Buying off the plan involves entering into a contract to purchase a property before construction is complete or has even begun. It can seem like an attractive measure by locking in a price and saving money on stamp duty. However in many cases, purchasers are left disappointed as the finished property does not resemble the one they purchased as it may be smaller, with different finishes and have defects. The end result is that the price you paid may not reflect the finished product, especially as often 10-15% of it is calculated for marketing expenses in order to get the project off the plan. Hence, it is wise to understand these 5 things before purchasing off the plan.
1. Rights to withdraw from contract
Cooling Off Period
It goes without saying that entering into a contract of sale to purchase a property is legally binding. Nonetheless purchasers in private sales have a three day grace period in Victoria to withdraw from the contract and receive a return of all money paid except $100 or 0.2% of the purchase price whichever is the greatest. However, this may be a small relief for off the plan purchasers as any risks to your investment are unlikely to eventuate in such a short period.
Sunset clauses, a date by which if the property is not finished, both the developer and the purchaser can withdraw from the contract and receive a return of the deposit, however, sunset clauses can too often benefit only the developer if it is of such a prolonged period as to deny the purchaser from withdrawing in the event of lengthy delays. Furthermore, recent reports shown sunset clauses may be used by a developer to deliberately withdraw from the contract and then re-sell the property at a higher price causing the purchaser to have to purchase the property at a higher rate should they want to buy again.
It is wise to do your research and understand that the average sunset clause is 18 months but this may change depending on the stage of the development at the time that you entered into the contract. Further it may be practical to incorporate into the clause an option to proceed with the purchase for the original price agreed if the delays are small and the market is still good.
2. Inclusions and warranties
Without a completed dwelling it is hard to know exactly what is included in the sale price such as fixtures and warranties. To understand what warranties are included, you should request further plans where appropriate, always ensure that the project has development and construction certificate approval and that the builder and developer have taken out all relevant levels of insurance.
Unfortunately, when purchasing an apartment in a building more than three stories, home warranty insurance is not included. As yet, there is no perfect solution so be sure to add in additional provisions into your contract prior to executing it so that it includes the right to withdraw should the building contain any major defects or otherwise. Even though this right is available to you via common law, it is always easier to deal with these issues if they have been accounted for in your Contract of Sale.
Furthermore, it is common for sale contracts to permit the developer to change the plans so long as the changes are of equal quality. It is important to discuss in detail exactly the tolerance percentage allowable for changes especially changes such as unit size. Developers typically want a 5% tolerance for variation but this may mean the loss of a laundry or linen cupboard so it is important to agree only to variances you could accept losing.
3. Check viability of property developer/builder
Research into the project and its constituents: builders, architects and the developer is the best way to protect yourself from disappointment. Firstly, check the developer’s website and learn of other projects completed by them. Investigate these properties and learn of any reviews on them to understand how well the developer builds and can produce satisfied clients. Call a lawyer who deals with Building Disputes and ask them about the reputation of the builder.
Secondly, it is vital that you check the builder engaged and insure that they are licensed and haven’t had any proceedings brought against them for defective or delayed work.
Thirdly, it may be wise to investigate prior work done by the architect to understand whether their design techniques are suitable for what you are looking for in the property.
4. Financing the purchase
Financing an off the plan purchase may be difficult due to lenders being reluctant to invest their money in a non-existing product as the property may be sold for more than it is worth. For this reason it is important to understand the purchase price. In order to ensure that the price is reasonable it is wise to research into the price of similar properties in the area and to look at the assets of the property in comparison to others in the area; view, noise, car space, accessibility, location and much more. Most importantly, remember that while assets depreciate in value over time, land increases in value so it is important to try to obtain an adequate land to asset ratio in order to ensure some financial security if you must re-sell. Doing this research may also help convince lenders that the property is a safe investment.
5. Make condition/inspection of property a condition for settlement
If you have done all your research and are satisfied that you are sufficiently protected and have a good interest in the property then the last step is ensuring that the final product makes all the hard work researching worth the trouble. This can be done by ensuring that in the contract for sale a condition to settlement is an inspection of the property be undertaken. It is advisable that you have an expert inspect the property and produce a report prior to settling so that you understand and have proof of the value of the property.
For any further information call Boutique Lawyers on 1300 556 140 for your free 30 minute consult with our experience property, building and planning lawyers or contact us via our website at www.boutiquelawyers.com.au.