The Risk & Reward of Buying off the Plan

Take outs:

• Buyers can secure properties at lower prices, benefit from potential capital gains, and enjoy design input, while also having time to save before settlement.

• Developers sell off the plan to minimize financial risk and attract favorable financing by having committed buyers, which aids in project funding.

• Buyers should be cautious of contract complexities, potential additional fees, and sunset clauses that could allow developers to exploit rising markets.

• Thorough research on builders and developers, as well as understanding personal borrowing capacity changes, is crucial to avoid financial pitfalls and ensure successful transactions.

Best Laid Plans: The Risk & Reward of Buying off the Plan

In a rising market, purchasing off the plan can be an attractive option, allowing buyers to lock in a property at today’s price without paying until two or more years down the track, when construction is complete.

But alongside the positives are potential pitfalls, from builder collapse to overlooked fees and sunset clauses.

Let’s look at the upsides, downsides and the often-overlooked sides of buying off the plan.

Why Sell off the Plan?

Selling or buying off the plan means the property you are committing to buy has not been constructed, or in the case of land developments, the lot has not been sub-divided or registered. So, the agreed sale is for a property that is planned but does not yet exist.

Developers often sell off the plan because having buyers locked in reduces risk in the eyes of lenders and allows them to access more favourable finance to complete construction.

Most commonly, buyers sign a sales contract and put down a deposit (generally 5-20 per cent), with the balance due on completion. Each State has its own regulations governing off-the-plan sales. For example, in Victoria deposits are capped at 10 per cent.

It’s a format frequently used to sell unit or townhouse projects, but is also used for land subdivisions.

Why Buy off the Plan?

Although it is driven by developers, there are potential benefits for buyers. These include:

• Price discounts: Early-stage buyers are usually offered properties at a lower price than when they will be brought to market as the project progresses.
  
  
• Time to save: The extended period between deposit and settlement gives buyers time to build savings and reduce the amount they need to borrow on completion. Of course, having cash tied up in a deposit over many years can be a drawback, so some lenders offer deposit bonds and other tailored products that aim to minimise off-the-plan deposits. Some schemes even allow buyers to earn interest on deposit amounts during the construction phase. Always deal with well-trusted deposit-bond providers and talk to your broker about off-the-plan lending options.
  
  
• Design input: Buying off the plan can come with the chance to choose fittings and finishes such as benchtops and cabinetry, or the option to alter a floorplan or make minor design variations.
  
  
• Potential capital gain: If the market rises during the construction period, buyers can end up owning a property worth more than the sale price come settlement.
  
  
• Stamp duty concessions: To encourage supply of new housing stock, many States now offer stamp duty concessions for properties purchased off-the-plan.

What to Watch

The devil is always in the detail and that’s certainly true when it comes to off-the-plan purchases. Some common pain points include: