Purchasing property off-the-plan means entering a contract to buy the property before or during its construction, so you can view the design and building plans but you won’t be able to inspect the finished property until construction is complete.
After all, it seems logical that if you sign a contract to purchase a property at today’s prices, it should be worth more when construction is completed one to three years time.
There are many other benefits of purchasing property off-the-plan, some potential pitfalls you need to be aware of and also some essential due diligence checks that should always be carried out.
Advantages of buying off-the-plan property
1. A better price
Everyone likes to save money. When developers first offer their new project to the market they tend to start with lower prices to meet pre sales targets.
Once these targets are achieved construction starts, and now that the developer has met their construction finance requirements, prices may increase.
Therefore, for investors who commit early to the project there is often a good price benefit.
2. Tax benefits
As with all property investment purchases, there are some significant tax benefits available.
These benefits are greatest when the property is brand new, because there is more tax depreciation available – therefore buying off-the-plan is a good strategy if you wish to maximise these benefits and improve your after tax cash flow.
Learn more about depreciation here.
3. Secure property at today's price
What this means is that while you'll pay a 10% deposit upon signing a contract (or use a bank guarantee or deposit bond), you don't have to pay the balance of the money until the property has been built, which provides buyers with time to organise their finances and / or to sell property without the need for bridging finance.
In the meantime, especially in a rising market, you can enjoy the benefit of any capital appreciation that occurs on the property.
4. Government incentives
There are a number of government incentives available to you when buying off-the-plan property. Some state governments provide stamp duty concessions for brand new properties, in a bid to boost their economies through construction. For example, in VIC, a payment of up to $10,000 is available for eligible first home buyers if price of the property or construction of the home does not exceed $750,000.
In NSW, first home buyers can receive a $15,000 grant if buying a newly built property for less than $650,000. They are also exempt from stamp duty if the new property's value is less than $550,000 (or land valued less than $350,000), or a concession on stamp study if the value is between $550,000 and $650,000.
Contact your local state government for more information about the incentives that are open to you.
5. TimeIf you are purchasing off-the-plan you have the added advantage of getting things in order before you need to settle and either move in, or let the property out if you are buying as in investor.
Coordinating the sale of an existing property can be stressful, but knowing that you have some time before your new property is ready to occupy or let out provides you extra leeway to get your affairs in order.
The longer settlement period can also be used to save more money, reducing the amount you will need to borrow and therefore reducing your monthly loan repayments.
6. Greater choice
One of the greatest benefits of buying off-the-plan is that you get to choose your property from all stock that is available in the development.
A wider array of choice means a greater opportunity to ensure you purchase property that matches your strategy and buying rules, whereas when buying established property, you usually won't have multiple options within the one specific location.
If you act quickly and commit early to the project, you also have the opportunity to select property with a superior position, aspect and floor layout, which can often offer a greater potential for strong capital growth and maximised rental yields.
7. Stamp Duty Benefits
One of the most common reasons given for buying off-the plan in states such as VIC is the savings in stamp duty.
For example, Investors buying off-the-plan in VIC enjoy lower stamp duty rates, saving 10-20 thousand dollars on rates compared to other states.
Also, if you enter into a 2-part contract to buy bare land and then build a new house, you will only pay stamp duty on the land value.
The risks of buying off-the-plan
With all forms of property investing, there are some risks that you should be aware of.
1. Falling property marketThere is a risk that the property market may fall between you paying the initial deposit and settling in the future. If this happens, you may find it difficult to secure finance for the full amount of the property purchase price and may have to pay a larger deposit. Also be aware that your personal situation may change, for example you may divorce or have a child, yet are still obliged to settle.
2. Development delaysSome developments will be delayed by several years.
If this happens, you could spend this time waiting for completion with your deposit tied up, and have the added uncertainly of not knowing whether the purchase price will be above or below the market value at that time.
3. Expected finance may not be available
Your bank may offer you pre-approval as an off-the-plan buyer. However this is not a guarantee that your bank will be willing to lend the full amount for the property, as the valuation may be lower than the purchase price or your income and circumstances may have changed at the time of settlement.
Under these circumstances, the buyer will usually need to pay a larger deposit.
4. Developer risksDevelopers may take risks when financing their developments or costs can increase and the development may become unviable. If this happens, that development may not go ahead.
In such cases the developer can cancel the sale contracts as most contain special conditions which allow for this under specific circumstances. Always research what your options are if this occurs, and when you get your deposit released from the trust account, find out what guarantees you have.
5. Rising interest ratesInterest rates could increase before you settle on the property, leading to greater costs of holding the property, impacting your cash flow.
6. Final product is unknown
Buying a property off-the-plan means you will not know exactly how it will look when construction is complete.
This means the finished product may not live up to your expectations in terms of aspect and quality.
Another risk is that the dimensions of your chosen lot may change, if the local council or other authorities put conditions on the granting of approval for a development.
The developer may, for example, need to set aside land for open space, and if this has not been anticipated by the developer, the plans may need to be amended.
7. You may not like the property when it is completedAll you have to judge how the property will look when completed in the future is display suites, artist's impressions and floor plans, and there are a number of unforeseeable issues that may mean you simply do not like the property when it is completed.
8. Complexity of documents
Contracts for off-the-plan properties are usually lengthy and can be extremely complex. The transaction may be subject to some restrictive clauses or penalty interest payments in the event of a default from late settlement. Always have a legal professional check over your contract before you sign.
9. The settlement date can be uncertainIf settlement does not take place on the specified settlement date, all parties must wait for events that will trigger this date, which can include the registration of the plan of subdivision or the issue of a certificate of occupancy. As a purchaser, you may have to wait years for settlement or the opportunity to cancel the contract if, for example, the vendor has difficulties registering the plan of subdivision, or financing the construction.
Essential due diligence checks when buying off-the-planBuying off-the-plan can be a strategy that works for many investors.
As always, you need to do all your research to ensure that the numbers are going to be right including finance, return, growth potential, gearing, depreciation benefits and so on. Here are some other checks that you should also carry out.
1. Research the developerStart by visiting the developer's website.
Find out who the developer is, what other developments they have done and whether they have always delivered.
You can use online forums to find out whether other buyers have had positive or negative experiences with the same developer in the past. Carefully inspect the display home, models and plans. Investigate the fixtures, fittings and finishes.
You can also obtain the license number of the builders used for the construction of the development, which you can research on any state government website to determine factors including:
- Details about the licensee
- The date of issue and expiry of the license
- Conditions endorsed on the license
- Names of partners in a partnership, or directors of a corporation
- The results of any disciplinary determinations and prosecutions
- The number of insurance claims paid in respect of work done by the holder
2. ContractBuying off-the-plan involves entering into an off-the-plan contract of sale, so you should always seek legal advice from a property law professional before signing this contract. Check to see whether these factors are included in your contract of sale: Cooling off period A cooling off period of between three and five days applies in most states, after which you are legally bound to buy the property.
However, if you do decide to withdraw, you may be charged with a penalty fee by the developer (commonly 0.25% of the purchase price.)
Once the cooling off period ends, you are legally bound to purchase the property.
3. DepositUp to a maximum of 10% of the purchase price is payable and usually held in a legislated trust account and until settlement occurs.
You should check who earns the interest earned on the investment at settlement.
4. Adequate plan disclosureAn off-the-plan contract provides you with specifications and plans of what the developer intends to build as the finished product.
Always check these plans carefully before signing any contract so you are fully aware of the level of detail the developer has provided to you and proposed standard of the finishes, and whether the developer can alter the finishes and materials, provided the alternatives are of no less quality.
5. CompletionThe contract usually gives buyers an estimated time of completion for the development. The developer is usually provided with flexibility to alter these time frames, as long as all reasonable steps are taken to complete the project as quickly as possible.
If the developer cannot complete the project within this time frame, the developer and the buyer can terminate the contract. In those circumstances, the deposit is refunded to the buyer.
6. DefectsThe contract usually gives the buyer the right to pre-inspect the property prior to settlement and identify to the developer defects which must be remedied.
7. Stamp duty
Stamp duty must be paid on all purchase contracts. There are strict time periods involved and certain concessions and exemptions available to buyers of residential property.
You should also check:
- If there are penalties if you withdraw from the contract.
- If you can visit the site during construction.
- If you can make changes to finishes and fixtures.
- What happens if faults are identified post-completion?
- Can you on-sell during the construction period?
- What are your the rights if construction is delayed
8. Researching the property and its suburbWhen buying off-the-plan, consider these factors around the stock itself and its position which include:
- Is it well located within the development?
- Is it as high or low in the building as you want?
- Is it removed from noise sources such as busy roads or workshops?
- Is car space conveniently located?
- Median rental yields and compare them to the developers rental estimates
- Clearance rates
- Depreciation estimates and compare them to the developers estimates
- Capital growth changes
- Vacancy rates
- Median rental yields
- Capital growth rates
- Future development and infrastructural improvements
- Proximity to amenities and public transport
- Clearance rates
- Population demographics
- Supply and demand indicators
- Growth rates of nearby suburbs
Remember that when you buy off-the-plan, you are paying for a property where the finished product may be different from your expectations, so ensure you take appropriate legal and other advice before signing any documents or paying any money.