Buying off the plan lets you enter into a contract to purchase a property before construction on it has commenced. This approach is common for apartments, although it is sometimes used for commercial property and houses as well.
Some buyers are wary of only having a plan to go off when committing to a purchase, while others are attracted to the thought of moving into a place that is brand new and requires no upfront work. So what is best for you?
Benefits of buying off the plan
1. A brand-new place to call home
When you purchase a property off the plan, you’ll often have the freedom to make it your own by choosing the fittings, appliances and colours. This allows buyers to create a style they like without having to arrange any renovations. Generally, new properties also require far less maintenance than existing ones.
Tip: The earlier you get in, the more chance you’ll have to purchase the property with your preferred aspect and layout.
2. Financial gains
Depending on the complex and your own situation, you could stand to make a financial gain by purchasing a property off the plan.
Stamp duty: Stamp duty is calculated on the price you agree to when you purchase the property, not its value when construction is completed. Often the property is worth more after construction time has elapsed, which saves you on stamp duty.
Extra time to save: Buying off the plan lets you pay a deposit (which is usually around 10%) and then take your time to sort out the rest of your finances. You might use this time to continue saving or to sell an exisiting home, negating the need for bridging finance.
Tax savings: An advantage for investors is the tax offset from depreciation. Typically, new buildings are subject to greater depreciation claims, which can lead to attractive tax savings. An important point to note on depreciation is what you can claim. Depreciation on the building as a whole applies when you own the building, but in the case of a unit development where you own the unit, you can claim fixtures and fittings inside the unit but not the building.
First home owners grant: Presently, the Queensland first home owners grant (called the Great Start Grant) offers $15,000 to first home owners. It is only available for new and off the plan properties.
Potential issues of buying off the plan
1. The property doesn’t match your expectations
When you agree to purchase a property off the plan, there is a certain level of ambiguity as to what the property will look like. There is a risk that the property will not be the same as you envisioned, or that the quality of work will not match your expectations. There are insurances in place for faulty construction work, but the process can be stressful and time consuming.
2. Depreciation in property value
Market growth generally means that off the plan properties will be worth more once construction is completed, but there may be instances when the market falls. If this happens and the property is worth less than the price you agreed upon, you may have issues accessing finance come settlement time.
3. Interest rate rises
Buyers can be lulled into a sense of security when rates are low, but many fail to remember that their loan doesn’t begin until construction is completed. If rates have gone up during this time, you may miss out on an opportunity to lock in lower interest rates.
4. Developer bankruptcy
Before entering into a contract, it is important to understand the developer’s track record. Are they reliable? What is the scope of their portfolio? Research the developer carefully and understand the implications for you if the company does go into liquation during construction.
Before signing on the dotted line, there are measures you can take to ensure things go as smoothly as possible.
Research the market: Understand the current market and future projections. Check to see whether there are any projects such as new schools, hospitals or other developments planned for the area that could see property prices increase in value.
Get to know the development: Look into the developer’s past, try to view other buildings they have completed and carefully inspect the display home. Also visit the site so you know which aspects are best, whether there is any noise from traffic and if there are other constructions happening in the area that may affect your view or natural lighting.
Ask plenty of questions: Make sure you understand exactly what is included in the property (such as types of fittings and floor coverings and the timeframe for construction), and ensure that your expectations match those of the developers.
Find a good solicitor: Off the plan contracts have a number of extra clauses that don’t appear in other property contracts. These clauses may give the developer rights to change parts of the building’s design, amend the completion date or even change the final price of your home. For this reason, it is important to have it checked by a solicitor before you sign on the dotted line. Check what changes you can make to fixtures, fittings and original designs, the sunset clause (the date at which you or the developer can withdraw from the contract if the property is not completed), what will happen if the developer encounters financial problems and what provisions are in place if faults occur after construction has finished. Your solicitor will be able to recommend amendments to the contract that will work in your favour.
Understand your finance: Pre-approval is essential, but it is not a guarantee of getting finance at settlement. One issue with off the plan contracts is that the finance is conditional upon a satisfactory valuation. If the valuation is lower than that stated in the contract, a lender might not be willing to provide finance. If the valuation is satisfactory, your pre-approval will make the finance process a lot smoother come settlement time.
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