A few weeks ago a friend of mine asked me to write a blog on buying off the plan.
I found this great article on the NSW Government’s Department of Fair Trading website which sums up the majority of issues associated with buying off the plan.
Despite the risks and issues associated with buying off the plan many investors have done extremely well using this as an investment strategy when they line up timing, with the right developer, property and area.
Many investors use buying off the plan as an investment strategy. They do this by purchasing a property at todays prices in the hope that on completion the property will have made a capital gain.
What is purchasing off the plan?
Often units, town houses and in some instances houses are advertised for sale before the building has been constructed. This is know as buying off the plan and has a range of advantages and disadvantages.
There are a number of issues to be aware of when buying off the plan because you are entering into a contract to buy a property without having first been able to view and assess the finished product.
When buying off the plan, the date for completing the contract is usually not until the building is finished. Commonly, the buyer pays a deposit to secure the property, with the balance payable upon settlement.
The conditions of the contract should be closely checked. Legal advice should be obtained on the benefits or restrictions provided by the terms of the contract. For example, consideration should be given to whether there are any penalties for withdrawing from the contract. Other questions you might need to ask could include:
- Can I make changes to the finishes in the kitchen and bathroom?
- Can I select appliances such as stoves and dishwashers and items such as floor and wall tiles?
- Can I visit the site during construction?
- If the building is finished earlier than expected, has finance been suitably arranged?
- What are my rights if construction is delayed?
- Is my deposit secure if the building doesn’t proceed?
- Can I on-sell during the construction period?
Always read your contract and obtain advice from a lawyer or licensed conveyancer.
Making an offer or an expression of interest
The steps for purchasing properties off the plan can be quite different to purchasing other types of properties.
‘Off the plan’ properties are often advertised and sold at a fixed price, so getting the one you want may be a matter of getting in early and making an expression of interest payment, rather than competing directly with other buyers through an auction or private sale.
Generally, the developer will decide on the conditions for sale, including whether the property will be sold to the highest bidder, at a fixed price, or as part of a cluster of properties at wholesale prices. Their intended method of sale for any particular property may change over time.
Developers sometimes contract a number of different real estate agencies who may compete against each other to sell each property. The activities of these agents may also coincide with the developer’s own marketing and sales activities. With so much going on, it can make it difficult for potential purchasers to know where they stand when they make an expression of interest payment or an offer.
An expression of interest payment will not secure the property. The agent or developer is not obliged to sell you the property and they may take a number of such deposits on the same property. They must tell you if other offers are later made on the property, or if it is sold to someone else. However, when a number of agents and the developer are all selling the same property to buyers who may be located anywhere in the world, a significant amount of time may pass before the agent you have dealt with is even aware that the property has been sold to someone else. Unfortunately, this can mean your expression of interest payment is locked up for weeks, even months, and you still don’t get to buy the property you want.
Disallowed marketing tactics
Agents must not mislead or deceive any parties in negotiations or transactions and there are strict rules of conduct that apply to sales agents, including when selling properties off the plan.
For example, they are not allowed:
- to advertise a property that is less expensive than other similar properties, if the advertised property is no longer available
- to indicate a price range for a property if the lower end of the range is significantly less than the value of the property
- to hold on to your expression of interest payment or use high pressure tactics on you to purchase another, more expensive property, if the property you made the payment for is subsequently sold to someone else.
Home warranty insurance
Home warranty insurance is required to be taken out by the builder for residential building work (including the construction of strata units) valued over $20,000. An exception to this requirement is for the construction of new multi-storey buildings built after 31 December 2003. A multi-storey building is a building of more than three storeys (not including the car park) and containing two or more dwellings. Exemptions also apply to certain types of retirement villages.
All other residential building work that is not exempt must have home warranty insurance cover in place and a copy of the certificate of insurance must be attached to the contract of sale. The certificate is to show that the necessary insurance has been taken out by the builder.
The insurance is required to insure the buyer against:
- the risk of non-completion of the work, and
- breach of statutory warranties relating to the work.
However, a developer who sells a non multi-storey strata unit off the plan is exempt from attaching a certificate of insurance to the sale contract, but only if the building work has not yet commenced and the contract informs the buyer that:
- the developer selling the property does not need to give a certificate of home warranty insurance if the building work has not yet started
- the law requires there to be home warranty insurance in place for the building work before commencement of the work
- the developer is required to give the buyer the certificate of home warranty insurance within 14 days of the insurance being taken out
- the buyer can cancel the contract of sale if the home warranty insurance certificate is not provided within 14 days of the insurance being taken out.
The legal right to cancel the contract under the Home Building Act 1989 is limited to situations without home warranty insurance at the arranged time. In this circumstance, the prospective purchaser can only cancel before the contract has been completed (settlement).
Warning to purchasers
A contract could be completed before the building work is finished and before any insurance is taken out. Where a contract for sale is completed and settled, the legal right to cancel the contract no longer applies, even if the builder has broken the law and not provided the necessary insurance.
Things you should think about
There may be substantial demand for housing in popular areas of NSW and it is sometimes easy for developers to market such properties months before building work is complete.
Are you paying too much?
Market prices fluctuate, therefore the resale value may be different to that of your expectations or predictions. It may be difficult to know whether the selling price off the plan will reflect the actual market value at the time your property is ready for occupation.
Funding the purchase
You may need to sell your present home to raise the money needed to pay the balance owing upon settlement. Timing of this sale is critical. You do not want to sell your home too early or too late as problems could arise either way.
This may be a particular issue for those buying retirement village accommodation off the plan.
Changes to plans
Changes to the building plans often need to be made during construction. This can sometimes mean that the finished complex is not exactly the same as shown in the original plan.
Quality of finish
When signing the contract, you may not know exactly how your particular property will look when construction is finished nor the precise quality or standard of fixtures and fittings. Sometimes, the fixtures and fittings are different from how the buyer imagined, or what they were like in a display home at the time of sale.
Management contracts in place
In a strata scheme, the developer may have signed binding management contracts between the owners corporation and caretakers/building managers.
Prospective buyers are entitled to know the details and see copies of any such contracts. Your lawyer or licensed conveyancer can arrange the necessary searches.
Exclusive use or special privilege by-laws
The developer is not permitted to register by-laws which give exclusive use of desirable parts of the common property (e.g. a roof garden or parking) so that they are only accessible to owners of certain lots. This type of by-law can only be made after the initial period (i.e. after one-third of the lots have been sold).
The unit entitlement of the various lots within a strata scheme (which determines voting power at meetings and the required levy contributions) may not be specified or even known at the time properties are advertised for sale.
Remember that when you buy off the plan, you are paying for a property where the finished product may be different from your expectations.
NSW Fair Trading recommends that potential ‘off-the-plan’ buyers think carefully before entering into a contract to buy premises which have not been built. Caution should be exercised and appropriate legal and other advice obtained before signing any documents or paying any money.
This blog was written by the NSW Government’s Fair Trading Department.
The information provided in this blog is of a general nature only and in no way constitutes legal or professional advice, or specific advice in relation to any finance. In all cases we recommend you receive professional financial advice for your own personal circumstances.
Pumped on Property does not claim rights to any media posted unless specifically stated otherwise. Media are used solely for the purpose of discussion, comment or visual aid. We are not responsible for the source or editing of any media, unless stated.