Take care when buying a property off the Plan

The term “buying off the plan” usually refers to purchasing a property that is not yet
registered as a separate lot or not yet built.

Buying off the plan can refer to the purchase of a block of vacant land that is part of a
subdivision, or a house, or unit or apartment being built for sale where the land on which
it stands is not yet registered as a separate title.

Selling property “off the plan” allows a land owner to develop the land in a lessexpensive way, as the developer can negotiate lending rates with its Bank at a lower
rate if some of the land, houses or units are already sold to buyers.

This is an advantage to the land developer and can also be attractive to a prospective
purchaser who buys into an “off the plan” property in the early stages of the
development. Also stamp duty is often reduced.

There are however risks for the buyer of property “off the plan” and a diligent purchaser
should take care when entering into this type of purchase contract.

The contract

A contract for the purchase of property “off the plan” is a contract that does not have a
precise completion or settlement date due to the incomplete nature of the building
project and the subsequent separate registration process for the title to the land or new
building.

“Off the plan” contracts generally include several clauses that are different to those in a
standard contract for a registered lot. The major difference is the timeframe for the
owner to complete the subdivision or the building on the land.

A standard contract will have a precise date for settlement to occur (either an exact date
in the future or a completion period say “60 days after the contract is dated”). An “off the
plan” purchase contract will still have a timeframe but it is usually stipulated that
settlement will occur within a number of days following completion of the building project
and registration of a separate title for the property being purchased.

Off the plan contracts also often include a provision called a “sunset clause” which
establishes a period within which the contract must be completed – say within 24
months of the date of the contract. This means that completion or settlement can be
anytime in that 24 month period after the signing of contracts, subject to the land
becoming registered as a separate title or the building works being finished. If the date
passes the parties can terminate the contract.

If you are buying a block of land “off the plan” in a subdivision the contract will usually
include a clause allowing a variation in the area of that land that you will purchase on
completion of the purchase, often because the local council and the land title registering
authority have the final say on the area of the lots in the subdivision and may require the
land owner/developer to change the areas. This reduction is usually capped in the
contract at “not more than 5% of the area” and does not normally occur, but if it does
your land area may be reduced but the purchase price is not reduced if the areas are
changed.

When houses or units are sold “off the plan” the dwelling is not fully built or construction
may not have even started until after you enter into the contract. The usual concerns
with this type of purchase are that the progress of the building and the standard of the
building work may be different to what you as the buyer contemplated. Remember you
cannot see the finished product when you buy “off the plan” as the work will be done
after you have signed the contract.

Often the developer will have a demonstration or “display home” to inspect showing you
a model of how the buildings should look once completed, or they may have design
guidelines and artist’s impressions of the building. These may not resemble exactly the
finished building as some changes may be made during construction and you need to
ensure that the contract provides some protection here. It is essential that you check the
details of features, fixtures and fittings such as the stove, range hood, dishwasher, etc.
and ensure that the quality of all finishes is clearly specified in a schedule that should be
attached to the contract.

Market fluctuations

You should keep in mind that like the economy, property market conditions fluctuate and
with long-term building projects such as luxury high-rise units, the value of the units may
change prior to completion of the building and your contract. The price you agreed to
pay stays the same regardless.

Paying a deposit

Your deposit could be tied up for some time between signing the contract and
settlement.

Paying a deposit by way of a Deposit Bond (not always available) or bank guarantee
may be a better choice than a cash deposit when buying “off the plan”.

If you do pay a cash deposit you should stipulate in the contract who is holding the
money and where it is being held, if possible it should be deposited in an interest
bearing account by the stakeholder (often the real estate agent).

The developer’s financial position

Construction companies and land developers who become insolvent or go bankrupt
during construction can leave a trail of destruction behind them. Rising building and
material and labour costs may force a site closure and you may be locked into a contract
for a home that is not finished within the timeframe you expected.

While an early buyer “off the plan” has the best choice of the land or homes available in
a project and has a longer time to on-sell the property for potential profit, the strategy is
not without risk. There are many factors to consider before entering into a contract and
we can help guide you through this process.

If you or someone you know wants more information or needs help or advice, please
contact us on (03) 9600 0162 or email info@lordlaw.com.au.