Buying off the plan – What does it mean?
Buying off the plan means entering into a contract to purchase a property before the property title is created and construction is complete or has even started. This can include the sale of vacant land, house and land packages and strata properties.
It’s a purchase option that gives buyers a range of valuable advantages, like saving on price, the option to customise and stamp duty concessions, but it may not necessarily be the best choice for everyone. So it’s important to understand the pros and cons.
Advantages of buying off the plan.
Time to save a bigger deposit
Generally, a 10% deposit will secure an off-the-plan property. Once this is paid, you might also find yourself with additional time during the construction period to save for future repayments even though your property has already been secured. For example, off the plan buyers potentially have a window of opportunity to grow their personal savings which could allow them to take out a smaller home loan with less to repay each month. In some cases, you might even see the value of the property increase by the time of settlement.
Savings on Stamp Duty
Some great stamp duty concessions are also often available with off-the-plan purchases.
For example, if you buy off the plan, you have the option to defer your stamp duty payment for up to 12 months (compared to up to 30 days for existing properties normally) giving you extra time to save. In some circumstances for first home buyers, you might even be eligible to receive concessions off stamp duty or have your stamp duty waived completely. However, the rules vary in each state and territory, so don’t just rely on what a developer tells you. Check with the State Revenue Office in your state and seek legal and financial advice to find out how much you could save on duty when you buy off the plan.
Deposit
In some cases you might have the option to hold your deposit in a trust account until completion. Depending on your developer agreement, you may even be able to secure your property with a deposit bond from your bank to keep your savings in an interest earning account until settlement.
Developer discounts
When buying off the plan, many developers will offer a discounted price if you choose to commit to the purchase of the property early in the process – sometimes even before construction begins.
Government Grants
If you’re a first home buyer and are looking to buy off the plan, not only are you potentially eligible for the stamp duty concessions mentioned previously, but there are also several government grants that might apply to you. For example, subject to your availability, the First Homeowners Grant applies in most states to first homeowners buying or building a new property, including off the plan purchases. You should enquire with the State Revenue Office in your state and obtain legal advice regarding the grants that may be available.
Additionally, you might also be eligible for the First Home Loan Deposit Scheme which allows you to apply for your home loan with a deposit of just 5%.
Buying off-the-plan also means you may potentially have more input into your home design, and the contract price is locked in at the time the contract is signed. This means the contract price won’t change even if the property increases or decreases in value throughout the build.
Risks of buying off-the-plan
Development Quality
As you’re buying your property before it’s been built, you’re committing to something you can’t physically inspect. This means you have to rely on an artist's impression, floor plan and advertising material for information about what you are purchasing. And while you can always head to a Display Village to check out a particular home design, the display suite you inspect might differ in layout, size and finishes from the actual home you’re buying. The upshot? The possibility that the actual finished property doesn’t align with your expectations.
For this reason, it’s important to carefully check the specifications outlined in your contract. There’s no guarantee they’ll match what’s in the marketing material. Get ready to ask lots of questions because you need to know as much as possible about finishes and fittings like blinds, curtains, tiles and carpets etc so you’re totally clear about what you’re getting come handover of keys.
Construction Delays
Another risk of choosing to buy an off the plan property is that unexpected delays to the construction can sometimes occur. If this happens it can affect your plans, leaving you in need of temporary accommodation or, if you are an investor, they can affect the amount of rental income you’re anticipating.
To address the possibility of construction delays, many off the plan contracts will include a ‘sunset clause’ which essentially sets a specific date by which the property will be completed, or the contract can be voided, and your deposit refunded.
Market Changes
When buying off the plan, you also have to wait for your property to be built. So, there’s always a chance that market conditions will change by the time the property is completed, and you start servicing a mortgage. For example, property market volatility might result your final property value being lower than first estimated, effecting your Loan to Valuation Ratio and the interest rates payable on your mortgage. Changes to the value of the property or delays in completion can also potentially also impact your ability to obtain finance.
Changes to your finances
Like changes to the market, changes in your financial situation between the time you sign the contract, and the end of construction could affect the loan amount you were originally pre-approved for. Typically it’s many months from the time you purchase land in a residential land development, until your house is built, and a lot can happen within that timeframe. So it’s important to think carefully about anything that could impact your ability to complete the purchase further down the track. Even if you no longer want the property, you’re still committed to buying it, and exiting your contract can be costly.
The contract might be tricky to decipher
Resist the urge to sign on the dotted line until you’ve had the contract of sale thoroughly checked by a solicitor. Off-the-plan contracts are often more complex than for established homes. So it’s a good idea to engage a legal and financial adviser to help with each stage of the buying off-the-plan process.
Developers’ Reputations
Opting for properties backed by an established developer like Dennis Family Corporation with a blue-chip reputation and a proven track record can give you a little more certainty and confidence when buying off-the-plan. Plus, sticking to a reputable developer gives you the chance to check out completed projects by the same company. How are they looking five years on?
Developer Bankruptcy
Another possible outcome with buying off-the-plan is if the developer or builder you signed a contract with goes bankrupt. In this event you may not get your deposit back, depending on the terms of your contract.
Buying off the plan . The Requirements.
Deposit
If you’re purchasing off the plan, you’re required to pay a deposit – usually in the form of a bank guarantee or cash deposit, of no more than 10% of the contract price at the outset. Moreover, if you buy off-the-plan and the plan of subdivision is not registered by the time specified in the contract, or the default time of 18 months in Victoria, you have the right to end the contract and get your deposit back.
Off the Plan Home Loans and Finance Approvals
When buying an off the plan property, the home loan process differs slightly from a mortgage over an established property. As with the latter example, if you buy an off-the-plan home, you’ll receive your home loan on the settlement date. However, for off-the-plan purchases this could be months or even years down the track depending on the development process.
As you’ve signed into a contract to borrow funds once your home is built, it’s worth speaking with a finance broker to help you to obtain pre-approval on your home loan as this will allow you to determine what you can afford to borrow and what sort repayments you’ll be up for once construction is completed. While your property is under construction, your broker can also meet with you to reconfirm your financial position and reapply for pre-approval if needed.
Current exemptions and concessions in Victoria
From 1 July 2017, the off-the-plan exemption, and concessions for land transfer duty in Victoria only apply to a property you buy to live in and to first home buyers. Please note the following duty exemption and concession are subject to any further changes in the relevant law.
You are eligible to apply for an exemption from paying land transfer duty if:
- You’re a first home buyer, and
- the dutiable (payable) value of your property is $600,000 or less.
You’re eligible to apply for a land transfer duty concession if:
- you’re a first home buyer and the dutiable value of your property is between $600,001 and $750,000, or
- the property will be your principal place of residence and the dutiable value is $550,000 or less.
The amount of the duty concession depends on how advanced the construction of the building is and its value when the contract of sale is signed. If construction is close to completion, the duty is likely to be higher.
Buying off the Plan in Melbourne & Victoria
If you’re looking to buy off the plan in Victoria, it’s important to be aware of new laws passed by the Victorian Government in 2019. The Sale of Land Amendment Act 2019 was enacted to restrict developers to only being able to rely on sunset clauses with a buyer’s written consent, or with permission from the Supreme Court of Victoria.
These laws are great to know when you’re looking to buy off the plan as they’re intended to protect buyers from contracts being cancelled intentionally by a developer with the intent to re-sell the property at a higher price.
Other key safeguards you need to be aware of are as follows.
Disclosure requirements
Your contract should specify key information relating to your purchase including sunset dates and other conditional dates, and the draft plan showing lot number, location, and area of your property, as well as the draft floorplan, the site of any proposed easement, any proposed bylaws, development contract and management statement, and schedule of finishes.
Your developer is also required to notify you of changes to the draft plan that occurs during development. This can include: a change to the lot number, a change in street name; and in the case of an apartment or townhouse, a change to the location of parking or storage areas; but only if the change is made in accordance with the terms of the contract or the relevant government authority.
Cooling off period.
If you sign a contract to buy off the plan, you have a 3-business day cooling off period to change your mind. However, there are exceptions to the purchaser’s cooling off rights. You should seek legal advice and check if cooling off period does apply to your contract.
Deposits.
Any deposit paid under an off the plan contract must be held by a stakeholder – like your real estate agent or the vendor’s legal practitioner – in a trust or controlled monies account and may be invested in accordance with the terms of the contract. The deposited funds are only released to the developer upon settlement or termination of the off the plan contract. This protects you in the event of your developer going bankrupt but will not prevent you from using a deposit bond if you negotiated this with your developer.
Buying off the plan – key considerations
The bottom line? You need to consider buying off the plan carefully as you’re effectively purchasing a property where the end product can differ from your expectations. So, if you do intend to go down this path, it’s important to do your research and obtain appropriate legal and financial advice before you sign any documentation or pay any money, so you are across all your options and can determine the best outcome for you.
Disclaimer
This article is made available by Dennis Family Corporation Pty Ltd (Dennis Family Corporation) for general information purposes only. By viewing this article, you understand, acknowledge and agree that:
- this article contains only general information and Dennis Family Corporation provides no guarantee that the information in this article is accurate, current or complete;
- this article does not take into account any individual’s particular circumstances;
- this article does not constitute any legal, tax (including stamp duty), financial or investment advice and is not to be relied upon as, nor to be used as a substitute for, legal, tax (including stamp duty), financial or investment advice.
You alone are solely responsible for determining whether any investment, asset or strategy is appropriate or suitable for you based on your investment objectives and personal and financial situation. You should consult a suitably qualified professional about your specific legal, tax (including stamp duty), financial or investment situation before purchasing off-the-plan property.
To the extent permitted by law, Dennis Family Corporation accepts no responsibility or liability for any loss which may be suffered or incurred by any person who acts, or refrains from acting, on or as a result of any information contained in this article.
Publication date: July 2022