This article was originally published by TJ Ryan on 13 June 2017.
First home buyers, existing property owners and investors might find benefits in buying an apartment or townhouse off the plan from a developer, such as the potential to earn capital gains or save money on stamp duty.
But it’s important to weigh up the potential cons as well, such as the risk that the property could decrease in value by the time it’s fully built. The structural quality of new developments has also been called out by property experts recently after the evacuation of residents from Sydney’s Opal Tower in December 2018 and the Mascot Towers in June this year due to defects such as cracked walls.
We break down some of the main risks and benefits of buying a property off the plan below.
What does buying property off the plan mean?
Buying a property ‘off the plan’ means buying a property that hasn’t been built yet. In Australia, the phrase is most commonly used when referring to apartments, units and townhouses, although off-the-plan houses, often referred to as ‘spec homes’, may also be available in some cases.
The decision to buy is made on the basis of what the developer says will be constructed. Potential buyers are usually supplied with a wide range of information about what the property will look like once it’s constructed, to help them visualise their purchase. This could include design blueprints or plans, artist renderings of interiors, architectural models of the exterior and even display suites and site tours.
Buyers are usually only required to pay a deposit to the developer or their real estate agent when signing a contract to purchase the property, usually between 5% to 20% of an estimation of what the property will be worth once it is built, although this can differ from project to project. The remainder of the price can sometimes be broken up into progress payments correlating to construction, or is required to be paid to the developer when the property is completed and its new owner is able to take possession.
When it comes to getting a loan to pay for the purchase, you may be required to have a deposit or a pre-determined portion of the total contract price already saved, or have suitable equity. However, this varies across lenders depending on many factors.
What are some potential benefits of buying property off the plan?
It could be worth checking to see if you are eligible for government help with the costs involved in buying an off-the-plan property.
For instance, you may be able to get a government grant if you’re a first home buyer. The First Home Owner Grant (FHOG) scheme is designed to encourage and assist home ownership across the country. The details of the grant can differ between states and territories but in most parts of the country, it is only available to those buying new homes, including off-the-plan properties. You may want to contact your state or territory government to find out if you’re eligible for the Grant.
Stamp duty concessions
When purchasing any property in Australia, most buyers have to pay stamp duty, which is sometimes also referred to as transfer duty. This is a tax levied by state and territory governments. When buying off the plan, some buyers can apply for an exemption or concession.
This means that depending on your circumstances, you may be able to reduce how much stamp duty you pay, or avoid paying it altogether. The stamp duty concession for off-the-plan property purchases could be available for eligible first home buyers or people who intend to have the property as their principal place of residence, while investors are generally not eligible for these concessions. In the case of Victoria, for example, the concession typically reduces the cost of stamp duty by deducting construction costs incurred on or after the contract date from the contract price.
Check with your state or territory government to see if any exemptions or concessions apply in your case. Where concessions are available, it’s worth keeping in mind that the rule for calculating stamp duty can depend on a number of factors, including the location, contract price, whether you are a first home buyer and whether you’re buying the home as an investment or to live in. Canstar’s Stamp Duty Calculator can help you work out how much that might be.
As a way of enticing buyers to purchase something they can’t yet physically experience, some developers may offer lower prices or other incentives for off-the-plan projects. This could mean the purchase price ends up being less than for an existing property of a similar style. This sales tactic is often seen in situations where the developer hasn’t yet started construction.
The developer may also offer other, non-monetary benefits for those willing to buy sight-unseen, such as the option of furniture packages, or membership to gyms or car-sharing schemes.
It’s worth keeping in mind incentives shouldn’t be considered in isolation, but as part of the overall risks of benefits of the purchase decision.
If house prices happen to go up in your area after you have signed a sales contract for an off-the-plan-property, there’s the potential that your property could actually increase in value by the time it’s finished being built.
This lift could mean that your loan-to-value ratio (LVR) goes down. Here is an example of how an increase in property value could reduce your LVR, excluding any extra fees or costs that your lender may charge:
- Let’s say you purchase a property for $400,000 and you have a deposit saved up of $80,000, meaning you need to borrow $320,000. This means your LVR would be 80% because $320,000 is 80% of $400,000.
- A few years later when the property is completed and it’s time to pay, the value might have gone up to $450,000. If you haven’t been able to save more and still need to borrow $320,000, your LVR would go from 80% to around 71%.
A lower LVR could help you avoid paying the added cost of Lenders Mortgage Insurance (LMI) – a fee which is sometimes charged to borrowers who put down a deposit of less than 20% of the total value of the property they’re buying.
More time to save
Allowing for construction time means there is a gap between paying the contract deposit and handing over the full sales price upon completion. This extra time could be an opportunity to continue building up your savings. The extra cash you accumulate could then provide more of a buffer should you encounter financial difficulty. Alternatively, you could use it to help with moving costs, or potentially put it down as extra money towards your loan deposit.
There may also be some cases where a lender does not require you to make the deposit payment upfront, which would give your savings more time to earn interest while the property is being built.
Make the home ‘your own’
Depending on the developer you work with, there may be an opportunity to have a say in how the unit or townhouse is designed internally, such as floor plans, finishes and décor colours.
The earlier in the development stage you buy in, the easier it may be to customise the property to your liking.
Saving on repair costs
Buying a new apartment of the plan would ideally see you living in a home with brand new, quality furnishings that aren’t going to diminish or need repairs in the near future. Buying an older, existing property, on the other hand, could involve expensive renovations.
It’s worth doing your research into the quality of fittings and appliances used by your developer.
What are some risks of buying property off the plan?
Lower property value
Some investors buy off the plan with the intent of reselling the property once it is built, banking on the chance that the value of their property will increase in the future. But, as seen in recent years, house prices can decline, leaving the owner with an asset worth less than the agreed contract value. CoreLogic data shows home values fell 8.7% across the combined capital cities in the 12 months to June 2019.
When it comes time to settle up, if you are left with a property that is worth less upon completion than what you agreed to pay, the bank may not finance the full loan amount you agreed on. This could leave you in negative equity, and could mean you have to find the cash to cover the funding gap yourself.
A fall in your property’s value, combined with not having saved any more money to go towards the deposit, could also see your LVR go up. This could mean the lender may charge you extra for LMI, because they would be taking on more risk.
Structural quality may be poor
The risk of buying off-the-plan means there is no history of the property to look over for signs of structural issues, so you won’t know the quality of the apartment until it is built.
A Deakin University report this year revealed the extent of structural defects in apartment buildings, finding fabric and cladding were the most common issues, followed by fire protection, waterproofing, and more. The research showed 97% of apartment buildings in New South Wales had some form of structural defect.
May not meet expectations
When buying off the plan, there is also the risk that you could be dissatisfied with the completed property’s appearance or liveability, as there is usually no guarantee that it will look exactly as promised at the time you bought it. Depending on the contract terms, during construction developers are typically entitled to switch out finishes for those of similar quality, such as lighting and bathroom fittings. For this reason, you may find it beneficial to specify your preferred brands of fixtures and fittings in the contract, to manage expectations and avoid disappointment.
Developers should generally notify buyers when significant changes are made, and you may have the option to terminate the contract if anything important is removed or changed. Once the property is built and settlement has occurred, then as the buyer you’ll have a certain timeframe to inspect the apartment and notify the developer of any flaws.
If you’re buying the property as a place to live, unexpected delays in construction could mean you are unable to move into the property as planned, leaving you in need of temporary accommodation. Or, if you’re an investor, delays could leave you unable to rent it out when you originally planned to, resulting in you missing out on valuable rental income.
However, in most off-the-plan contracts there is a safety net for buyers, called the sunset clause. This sets a time limit on the contract, so if the property is not completed by a certain date, the contract could be voidable and the buyer’s deposit refunded. The risk here is that when the property is finally completed, the developer could sell it all over again – and at a greater profit – if the market has gone up. Meanwhile, as the initial buyer, you could miss out on benefitting from the increased worth of the property, and may have to begin your property purchase process all over again.
Given delays could tie up your money and impact your financial plans, it could be a good idea to check whether your contract has a sunset clause, how long the developer has to finish the build and if this matches up with your expectations and requirements. A professional conveyancer or property lawyer may be able to provide assistance here.
Body corporate fees
Living in an apartment building or townhouse complex may involve being a part of a strata scheme, whereby you own your own apartment, but fees are charged to you for the shared ownership of common areas.
Strata fees – also known as strata levies or body corporate fees – are regular fees paid by the owner that go towards regular maintenance of shared facilities such as pools, gyms, gardening, cleaning and plumbing.
It’s worthwhile considering the amenities on offer at your off-the-plan development, and whether you are willing to potentially pay extra on top of the cost of your property for the use of them.
Development fails to be completed
If the development fails to go ahead, you should be entitled to get the deposit back. Of course, this may mean you have lost time earning interest on the amount you’ve invested and any capital gains. It can pay to check the contract terms before signing, to see what happens in this scenario.
There is also the risk that a development may go bust if the developer goes bankrupt. Depending on the terms of your contract, this may jeopardise the refund of your deposit. It’s worth checking this in the terms and conditions of your contract, and also checking a developer’s background and previous property work to see if they are reputable. You may need to seek independent assistance from a solicitor or conveyancer to help you understand the terms of your contract.
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