June 04, 2014
Off the plan construction can occur both in the large developments of units and also individual house and land projects however, it predominates in multiple storey unit developments.
The builder keeps control of the product from start to finish and you have very little choice, if any, of finishes.
You sign a contract (usually well before construction commences) and pay a deposit (usually 10%).
Once the developer has a certain number of “pre-sales” their bank will approve finance to them to commence construction.
In this case the developer has the construction loan and once the construction is nearing completion you are notified that you need to have your finance in order so that you can settle (usually with 14-30 days of this notification).
You “settle” on the finished product.
In some respects it is similar to buying a “second hand” property but in some very significant aspects it is very different. The most common “off plan” option is a multi storey unit development.
Pre-sales and initial contracts could easily occur up to two years before you will take eventual possession. Finance approvals once issued last 90 days.
No matter what you might think, and no matter what words are used, you will sign a contract, which will be unconditional and binding on you to settle, but you cannot obtain unconditional finance approval at this stage.
You might (in fact should) seek out opinion as to whether you can obtain finance on your current circumstances. You might obtain an indicative approval but no matter what you might think or even be led to believe it will remain subject to:
- Valuation of the finished product
- Reconfirmation of your financial circumstances within 90 days of settlement
This is a VERY important point, as there is an element of risk. At the very least before you make ANY other financial commitments in the time between signing your off plan contract and its completion you MUST stay in very close contact with your mortgage broker.
Financial commitments that could impact on your ability to gain the unconditional approval necessary to settle include:
- Buying a car under finance
- Shifting house
- Buying an investment property
- Taking maternity leave or having a child
- Changing careers or employment
There are risks and benefits of buying off plan.
- The property may be sold out or unavailable if you wait – buying now secures what you want
- The value of the market may rise between signing and taking occupancy
- Depreciation benefits of new property
- The value of the property may fall between signing and taking occupancy
- Your circumstances may change and you may not qualify for a loan.
Let’s consider these risks in more detail and look at ways to manage them
Falling value: A lender will lend against the value at time of completion. In a falling market this presents a risk. Let’s use an example. The purchase price is $500k let’s say the bank values it an only $450k. You will have to put in the $50k shortfall in addition to your original deposit. In a rising market everyone has happy faces at settlement time as you have made a capital gain with no holding costs, but for every benefit the coin can be turned over. When buying off the plan you must be sure you are aware of the risk.
Changing Circumstances: A lender will only lend within 90 days of settlement. (As I mentioned earlier this is a little known fact – loan approvals and loan documents “expire” after 90 days and must be reapplied for.) This might be as simple as reassuring the lender that nothing has changed in your financial circumstances. The consequence of this in buying off the plan is that you will sign an unconditional contract for the purchase BUT you cannot apply for the loan until 90 days from settlement.
It is prudent to check with your mortgage broker that you qualify for the loan now BUT then you need to realise that you need to carry that risk all the way to settlement. Let me give an example of things NOT to do. Don’t give up your salaried employment and become self-employed during this time. Don’t take ANY other credit facilities (eg. upgrade your home and increase your home loan) unless you have checked with your mortgage broker.
Off plan purchases are becoming popular again because the market is rising. It is a concern that people will ignore the past and take imprudent risks.
We have only just come out of a period of falling values in the off plan market that have created a large number of very sad stories. If a developer forces you to settle (which they can do as you have agreed unconditionally 2 years prior) then, unless you can raise the additional capital you may have to sell the asset.
This can be a very sad story as you are going to be selling that asset in a market that has fallen. Once again, with off plan buying as with all property purchases, it is a case of “buyer beware”.
As a general rule, people buy off plan because they perceive a benefit. To cover the risks it is advisable to:
- Sit very still financially until the property settles
- Have a strong cash buffer behind you so that you can cover any surprises
If you know me at all you’d understand that even crossing the street carries considerable risk.
The old saying – “Look to the right, then look to the left” before you cross a busy street applies very well to buying “off plan”
- Consider the risks carefully before “stepping off the kerb” (signing the contract)
- Think carefully as you cross for any surprises (stay in touch with me)
Following these steps and maintaining contact with me and you will arrive safely at the other side – with a new property and a loan that settles.
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ALAN HEATH Mortgage Choice Brisbane CBD 0411 601 459