Tips for Buying off the Plan
INDUSTRY INSIGHTS
Solicitor Michael Seeff from Bush to Beach Legal explores things to consider when buying off the plan.
What does ‘buying off the plan’ actually mean?
Buying off the plan basically means agreeing to buy a property before the finished property legally exists in the form you are ultimately purchasing.
That might be an apartment that is still to be constructed, or a block of land in a subdivision that has not yet been registered.
Instead of walking through the finished property before making your decision, you are largely relying on plans, specifications, disclosure documents and promises about what will eventually be delivered.
That does not mean buying off the plan is necessarily risky or a bad idea — there can be plenty of advantages — but it does mean you need to understand exactly what you are signing up for.
Why do people buy property off the plan?
There can be some real benefits.
You can secure a property at today’s price while settlement may still be a year or two away, and you generally only need to provide the deposit upfront. Buyers of new developments can often choose from different layouts, finishes or locations within the development.
For people planning ahead, that gap between exchange and settlement can also be useful.
The flip side is that a lot can happen during that time — to the development, the property market and your own circumstances — so buyers need to go into it with their eyes open.
“You can secure a property at today’s price while settlement may still be a year or two away, And you generally only need to
provide the deposit upfront.”
What is the biggest difference from buying an existing property?
Certainty.
If you buy an existing house, you can walk through it, look out the windows, see how big the rooms feel and arrange building and pest inspections.
With an off-the-plan purchase, a lot of that information exists on paper.
That makes the contract much more important because the contract effectively sets the boundaries around what the developer has promised to deliver — and, just as importantly, what they are allowed to change along the way.
Can the developer change what I am buying?
Usually, to some extent, yes.
Most off-the-plan contracts give the developer some flexibility to make changes while the development is being constructed or registered.
There can be perfectly legitimate reasons for that. Council requirements change, engineers may require amendments, services need to be relocated and the final survey may be slightly different from the draft plan.
The important question is not simply whether changes are allowed, but how much can be changed before you have a right to object, claim compensation or walk away?
That is one of the areas I pay particularly close attention to when reviewing these contracts.
What are some of the main risks buyers should look out for?
For me, the big ones are changes to the property, delays, finance and valuation risk.
You may sign a contract today and not settle for another 18 months or two years. By then, interest rates may have changed, lending policies may have changed, your personal circumstances may have changed and the bank’s valuation of the finished property may not necessarily match the price you agreed to pay.
There can also be changes to the lot itself, common property, easements, by-laws, finishes or the wider development.
None of those risks necessarily mean you should not proceed. They just need to be understood before you become legally committed.
What happens if the development is delayed?
This is where the sunset date becomes important.
Most off-the-plan contracts contain a date by which certain things — commonly registration of the plan or completion of the development — are expected to occur.
People sometimes look at the estimated completion date in the marketing material and assume that is when they will be moving in. Unfortunately, that is not always how it works.
The contract may allow considerably more time, and developers will often have rights to extend time because of delays outside their control.
My advice is always to plan around what the contract actually allows, rather than the most optimistic completion date.
Can I simply pull out if my circumstances change before settlement?
Usually not.
Once the contract is unconditional and any cooling-off rights have expired, you are generally committed to completing the purchase.
That becomes particularly important with off-the-plan transactions because there can be a long period between signing and settlement.
If your finance falls over, you lose your job, your relationship changes or you simply decide you no longer want the property, that does not automatically give you a right to terminate the contract.
That is why buyers need to think not only about whether they can afford the property today, but whether they are comfortable carrying that commitment through to settlement.
What about getting finance so far in advance?
This is one of the issues buyers sometimes underestimate.
A finance approval obtained when you sign the contract generally does not mean the bank is guaranteeing that finance will still be available years later.
The lender will ordinarily reassess things closer to settlement and may obtain a new valuation.
If the market has fallen and you agreed to buy for $900,000 but the bank later values the property at $820,000, the bank may lend against the lower valuation. Suddenly the buyer may need to find considerably more cash to complete.
It is worth having this conversation with your broker or lender before committing.
Are sunset clauses something buyers should be worried about?
They deserve attention, but they are not automatically a red flag.
A sunset clause essentially provides a long-stop date for the development. If the required event has not happened by then, there may be rights for one or both parties to terminate.
Historically, buyers were particularly concerned about developers using sunset clauses to terminate contracts after property values had increased and then reselling at a higher price.
There are now statutory protections around developers exercising sunset rights in circumstances like these, although the protections differ between New South Wales and Queensland.
The key point is to understand both the sunset date itself and every other termination or extension right sitting around it.
What should buyers do before signing an off-the-plan contract?
Get the contract reviewed before signing it.
That sounds obvious coming from a solicitor, but with off-the-plan purchases there can sometimes be a lot of excitement around a launch, a particular apartment or securing a lot before somebody else does.
It is worth slowing that part of the process down.
You want to understand the sunset provisions, proposed plan, easements, restrictions, by-laws, developer's variation rights, settlement timing, deposit arrangements and exactly what happens if the finished product differs from what was originally disclosed.
And if there is something in the contract you are not comfortable with, the best time to negotiate it is before the contract is signed — not two years later when settlement is approaching.
Is buying off the plan something people should avoid?
Not at all.
I have plenty of clients who buy off the plan and are very happy with the outcome.
It can be a great way to secure a new home, investment or piece of land, particularly where the buyer likes the development and is comfortable with the timeframe.
The important thing is recognising that you are buying something different from an established property.
There is a little more uncertainty involved, so the contract and the due diligence become particularly important.
My general view is: don't be scared of buying off the plan — just understand the deal you are actually making.
A glossy brochure can tell you what everyone hopes the development will look like. The contract tells you what you are actually entitled to receive.
To get in touch with Michael email michael@bushtobeachlegal.com.au.
