Making the Initial Decision
Buying off-the-plan involves entering into a contract to purchase a property before construction is complete or even before building work has begun at all.
You can view the design and building plans but there is no physical property to see or inspect.
This type of property purchase offers you a chance to lock in a price now, whilst you save additional funds during the construction of your new home.
There may also be savings on stamp duty as duty is levied on the value of the property at the time of purchase, and this is often less than the value of the finished construction.
The reason many people like to buy off-the-plan is that they hope the property will be worth more when it is completed.
It seems logical that if you were to sign a contract to purchase a property that was for sale at today’s prices, it should be worth more when construction is finished in a few years’ time.
This is based on the real estate principle that as time goes on, property prices generally go up. Want to know more call now or fill in the form on this page to make an appointment?
When buying off-the-plan it is important to understand that banks will initially only provide “approval in principle” for finance.
Settlement of the property is too far in the future to approve a loan. Some banks may pre-approve your finance for 6 months, but will still require an update of your personal information prior to lending you the money and settling the property.
Pre-approval is not a guarantee that the bank will give you a loan when the property is completed. Formal unconditional finance approval by the bank will be provided only after the property has been fully completed and can be valued by the bank. The bank will also ask for a certificate of occupancy prior to settlement (the builder typically issues this around two weeks before settlement is due).
So what are the possible pitfalls?
As the purchaser, you are vulnerable to market fluctuations, oversupply and interest rate rises. You might end up purchasing an overpriced off-the-plan property.
Banks will always use the market value shown on their valuation report when completed rather than the contracted purchase price when assessing your Loan to Value Ratio (LVR), LMI premium (if applicable) and final loan amount.
Do your own research into the location, the reputation of the builder and the value of the property before you sign the contract of sale. In particular you should look at comparable properties that have sold in the last six months that are not in the same development that you are buying in. Check out completed projects by the same builder, and know how your property will differ from the display suite.
Off-the-plan contracts can have a range of clauses that don’t normally appear in contracts for existing dwellings. Construction problems may delay delivery and contracts rarely include penalties for late completion. The vendor has the right to amend the property (including the size, layout, location and finishings), and impose additional restriction and easement on the property that might not be known at the time of contract.
Banks tend to be more conservative with off-the-plan sales because in some cases properties are sold for more than they are worth. The bank is only concerned about their risk and in some instances that valuation may come back short. In this case, you need to ensure you have additional funds available to cover any potential shortfall.
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