updated 15th October 2015
Buying property off the plan
allows an investor to purchase a property today, at tomorrows prices. However, there are a number of issues investors must consider prior to purchase
When buying a property off the plan, usually the investor enters a contract and pays a deposit of approximately 10% of the purchase price. The balance is paid when the contract is ‘settled’ on the building’s completion, which is anything from a few months to two years after the initial contract was signed.
Buying property off the plan is distinct from entering a contract to build a property, as the purchaser is entering into an agreement with a developer, and is therefore less involved in the building process.
Advantages of buying off the plan
Luke Woollard is the Principal of Pacific Lifestyle Property, a Gold Coast-based real estate agency that deals almost exclusively in off the plan developments. He says that one of the major benefits of off the plan developments for investors is their high level of tax advantages, due to depreciation.
“Generally, the depreciation allowances will be higher than with an existing property, because depreciation can only be claimed for so long,” Woollard says. “Also, because the fixtures and fittings are all brand new, there is more to depreciate there as well.”
However, despite the generous tax advantages, investors purchasing a property off the plan should make every effort to understand issues that may arise during the construction process and upon settlement. These include factors relating to the property’s usability, such as the style and finish of common areas, proposed security systems, visitor parking, access to garages and garbage disposal systems.
The time that lapses between signing the purchase contract and the property settling can be months or even years. During this time, if the property is positioned in a sought-after area where high capital growth exists, the value could appreciate by tens of thousands of dollars. Also, according to Woollard, historically, CPI generally pushes land acquisition and construction costs up.
Fixtures and fittings
You may be able to have input regarding the style and colour of fixtures and fittings throughout the property. Although you won’t know exactly how the property will look when construction is complete, you can get an idea of the quality and standard of fixtures and fittings by visiting a demonstration unit, or viewing sample finishes.
Stamp duty savings
In some states, stamp duty must be paid on the value of the property at the time of signing the purchase contract, not at the date of settlement. By buying off the plan you often enter into a contract before construction commences, and as a result, you only pay stamp duty on the value of the vacant land.
A strong yield can often be obtained by holiday letting the property, particularly in beachside areas where demand is high. “It’s all about location,” says Woollard. With a holiday let, the owner has the opportunity to stay in the property for free for “around a month” per year, according to Woollard, depending on the developer. If you choose to do this, be aware that all costs related to the property, such as interest payments, rates and strata fees, may not be tax-deductible for the period that you stay in the property.
One of the risks of buying of the plan that you don’t know what the finished product is going to look like and there is also a chance that the developer goes bust before the project is completed.
Other issues to consider include:
The developer may have caused the owners corporation to enter into long-term management contracts with caretakers or building managers. These may be unbreakable contracts.
Exclusive use / special privilege
The developer might register by-laws, which give exclusive use of desirable parts of the common property, such as a rooftop garden, to owners of certain lots. This information may not be available at the time of purchase, and such by-laws could impact on the value of individual lots.
The unit entitlement of the various lots, which determines voting power at meetings and the required levy contributions, may not be displayed or even known at the time the units are advertised for sale.
Failure to appreciate
The Queensland Department of Fair Trading warns that the value of the property when completed may vary from when you purchased it, so if the market has declined, you stand to own property that is worth less than what you originally paid. Investors have been burnt when buying properties off the plan that promise impressive returns and solid capital growth, but fail to capitalise on expectations – so it is important to do your own research, rather than relying on information supplied by the developer, and read the contract carefully. “All sorts of things need to be considered,” agrees Woollard, “such as the developers’ reputation for producing quality properties, and their track record. It’s even worth checking out the developers previous developments, to see how well they’ve appreciated in value.”
If you are considering purchasing a property off the plan, legal advice should be sought before entering into a contract. For further information, contact the Office of Fair Trading in your state or territory.
Home warranty insurance
The NSW Office of Fair Trading advises that home warranty insurance must be taken out by the builder for residential building work valued at over $12,000, excluding the construction of new multi-storey (three-storey plus) buildings, containing two or more dwellings, built after 31 December 2003.
The insurance is required to insure the buyer against the risk of non-completion of the work, and breach of statutory warranties relating to the work. A copy of the certificate of insurance must be attached to the contract of sale for the property.
A developer who sells a non-exempt strata unit off the plan is exempt from attaching a certificate of insurance to the sale contract, but only if the building work has not yet commenced, and only if the contract informs the buyer that:
- the developer does not need to give a certificate of home warranty insurance if the building work has not yet started
- the law requires there to be home warranty insurance in place before commencement the work
- the developer is required to give the buyer the certificate of home warranty insurance within 14 days of the insurance being taken out
- the buyer can cancel the contract of sale if the home warranty insurance certificate is not provided within 14 days of the insurance being taken out
What to look for in a strata purchase contract
- a copy of the draft Strata Plan, showing the lot and any garage, car space or storeroom
- a scale plan of the interior of the property, showing internal improvements
- a schedule of the finishes and appliances
- a description of the “title” proposed to be registered
- an obligation on the vendor to commence construction within a specified time frame
- a mechanism in the Contract to deal with “variations”
- a dispute procedure and a rectification provision
- a provision for the developer to supply details of building costs, to facilitate a depreciation claim against income by the purchaser
5 Questions to ask the developer
- Are there any penalties for withdrawing from the contract?
- Can I make changes to the finishes in the kitchen and bathroom?
- Can I visit the site during construction?
- Can I select appliances and items such as dishwashers, floor tiles and wall colour?
- What is the quality of the developer’s previous work?
By buying off the plan you often enter into a contract before construction commences, and as a result, you only pay stamp duty on the value of the vacant land