May 22, 2015
Off the Plan Property Purchase
Buying real estate Off the Plan is potentially a great opportunity to purchase property at a favourable price and enables purchasers a choice of property within a development to suit their requirements with regard to price point, aspect, floor level and unit size and configuration. However, along with the benefits, there are risks of which purchasers need to be aware when considering the purchase.
The purpose of this blog is to bring to your attention the main potential risks that may exist for Off the Plan property purchases and what can be done to mitigate or reduce these risks.
There are three major (but certainly not the sole) areas of risk you should consider before committing to an Off the Plan purchase. These are detailed below.
Borrowing Risk - Lender credit policies are reactive to the economy and property markets. Formal and final loan approvals for Off the Plan property loans can be provided only when the property construction is completed and the property is ready for occupancy. During the time between contract exchange and settlement, which can be a period of two years or more, lender policy changes mean that a loan applicant may no longer qualify for the required loan at settlement. It is prudent lending practice for you and your broker to make sure there are sufficient buffers and lending options at the outset to make sure that your loan will be approved when the purchase settlement date is approaching.
Valuation Risk - Nobody knows what the market valuation will be for a property at a future date. It is quite common for settlement valuations to fall short of purchase price for a number of reasons. This has the effect of changing the borrowing ratio for your end loan, which in turn may require an increase in deposit by either cash or equity in another property. We suggest you minimise this risk by again having buffers in place and making allowances up front to cover these contingencies.
Personal Circumstances Risk - This is the most difficult for a broker to overcome because they are by their nature, customer driven. Changes to your personal circumstances may impact on your ability to borrow or hold the property. The most common changes that impact borrowing include:
• Taking on additional debt between exchange and settlement.
• Increases in personal expenses or addition of dependants.
• Changes to employment, particularly becoming self employed.
• The cash or equity planned to complete the purchase is used elsewhere.
The only way to reduce these risks is to be open and honest with your broker at the outset and make sure that you speak with your broker before making any of the above changes that could impact your borrowing capacity.
Your Responsibilities - Entering into a contract to purchase property Off the Plan is a binding agreement. As such, you are responsible for being in a position to complete the transaction when the property settlement is called. The legal and financial implications for being unable to settle are severe. You should seek independent legal and property advice before committing and exchanging contracts. If there is a change in your circumstances during the period between exchange and settlement, please contact your broker immediately to discuss.