Buying off the plan can have plenty of pluses but is it the right option for you? We weigh up the pros and cons.
Buying off the plan literally means committing to a property that’s not fully, or even partially, completed.
It’s a strategy that can offer valuable advantages, and this has seen skyrocketing growth in the number of property purchases off the plan. In NSW for instance, off the plan purchases accounted for 11.5% of all residential property sales in 2016/17 compared to just 1.25% in 2006/07.
However, off the plan buying also carries risks, and you need to be aware of the possible pitfalls before committing money to building that may not be completed for months or even years.
The potential for stamp duty savings
Stamp duty is typically levied on the market value of your property. However, as an off the plan property is not yet constructed, it’s value at the time of paying stamp duty is likely to be a lot lower than if you were to purchase the finished product This could mean handy savings on stamp duty.
In some states concessions and exemptions for new homes can apply to off the plan homes. Nonetheless, it’s worth knowing exactly how your state government handles stamp duty on off the plan purchases as these concessions can change rapidly.
In NSW, new rules were introduced that require investors to pay stamp duty upfront on the purchase of off-the-plan properties from 1 July 2017. Owner occupiers on the other hand, can delay payment of duty by up to 12 months, providing useful time to pull together the necessary funds.
In Victoria, concessions are available to buyers making an off the plan purchase but only if they live in the property on completion.
Your local Aussie Broker can let you know the latest developments as they apply to off the plan properties.
A chance to get started with less
Buying off the plan property often calls for just a small deposit – generally 5-10% of the agreed purchase price. The remaining time to completion can provide a financial breather to save additional funds.
That said, the time gap between signing the contract and completion of the development can also have downsides.
Property values can rise – or fall
A lot can happen in the property market in the space of a year or more. In Melbourne, values rose by 8.9% in 2017, so an off the plan buyer who’d put money on the table 12 months ago could have made a tidy gain on their property without having to pay loan interest or maintenance costs.
The flipside is that market values can cool – or even dip, while your property is being built. If that happens you could be committed to pay more for the place than its market value on completion. More than just a blow to your finances, this can make it harder to secure a home loan.
No one can say for sure how property markets will move while your off the plan property is under construction. A sensible step is to contact local councils for details of other similar developments planned for the area – a large number of new constructions could negatively impact the value of your property.
The home loan market can swing for, or against, you
It’s not just the property market that can experience shifting conditions. In the time taken to complete your property, interest rates can change or bank lending policies could alter.
In 2017, we saw a clampdown on interest-only lending to owner occupiers by banking watchdog APRA. This saw the volume of new interest-only loans fall by 40%.
What you see may not be what you get
Visiting a display suite can give you an idea of how your place will look on completion, and you may have options to customise some of the fixtures and finishes such as stoves or bathroom tiles. Be aware though, the finished product can look quite different.
Building plans can be altered during construction, and this can mean anything from the tiles being different to the display suite through to the finished complex or unit differing from the original plan.
As a guide to how dramatic the changes can be, the NSW state government has encountered cases where one-bedroom apartments have become studios, and where lot sizes have been reduced substantially so that more units can be squeezed onto the site.
Two key steps to protect yourself
The potential for so much to change, makes it essential to do plenty of homework before putting your signature to an off the plan contract. Two steps are especially important.
1. Check out the developer
Do a background check on the developer and builder to investigate their track records, and visit recently completed developments for first-hand insights into the quality of work you can expect.
It’s also worth contacting the builder licensing authority in your state/territory to check if any complaints have been lodged regarding the developer.
2. Have the contract thoroughly reviewed by a legal professional
Off the plan contracts are often more complex than normal sale contracts and can feature terms and conditions that could work against you – and in the developer’s favour. In the rush to exchange contracts, buyers may not have time to review the contract or negotiate more favourable terms.
In NSW, the state government is investigating the possibility of simplifying off the plan contracts. Until this happens, no matter where you buy it is critical to have the contract professionally reviewed. This way you can be sure about what you’re signing up for.
Buying off the plan can be a savvy move but it does call for some research to weigh up the risks against the benefits. Talking to your Aussie Broker is a key part of this process and can help you decide whether buying off the plan is right for you.