Following the recent collapse of two high-profile building companies, it’s important for potential property purchasers to be aware of the risks involved with buying property off the plan, as well as the benefits on offer.
Recently, Condev Construction went into liquidation, following the collapse of Probuild in February 2022. With their building projects in limbo, there are risks that Australians who bought properties off the plan could never see the homes completed.
How does buying off the plan work?
Rather than buying an established home at an auction or via a private sale, it’s possible to purchase a property from a developer while it is being built, or even before construction has begun. This could be a unit, a townhouse, or a freestanding home being built as part of a larger development project, such as an apartment tower or housing estate. Once the project has been built, you can move into the property, rent it out as an investment, or even sell it.
Getting a home loan for an off the plan property is a little different to buying an established property. In many cases, you’ll pay a 10 percent deposit upfront, with the rest of the purchase price to be paid upon completion of the project. You may be able to organise home loan preapproval with a bank or mortgage lender in advance, or apply for a home loan as construction approaches completion. In either case, the lender will need to conduct a valuation of the property to ensure it can fulfil your mortgage’s loan to value ratio (LVR) requirements.
Benefits of buying off the plan
- It’s often cheaper: Developers often encourage buyers by offering units at low prices early in the development process. As long as you’re prepared to wait for the project to be built, you could pay much less than you would for a comparable established property. This could also make it easier to qualify for some first home buyer grants and incentives, which have maximum property value caps in some states and territories.
- Your investment could quickly increase in value: Once a development project is completed and your lender conducts a valuation, you may find that your property is valued at a higher price than you paid, instantly giving you equity in the property. This could give you options to refinance or purchase a second investment property in the future, or to sell your property at a profit.
- You may pay less stamp duty: Depending on the state or territory where you’re buying off the plan, you may be eligible for stamp duty exemptions or concessions when buying off the plan. You may also be able to defer your stamp duty payment until later.
- You can have a say in the development: Buying an established home means accepting the current layout and condition of the property, even if you plan to renovate in the future. Buying off the plan could allow you to work with the developer from the beginning, and make changes to the property design so it better suits your preferences.
Risks of buying off the plan
- The building’s not finished yet: If you’re buying as an owner occupier, you’ll need to have some other accommodation available while construction is completed. If you’re renting, this could be a significant long-term expense, especially if construction experiences delays.
- May not meet your expectations: The final product may differ substantially from the initial plans you saw when making your buying decision. The developers or builders may make changes to the design during construction, or the build quality may not be up to the standard you expect.
- Value is not guaranteed: When you apply for your home loan, your lender’s valuation may come back shorter than expected, such as if apartment oversupply is driving prices down in the area. This could affect your home loan approval, requiring you to seek assistance from a guarantor or pay for Lender’s Mortgage Insurance (LMI).
- You could lose everything: Worst-case scenarios do happen. As we’ve recently seen and/or experienced, builders and developers go out of business, and natural disasters can end development projects before they can be completed. While there are regulations in place to help protect home buyers in different states and territories, there’s a chance you could never see the home you bought being built, or even lose the money you already paid if the developer goes out of business.
What can you do before buying off the plan
- Do your research: Look into the developers and builders involved. See what projects they’ve worked on and completed before, and how they’ve turned out.
- Check the contracts: Understand what you’re paying and when, what your rights and responsibilities are, and under what circumstances you can pull out of the deal if required.
- Get professional advice: A legal professional such as a solicitor or conveyancer may be able to offer valuable advice on buying off the plan, pointing out hidden pitfalls in the contracts and risks you may not have considered. And a mortgage broker may be able to help you organise a home loan to finance your purchase that satisfies developer and lender requirements and is also right for your financial situation.