Depending on who buyers speak with, off the plan properties are either the best idea or the worst.
Locking prices in early, having extra time to save and luxury finishes are all positives, but recent history has shown that defects can occur, prices can dip and builders go bust.
Canstar executive Steve Mickenbecker said off the plan purchases had their place. “There might be advantages,” he said. “But you need to go in with your eyes wide open. Make sure you get good advice, especially if you’re a first-home buyer, because if things go wrong or delays happen it can put you years behind financially.”
Louise Hethorn, principal solicitor at Your Property Lawyers, said buyers should be aware of the many variables of buying off the plan. “Various factors can cause delays in (building) and purchasers need to have flexible finance arrangements and accommodation plans in the lead up to settlement,” she said.
“Off the plan contracts give the developer scope for final plans, unit layouts and finishes to be different from the model display apartments and promotional materials the buyer may view at the time of purchase,” Ms Hethorn said, adding that such changes could be in the buyer’s favour. “Buyers are often able to have input into the plan or layout by negotiation with the developer or builder with the updated draft plans forming part of the contract.”
TIME TO SAVE
The time between putting down a deposit and paying for a property bought off the plan allows buyers an extended savings period.
A committed purchase also gives buyers a deadline and more motivation to save than if they were simply waiting for the right property to turn up. “You’ll have to come up with a deposit, whether that’s 5, 10 or 20 per cent, which will sit in a solicitor’s trust account, but you still then have time to save a bit more so when it comes time to settle you might be looking at a smaller loan than if you’d had a 30-day contract,” Mr Mickenbecker said.
LOCKING IN A PRICE
Buying off the plan in a rising market can make good financial sense because by the time settlement day arrives (which could be a year or two later), the value of the property could have increased. The risk is that prices can also drop.
“If the market goes gangbusters you can be earning capital gain before you’ve even had to part with all the money for the property. But if it goes the other way, you might be settling for a property worth 10 per cent less than you expected.,” Mr Mickenbecker said.
LENDERS MAKE THE CALL
If property values fall while a buyer is waiting for their property to be finished, they could find themselves suffering a financial shortfall.
“Pre-approval is not binding at all on the bank. They’re saying ‘This is what you get based on today’s circumstances’ but if things change, so could that approval and the lender is under no obligation to lend you the amount you need. If the bank’s not happy with the property, chances are they won’t be prepared to lend on it and you’ll have to find a way of not losing your deposit with other finance,” Mr Mickenbecker said.
THE WAITING GAME
In the time it takes a development to settle, Ms Hethorn said a buyer’s circumstances can change and this will affect the purchase.
“As the property market fluctuates, bank lending policies and the valuation of the completed unit may result in reduced borrowing capacity. If a buyer is unable to obtain finance for settlement, they’ll need to on-sell the property to avoid forfeiting the deposit paid under the contract, but there may be a clause in the contract preventing or restricting a buyer’s ability to on-sell the property,” she explains.
There is also a possibility the multidensity landscape changes lenders’ practices.
“When a buyer requires loan funds to purchase off the plan property, they need to understand lenders can reduce the loan to value ratio for developments with over 30 apartments. The same applies to certain high-density postcode areas,” she said.
CRACKS CAN APPEAR
While laws exist so builders and developers deliver what they promise, defects can happen.
“If the apartment doesn’t meet building standards, you probably won’t have to complete the contract and you’ll get your money back. But there could be little things about the quality of finish that aren’t what you expected and sometimes you won’t have much recourse on that, it’s just bad luck,” Mr Mickenbecker said.
Ms Hethorn said stories of questionable building practices have put the industry on notice. “The Building Commissioner has been playing an active role in overseeing developments of larger complexes. New buildings are still very attractive to home buyers and investors and I find clients are doing more research into the history of the developer and their other recent works before committing on an off the plan purchase,” she said.
Another factor to consider is that developers can go bankrupt and although buyers have legal recourse to recoup their money, Mr Mickenbecker said it remained a risk. “Only go with a very high reputation developer and builder so you can hopefully avoid these sorts of problems, and to hopefully avoid somebody going broke partway through the project.”