Buying off the plan

"Fools rush in where Angels fear to tread"    ~   Alexander Pope, 1711

“Off the plan” refers to any sale of a property where the property has not yet been built.

Builders often raise capital for their development by selling units or townhouses off the plan. 

Most Lenders that fund major developments require a certain number of pre-sales (off the plan sales) before they will approve, or release, finance to undertake the development.


The pros and cons of buying off the plan

Probably the only plus side is that this can be a way for buyers to get a reduced price and even make a capital gain before settlement.

However, it is because this is the only plus that many developers spend a fortune on exorbitant commission payments (and other hidden payments) to “project marketers” (aka property spruikers). 

Many of whom target novice property investors with upmarket presentations using ‘smooth curve and straight line’ predictions about the increased value of the property market. 

Their goal is to make it sound like you can’t lose and that this style of property investment remains the hidden secret to massive wealth creation.  It’s why many of these companies have “wealth” in their business name – despite constantly assuring the Regulators that they are not straying into unlicensed financial advice.

In case it’s not obvious – we don’t recommend that you believe anything they tell you or that you purchase property this way.  No matter how good the food or wine at the presentation – these people are not your friends.

Oh – and if you were introduced to the property spruikers (or more likely taken to a seminar) by your mortgage broker, financial adviser, or accountant – sack them on the spot.  They are very definitely placing a commission “kick-back” ahead of your best interests and have a massive conflict of interest.


Buying off the plan is not risk free

After all, the property market can move down as well as up – and Lender credit policies can change.  So, you could end up losing money on the purchase price - or not being able to get a loan to complete the purchase and forfeit your deposit.

At the time of writing we are seeing significant challenges – particularly in Sydney and Melbourne – with people not being able to complete off the plan purchases.  This is expected to continue for some time to come as developments are completed that were sold during a much different market and under much easier credit rules.


You CANNOT get a genuine pre-approval for an off the plan property

While almost all off the plan contracts will have a finance clause in them this is largely to allow you to mislead yourself – or be misled by the property spruikers ‘tame’ mortgage broker – that you can achieve a pre-approval.

To understand how limited pre-approvals are at the best of times, please refer to our Pre-Approvals Fact Sheet.

For off the plan purchases, pre-approvals are even more of a fiction than normal.  It's not that you won’t get a salesperson at the Bank to provide you with a written pre-approval that says something like “Congratulations – your loan has been pre-approved” – it's just that it isn’t worth the paper it’s printed on.

Even if nothing happens to your income or creditworthiness between when you make a finance enquiry and when the property is eventually completed – the economy, local property market, or credit policies (including servicing, LVR and approach to high density property) can all change.

And this all assumes that the person who reviewed your theoretical ability to obtain finance in the first place was competent, diligent and had your best interests at heart.


Making sure you get what you thought you were buying

There is also a chance you may not end up with what you intended.  

For instance, there are plenty of stories of people being shown highly appointed demonstration Apartments whereas the Contract permitted the Developer to build to a much lesser standard of finishes and inclusions.

So, be sure that you read the Contract very carefully and you know precisely what you are, and are not, getting.

There have also been many stories – and indeed Court cases - involving off the plan properties that were completed entirely differently than what was initially represented.  Ignoring simple ‘dodgy behaviour’ for a moment – this can occur because a Developer is often required to make many compromises (with Council, other Government Authorities or sub-contractors) that cause the development – or certain Apartments within it – to have major changes from the original plans.

A very notable example was when a buyer was sold an Apartment on the premise that it would have “180-degree water views” but found that on completion it had virtually no views and that there was a concrete wall obstructing them. 

In this case the purchaser successfully sued the Developer and got their deposit back – but we hardly think you want your money tied up for 2 years and then you still don’t get to settle on your property and you have to fund a Court case.

So, make sure you get any offers or inducements in writing.  Have them included in the Contract wherever possible.

Finally, Developers have had a horrible habit in the past of taking enforcement action to ensure people complete their purchase if the local property market has gone down - compared to the off the plan purchase price - but find any excuse to get out of the sale if prices have gone up significantly (so they can re-sell the property at an increased profit).

Now, bearing in mind that buying at a reduced price (i.e. making a capital gain) is the only real upside of buying off the plan – this sort of behaviour is truly reprehensible.

The good news is that changes to the law (in NSW at least) made in 2015 make it harder for developers to rescind (get out of) off the plan contracts - but there are still considerable risks in buying something yet to be built.


Getting finance once the property is complete

Most off the plan Contracts have a requirement for you to settle the purchase within a certain period of being advised that the property has been completed.

While the Contract will give the Developer all sorts of “get out of jail free” clauses if they take much longer to finish the project – or don’t end up even starting – you are normally only given 14 days, or at most 21 days, to finalise the purchase once you’ve received notification from the Developer (or their Agent).

This is simply not enough time in the current credit environment.

As we’ve already explained you won’t be able to obtain a meaningful pre-approval at the outset – therefore it is imperative that you either:

  • Negotiate a longer period from notification.  4 weeks should be enough time in most cases; or

  • Stay all over the Developer or Agent as the development is nearing completion and start your loan Application a good few weeks before they think your property will be at practical completion.  The date will undoubtedly slip - but an Approval in Principle will last for 90 days (normally) and you want to be at Conditional Approval stage before they announce practical completion.  That way the Lender can get their Valuer straight into action and move to a Formal Approval and loan contracts in an acceptable timeframe.


Conclusion

We hope this Fact Sheet has provided you with a good understanding of the considerations involved in off the plan purchases – when not to undertake them – and how to protect yourself as much as possible if you are buying off the plan.

If you have any questions or require any assistance - please feel free to Contact Us.


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If you have been directed to this Fact Sheet by your Independent Mortgage Planner it is in order to allow you to review some relatively detailed considerations in your own time and at your own pace. Only any specific advice subsequently, or previously, provided by your Independent Mortgage Planner constitutes personal advice. In all other circumstances, the information provided in this Fact Sheet is general in nature only and does not constitute personal advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information in this Fact Sheet you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Before making any decision, it is important for you to consider these matters and to speak to an Independent Mortgage Planner. We provide Credit Advice only. You may also wish to seek appropriate legal, tax, and other professional advice.
 
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