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Purchasing “Off the plan”

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Purchasing “Off the plan”

In the past few months, there has been an exponential increase in the sale of units ‘off the plan’. I thought I would write this article to demonstrate the risks and benefits for buyers from a legal perspective.

For first homebuyers, those new to the conveyancing scene, or anyone looking to purchase real estate, there are a few things which you need to understand before committing to an off the plan purchase.

Purchasing off the plan is in essence buying a house or unit, with stipulations agreed upon by both parties prior to completion being required under the contract. When a landowner or developer decides to sub-divide or to construct a block of units he can enter into contracts with potential buyers. The vendor typically has an allotted time frame, as mentioned in the contract, in which the lots will be completed. If unsuccessful, the contracts can be rescinded and the purchaser will receive a refund.

By definition, an “off the plan” property is a property which does not exist at the time the contract is signed. It is for this reason purchasing off the plan is essentially gambling with a variety of risks such as the property not being approved for sub-division or not being completed within the allotted time frame. Furthermore, what would you do if the property isn’t what you envisioned? It is smaller/larger than what was shown in the plans? Or simply missing something you were promised or that you requested?

Before explaining potential pitfalls of purchasing off the plan, it is also important to mention the benefits and the reasons behind why this has become such a popular way of purchasing real estate.

The hype behind purchasing off the plan can essentially be broken down into two factors; perceived savings and the option for customisation.

Purchasing off the plan offers the incentive of saving through stamp duty concessions, tax benefits and potentially lower purchase prices.

In NSW, stamp duty is payable on an off plan contract on the earlier of completion or 15 months from the date of the contract for sale. Under conventional contracts for sale, stamp duty is payable on the earlier of completion and 3 months after the contract is signed. A person buying ‘off plan’ has additional time to build savings or earn interest on monies that would otherwise be used to pay stamp duty.

In addition, there are often government grants available for buyers purchasing new or off the plan properties.

Often off the plan purchases, particularly those purchased as investments, incur significant tax benefits as opposed to existing properties. The newer the property the more tax depreciations available. Therefore buying off the plan or ‘brand-new’ maximises the available tax deductions.

Committing to a project early nearly always equates to a lower purchase price. Developers will be keen to sell as many units as possible and are often required by their financiers to sell a certain amount before the project can proceed. Therefore, those who purchase early receive lots for prices that will typically only increase as construction continues and units are completed. This is a big incentive to buy a property off the plan in a project that is just commencing. Furthermore, due to the price being ‘locked in’ the value of your new purchase may just increase with the market whilst you wait for completion.

Whilst there are many benefits to buying off the plan, we cannot ignore the variety of drawbacks that could possibly eventuate. Purchasing off the plan can be likened to gambling with the odds of receiving exactly what you asked for, in the manner in which you asked for it and in the timeframe which you requested. A brief explanation of some of the possible pitfalls is listed below.

  • Cancellation is a possibility. There is always the risk that permission for the development to go ahead may be refused or if the subdivision cannot be registered within a certain period of time. In cases such as this, the contracts are cancelled and the purchaser is left without the property they planned to own. Cancellation may come many months after the contract is signed. Purchasers must then find another property to purchase and in a rising property market they may find that they end up paying substantially more than they would have purchased at the time they signed the now cancelled ‘off plan’ contract.
  • Being unable to cancel as a purchaser is also a common problem encountered. Despite being promised that the property will be ready for occupation by a certain date i.e. before the New Year, this does not necessarily entitle the purchaser to cancel the contract. The only situation in which a delay can lead to a cancellation is if the subdivision isn’t registered by the agreed sunset date (e.g. 18 months). Thus pre contract promises for earlier occupation or settlement dates are not binding.
  • As a purchaser you do not have the right to rescind the contract if the developer goes into liquidation. In such cases, the liquidator can appoint a builder to complete the project.
  • The quality of the workmanship is also something that cannot be guaranteed in an ‘off plan’ property. The completed project may very well be built below expectations. However, despite not being completed to the standard promised, if it is not considered a defect under the contract, as purchaser you do not possess the right to rescind the contract or require rectification.
  • Changes to the dimensions, fixings, furnishings or perhaps simply not liking the final product are other risk taken when purchasing off the plan. Developers can often become aware of potential problems and be forced to amend plans causing changes to the dimensions of the original plans. Most contracts allow for minor changes and prevent purchasers from cancelling the contract based on minor changes. However, what may seem minor to the vendor could possibly be seen as a major change to the purchaser.
  • There is no Home Warranty Insurance on buildings that are more than 3 levels high.
  • Settlement dates are very unlikely to occur on a specific date and can sometimes come sooner than expected or can be delayed for long periods of time. This can often cause problems when taking financial organisations into consideration as finance approval may not be a) organised in time or b) expire after a certain period. This can adversely effect buyers whose borrowing capacity changes in the time between which the contract is signed and settlement. Or in the situation in which the values of property fall after the contract is signed.

Situations do arise in which the purchaser is entitled to rescind if they have not received what they bargained for. However, contracts typically only allow for cancellation due to situations such as major changes to the plan or building, illegal conduct on the vendor/constructors behalf, inability to register in the time period or other major complications.

In conclusion, there is a lot to take into consideration before diving into purchasing off the plan. It is important to remember despite many seeming benefits there is always going to be the potential for hitches and complications. Even more importantly it is imperative that you seek legal advice when considering or purchasing an off the plan property.