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Take care when buying a property off the Plan

The term “buying off the plan” usually refers to purchasing a property that is not yet registered as a separate lot with the government department responsible for land title registrations, or not yet built.

Buying off the plan can refer to the purchase of a block of vacant land that is part of a subdivision, or a house or unit being built for sale where the land on which it stands is not yet registered as a separate title.

Selling property “off the plan” allows a land owner to develop the land in a less-expensive way, as the developer can negotiate lending rates with its Bank at a lower rate if some of the land, houses or units are already sold to buyers.

This is an advantage to the land developer and can also be attractive to a prospective purchaser who buys into an “off the plan” property in the early stages of the development.

There are however risks for the buyer of property “off the plan” and a diligent purchaser should take care when entering into this type of purchase contract.

The contract

A contract for the purchase of property “off the plan” is a contract that does not have a precise completion or settlement date due to the incomplete nature of the building project and the subsequent separate registration process for the title to the land or new building.

“Off the plan” contracts generally include several clauses that are different to those in a standard contract for a registered lot. The major difference is the timeframe for the owner to complete the subdivision or the building on the land.

A standard contract will have a precise date for settlement to occur (either an exact date in the future or a completion period such as “60 days after the contract is dated”). An “off the plan” purchase contract will still have a timeframe but it is usually stipulated that settlement will occur within a number of days following completion of the building project and registration of a separate title for the property being purchased.

Off the plan contracts also often include a provision called a “sunset clause” which establishes a period within which the contract must be completed – such as within 24 months of the date of the contract. This means that completion or settlement can be anytime in that 24 month period after the signing of contracts, subject to the land becoming registered as a separate title or the building works being finished. If the date passes the parties can usually terminate the contract.

If you are buying a block of land “off the plan” in a subdivision the contract will usually include a clause allowing a variation in the area of that land that you will purchase on completion of the purchase, often because the local council and the land title registering authority have the final say on the area of the lots in the subdivision and may require the land owner/developer to change the areas. This reduction is usually capped at “not more than 5% of the area” in the contract and although area variations are usually minor there is the possibility your land area may be reduced but the purchase price will not be reduced if the areas are changed.

When houses or units are sold “off the plan” the dwelling is not fully built - construction may not have even started until after you enter into the contract. The usual concerns with this type of purchase are that the progress of the building and the standard of the building work may be different to what you as the buyer contemplated. Remember you cannot see the finished product when you buy “off the plan” as the work will be done after you have signed the contract.

Often the developer will have a demonstration or “display home” to inspect showing you a model of how the buildings should look once completed, or they may have design guidelines and artist’s impressions of the building. These may not resemble exactly the finished building as some changes may be made during construction and you need to ensure that the contract provides some protection here. It is essential that you check the details of features, fixtures and fittings such as the stove, range hood, dishwasher, etc. and ensure that the quality of all finishes is clearly specified in a schedule that should be attached to the contract.

Market fluctuations

You should keep in mind that like the economy, property market conditions fluctuate and with long-term building projects such as luxury high-rise units, the value of the units may change prior to completion of the building and your contract. The price you agreed to pay stays the same regardless.

Paying a deposit

Your deposit could be tied up for some time between signing the contract and settlement.

Paying a deposit by way of a Deposit Bond (not always available in all states) or bank guarantee may be a better choice than a cash deposit when buying “off the plan”. Deposit Bonds are structured in different ways but may allow for you to purchase the bond with a lesser amount than the actual deposit amount, although if you default on the purchase you will owe the bond provider the full deposit.

You should always seek legal advice if a request is made to release the deposit to the owner before the sale is settled. If you do pay a cash deposit you should stipulate in the contract who is holding the money and where it is being held. If possible it should be deposited in an interest bearing account by the deposit holder (often the real estate agent).

The developers financial position

Construction companies and land developers who become insolvent or go bankrupt during construction can leave a trail of destruction behind them. Rising building and material and labour costs may force a site closure and you may be locked into a contract for a home that is not finished within the timeframe you expected.

In some states the builder will be required to have insurance which may provide some compensation for defective work or loss due to a bankrupt builder. You should seek legal advice to see what protection is offered before signing a contract.

While an early buyer “off the plan” has the best choice of the land or homes available in a project, and has a longer time to on-sell the property for potential profit, the strategy is not without risk. There are many factors to consider before entering into a contract and our property experts can help guide you through this process.

If you or someone you know wants more information or needs help or advice, please contact us.

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