs a contract based on architectural plans, specifications and other information supplied by the property developer, pays a deposit, and pays the balance after the development is completed and the title is registered. This can apply to home units, townhouses, house-and-land packages and other new developments.
Off-the-plan property purchasing can be attractive because it allows buyers to secure a new property well before completion. However, it also introduces risks and uncertainties that are less significant when purchasing an existing property. Therefore, your decision about buying “off-the-plan” requires careful consideration of the potential benefits (the pros) and the uncertainties (the cons).
Pros of buying off-the-plan
Buying at today’s price
One of the main advantages is the ability to secure a property at today’s agreed price. Once the contract is exchanged, the purchase price is fixed even though the property may not be completed for several months or even years. If property prices rise during construction, the buyer could potentially benefit from purchasing at a lower price. However, this outcome is not guaranteed because the property’s value could also fall before settlement.
No renovations required
Another advantage is that buyers can purchase a brand-new property without having to undertake renovations. New properties typically feature modern kitchens, bathrooms, appliances, energy-efficient fittings and contemporary layouts. Buyers will usually have an opportunity to select finishes, colours or fixtures, depending on the development and contract.
Lower maintenance
There are also usually lower maintenance requirements (at least initially) compared with an older property. A newly constructed apartment or townhouse should have relatively new fixtures, fittings and building systems. A new construction should also come with legal protections and warranties about quality and building standards, although the extent of protection varies, depending on the state or territory, the property type and other factors.
Deposit/delayed settlement
For some buyers, the deposit structure and a delayed settlement can be a positive. A deposit is generally paid when contracts are exchanged, while the balance is not paid until settlement, after construction and registration. This gives the purchaser additional time to arrange their finances.
Tax/duty advantages/deferrals/concessions
There may also be tax or duty-related advantages, depending on the state or territory and the buyer’s circumstances. For example, eligible purchasers buying an off-the-plan residence to use as their principal place of residence may be able to defer stamp duty for up to 12 months. This is a deferral rather than a reduction in the amount payable, and eligibility conditions apply.
It’s also worth noting that there are new income tax rules on negative gearing (that is, the tax deductibility of losses where interest and other costs relating to an investment property exceed the rent). In summary, these concessions will be restricted to qualifying new residential buildings and are outlined in the Australian Taxation Office website.
Access to new developments
Finally, buying off-the-plan can give purchasers access to new developments in desirable locations that may otherwise be difficult to enter once completed. A buyer may be able to select a particular floor, orientation, parking space or layout before the development is finished.
Cons of buying off-the-plan
Uncertainty about the finished property
The biggest disadvantage is uncertainty about the finished property. When buying an established home, the purchaser may physically inspect the property and see exactly what they are purchasing. With an off-the-plan property, the buyer may be relying on plans, computer-generated images, display apartments, specifications and written descriptions. The finished building can look or feel different because changes to building plans can occur during construction.
Construction delays
There is also a risk of construction (and settlement/occupancy) delays. A project can take considerably longer than initially expected because of construction problems, planning issues, labour shortages, financing difficulties, bad weather and countless other unanticipated delays. The buyer may therefore have to wait longer before moving in or renting the property. This can create extra accommodation costs and cashflow problems, particularly if the buyer has already sold an existing home.
Finance risk
A related problem is finance risk. The buyer might receive loan pre-approval when signing an off-the-plan contract, but settlement could occur one or two years later. By then, lending conditions, interest rates, the buyer’s income, or the property’s valuation may have changed.
Nevertheless, the buyer will be expected to obtain sufficient finance when settlement arrives. Therefore, a sensible buyer must consider whether finance will still be available if the property is completed earlier or later than planned.
Changes to the development
Another important risk is changes to the development or individual properties. Developers often have a contractual right to make certain changes to designs, layouts, finishes or common areas, without the consent of the buyer. Some changes may be relatively minor, while others could affect the property’s use, appearance or value. Local laws may provide protections where changes affect “material particulars”, but purchasers may have limited time to exercise their rights.
Market risk
Buyers must also consider market risk. This is particularly important for investors. If the market declines between signing the contract and settlement, the completed property could be worth less than the contracted purchase price. Generally, the buyer cannot walk away just because the market has fallen. This can create a significant problem if a lender’s valuation at settlement is lower than the purchase price. As a result, the purchaser may need to contribute additional funds.
Developer and building quality risk
There are also developer and building quality risks. Although Australian states and territories have various regulatory and warranty schemes, buyers should investigate the developer’s track record, the builder, previous projects and the contractual protections available. Buyers should not assume that every potential defect will automatically be resolved without difficulty or additional cost.
Complex contacts/legal advice
Finally, off-the-plan contracts can be complex. They may contain sunset clauses, provisions dealing with variations, completion dates, finance, rescission clauses and assignment of contractual obligations.
Conclusion
As outlined above, buying property off-the-plan offers several potential benefits (the pros) that can make off-the-plan purchases appealing to both owner-occupiers and investors.
However, the major trade-off is uncertainty (the cons). The buyer commits to a property that does not yet physically exist, while taking on risks relating to construction delays, market movements, financing and changes to the design and quality of the finished product.
Therefore, it’s most important to treat an off-the-plan purchase as a long-term contractual commitment rather than as short-term property transaction.
Before signing, buyers should have an independent solicitor or conveyancer review the contract, investigate the developer and builder, understand the deposit and settlement arrangements, assess their ability to obtain finance at settlement, and consider what would happen if the property were delayed or worth less than the purchase price.
Remember that property laws, taxes and consumer protections vary between Australian states and territories. Each state and territory government offers on-line information, guidance and warnings about buying off-the-plan:
Here’s a link to our website, offering a starting point for researching investment issues, including off-the-plan property purchases.
Our overarching message with all investing is to do your homework carefully, take your time and don’t be pressured into something you’ll live to regret.
