Buying Off-the-Plan: Key Considerations and Risks for Property Buyers
Purchasing a property off-the-plan—meaning before its construction or subdivision—is an attractive option for many buyers. It offers the potential of entering the market at a competitive price, with developers often providing incentives like rebates or lower pricing to secure pre-sales. However, off-the-plan purchases come with unique considerations and risks. Here’s what you should know to make an informed decision.
What is an Off-the-Plan Purchase?
An off-the-plan purchase involves buying a property (house, apartment, or townhouse) or land before it’s built or subdivided. While there may be good deals available, prices are often based on future estimates, meaning some properties may be overpriced. Buyers should weigh both the benefits and potential risks and understand their legal rights and obligations before committing.
Key Considerations When Buying Off-the-Plan
1. Finance
Financing an off-the-plan purchase can be more complex than traditional property financing. Here’s why:
- Contract Conditions: Most off-the-plan contracts are not subject to finance, meaning buyers are responsible for funding the settlement regardless of future financial conditions.
- Loan Approval Challenges: Banks typically won’t approve a loan for a settlement far in the future, making it critical to consult a banker or finance broker before signing. Even if a bank pre-approves a loan, the pre-approval is often only valid for a limited time and subject to a bank valuation.
- Property Valuations: Property valuations can be lower than the purchase price at settlement, requiring buyers to cover any shortfall. Saving additional funds leading up to settlement can help manage any unexpected financial demands.
- Changing Circumstances: Life events—such as redundancy, relocation, or having children—can impact your financial situation, affecting your ability to secure a loan when settlement arrives.
Taking these steps can help ensure you are financially prepared when it’s time to settle your property.
2. Cooling-Off Period
Buying a property can be an emotional experience, and it’s easy to act impulsively. Fortunately, in many cases, buyers have a three-day cooling-off period after signing the contract. This period allows buyers to reconsider the purchase and seek legal advice without facing major financial penalties. The cooling-off fee is typically 0.2% of the purchase price or $100, whichever is greater.
Once the cooling-off period expires, buyers are generally bound to proceed, subject to any other contract conditions.
3. Defects Period
One unique aspect of off-the-plan purchases is the limited ability to manage construction quality. Unlike a direct building contract, an off-the-plan buyer does not have complete control over construction decisions or materials. Most contracts will include a defects rectification clause, allowing buyers to request repairs for certain defects post-settlement. However, these clauses may restrict repairs to only defined defects and may exclude minor issues like hairline cracks.
To protect your investment, consider negotiating defects clauses to cover all necessary repairs, ensuring the property meets your standards.
4. Builder’s Warranty
Builders are required by law to uphold certain standards, often called implied warranties, which ensure that construction is:
- Completed in a workmanlike manner
- Conducted with reasonable care and skill
- Done using suitable materials
- Finished within the agreed-upon timeline
In addition, builders warranty insurance (also called domestic building insurance) provides coverage against incomplete or defective work for up to six years if the builder becomes insolvent, dies, or disappears. However, this insurance only applies to residential buildings under four stories, excluding basements.
5. Sunset Clause and Potential Delays
A sunset clause sets a maximum time limit for developers to complete a project. If the project isn’t completed within this sunset period, buyers have the option to withdraw from the contract. Sunset clauses can vary significantly, with some lasting up to eight years. When considering an off-the-plan property, assess your willingness to wait for the potential completion timeframe specified in the contract.
Is Buying Off-the-Plan Right for You?
Purchasing off-the-plan can be a strategic move for investors and buyers looking to secure a property at a competitive price, but it’s essential to understand the associated risks. Consulting with a conveyancing lawyer before committing to an off-the-plan contract can help you navigate complex terms and ensure you’re protected.
If you have questions or need guidance on buying off-the-plan, don’t hesitate to contact us. Our team can help you review your contract, explain clauses like the sunset period, and ensure your rights and interests are protected throughout the purchasing process.
