BUYING OFF THE PLAN

Written by Melanie Toye

What you need to know before you sign the dotted line

Buying off the plan is seen by investors as risky. There are multiple reasons for this, including that the builder could go broke. It may take multiple years for the construction to complete. If you purchased in a high market and in four years it is completed in a tough market, you may find the value of the property at settlement is lower than the contract price. Other risks include not seeing the property in its entirety until completion.

If the financial risk is so great why do so many people invest their money into it? Capital gains returns can be made in a short amount of time, if you bought off the plan and then sold at completion. If you focus on this process, you only need a deposit instead of receiving a full loan. For example, say Jim paid $25,000 for a second level unit off the plan. The unit at completion will cost $250,000. Then once the unit is built, Jim decides to sell the completed unit at $300,000. Jim walks away with $50,000, resulting in 50% gains. That is one way to double your money. Another option is in year one of building, Jim pays $25,000 as a deposit. By year three of construction all units are sold off the plan. The building has become well sought after with only one year left till completion. Jim finds a buyer who will pay $75,000 deposit. Jim walks away with $50,000 profit.

However, as great as these figures sound, the risk involved is if the building never gets completed. In some cases, the building is valued less at settlement than the initial value, losing you money. Also, if you don’t have enough money to pay for the full cost of the property and you can’t sell it, you will find yourself in financial trouble. Just having enough funds for a deposit without the security of the entire cost of the unit is an incredible risk to you.

When researching off the plan be sure to view other ‘completed’ projects the company has built. Obtain written advice as to exactly what will be included in the finished outcome, such as fixtures and fittings. Have a solicitor review all the documents before signing. Be sure the contract has a funds set or drop dead clause stating the completion date of the property. Also, check the contract regarding the re-sale of the property.

Why do companies sell off the plan? Simply, to source as many pre-commitments as possible to finance the development. It is surprising how people assume developers have millions of dollars to just build a complex, however many require large loans in the hope they will pay them off and receive profit at completion, when all properties are sold within.

What are your rights?

If the plan of subdivision is not registered by the time specified in the contract you have the right to end the contract.

If you find defects at completion, you can:

• Seek to resolve the issue with the developer
• Approach the builder, as the defects are covered by implied warranties in the Domestic Building Contracts Act 1995
• Claim on domestic building insurance if the builder has died, is insolvent or has disappeared. Whether you are covered by this insurance will depend on your contract.