From Brochure to Reality: How do Off-the-Plan Purchases Stack Up?
Many people buy real estate “off the plan” – that is, buy a property that hasn’t been built yet. Usually, these purchases are of units or apartments and for many it will be their first step on the property-ownership ladder.
Most buyers will be happy with what they have bought, but buying “off the plan” is riskier than buying an established, standalone dwelling, and it’s important to understand why before you buy.
“Off the plan” deals have many advantages for buyers, including:
The buyer only needs to find the deposit when they sign up and they will have years to raise the rest of the price.
They can lock in lower prices in a rising market.
It might be possible to choose elements of the unit’s design.
Stamp duty may be reduced or eliminated, depending on the price.
But there are risks too.
The risks arise partly due to the long delay between the contract and settlement. For instance:
The market may fall between contract and settlement. If that occurs, the buyer’s investment is downgraded before it is even realised.
A drop in the market, or perhaps a change in the buyer’s employment or personal circumstances, can impact the buyer’s finance options. If the buyer can’t find finance when settlement becomes due, they could lose their deposit and they could be liable for the developer’s damages over and above the deposit.
The buyer won’t have access to the deposit funds for the construction period (which is usually years) and alternative, possibly better, investment opportunities are lost.
The developer may go bust or fail to build the property at all. If that happens the buyer can’t terminate the contract until the “sunset date” (usually 3 or 4 years after the contract). Only after the contract is terminated will be the deposit be refunded, usually with modest interest.
The developer has flexibility in “off the plan” transactions whereas the buyer does not.
“Off the plan” contracts are complex, voluminous and written entirely for the benefit of the developer. Usually, developers won’t negotiate key contract terms with prospective buyers because they want uniformity across the development. Here are some examples of common provisions that are favourable to the developer:
The developer can vary the plan and the specifications during the construction phase for any reason and the buyer must accept those changes unless they can demonstrate that they are “materially” different from the plans.
If there are problems with the build quality, the developer is generally immune from a claim and the buyer must settle on the due date despite defects. The buyer usually has rights against the builder regarding defects, but those rights can be exercised only after settlement and the rectification process can be drawn out and frustrating.
If there are delays in construction, the buyer cannot terminate the contract before the “sunset date” even if it’s obvious that the construction can’t be completed in time. An unscrupulous developer may manipulate the “sunset” timeline in a rising market and deliberately slow down the development in the hope that buyer will terminate the contract after the “sunset” so that the developer is free to re-sell the property at a higher price to an alternative buyer.
The developer will control the owners’ corporation (OC) for a period after settlement, and they are entitled to enter maintenance and management contracts during that period. We have known some instances where the developer struck a long-term maintenance and/or management deal with a friendly and/or related company, often with high service prices and minimal standards required. Once the development is complete, the OC members are bound by the contract entered by the developer.
Always remember: most buyers are happy with their “off the plan” property, but it does pay to be aware of the risks.
If you can, do some research on the developer and builder before signing the contract. See how satisfied their prior buyers are, and, if possible, inspect their earlier developments.
If you are considering an “off the plan” purchase, we strongly recommend that you receive legal advice on the contract before it is signed. If you want to discuss the buying process and the risks and rewards, contact our property team at Conlan Cummings Lawyers.