Purchasing Off the Plans: Perks and Pitfalls

The recent boom in the property market fuelled by a surplus in demand and shortage of supply has led to “off-the-plans” purchases becoming increasingly popular, particularly in our major centres.

An off-the-plans purchase means buying a property before the completion of construction.  In this article we also focus on turnkey purchases in referring to “off-the-plans” purchases.

Perks

1.                   Fixed price

With a turnkey purchase generally the purchase price is fixed when the contract is signed and the purchase price is unlikely to increase unless the purchaser asks for changes during the construction process.  Depending on the length of the construction process and current market trends, often purchasers have already made a small capital gain by settlement.

2.                   Building warranties

Whether stated in the agreement or not, the implied warranties of the Building Act 2004 and 12-month defect repair period will apply.  In other words, all of the benefits of a new build apply.

3.                   Accessible

Off-the-plans purchases are often more accessible to the market in a variety of ways:

a)      Purchasing off-the-plans generally occurs by negotiation or by indicating interest to a developer/building company – this may avoid having to compete with other buyers.

b)      From a lending perspective, purchasers are often able to get away with a 20% deposit (whether through cash or equity in another property) when purchasing off-the-plans. 

c)       From a contract perspective, the deposit paid to the developer is usually only 10% and with a turnkey purchase no progress payments are generally required. 

Pitfalls

1.                   Uncertainty

Contracts will not provide a fixed settlement date because there are many variables that determine the end date – many of which are outside the builder's or developer’s control.  As a result, the golden rule for building or buying off-the-plans is expect delays.   There are also generally clauses in most contracts that enable the builder or developer to make changes – this flexibility is essential to most developments but adds uncertainty for purchasers.

2.                   Lending risks

Many finance approvals for purchases off-the-plans have an expiry date – often between 30 to 90 days.  If your circumstances change or the bank’s lending criteria changes between the contract date and settlement, you might be left with an unconditional contract and no finance.

3.                   Cost

A low deposit and no progress payments are great but this means that the developer or builder has to pass the holding costs from the construction process onto purchasers.  As a result, off-the-plans purchases are generally more expensive than purchasing a land and building package.  

Conclusion                                                       

Purchasing off-the-plans can be a great way to buy property.  Given the current uncertainty we have not commented on the Government’s stated intention to provide exemptions under the Bright Line Test or interest deductibility rules for new builds.  As always, you should contact your solicitor before entering into a contract to ensure your interests are adequately protected.  

Contact Ari for further information.