Buying off the plan

1. What does off the plan mean?
2. Why is it different?
3. The steps involved
4. The Do's and Dont's

What does off-the-plan mean

When you buy a property off the plan, you effectively enter the contract of sale BEFORE construction of a building on the property has been completed.

It generally relates to land development or building development.

The main point is that the vendor who owns the property is generally conducting development work of some sort (eg, developing land or building a block of units) which will result in the title of the property being changed.

Why is it different to buying an established property

With established property – you are buying a completed product which is fully registered with the Land Titles Office

The Steps Involved in the Process

Lets use an example:

Mr and Mrs Smith wants to buy a property off the plan
Pretend it is currently June 2005
The property is a unit in a development which is not expected to be completed until December 2006
The property is $400,000
Mr and Mrs Smith know they want a home loan for $420,000 when the property is completed (to cover the purchase price plus related costs)
The property is being purchased through a real estate agent

Steps taken – this is a very general guide

Step

What

When

Comments

Form adviser team

Before committing to anything

Mr and Mrs Smith to engage solicitor / tax / finance adviser to discuss ownership structures, finance structures, funding the 10% deposit, taxation, the exchange process, etc

Finance pre-approval

Before committing to anything

Mr and Mrs Smith come to see Vision Home Loans to organise a pre-approval which essentially gives Mr and Mrs Smith an indication that they can afford to borrow the money.

Note – that when a property is bought off-the-plan, it is generally not possible to get UNCONDITIONAL approval. We can discuss this with you further.

Mr and Mrs Smith must understand that a pre-approval IS NOT A GUARANTEE that they will be able to get a loan when the property is completed.

Contract analysis

Before committing to anything

Mr and Mrs Smith ask the real estate agent for a copy of the contract – which they send to a qualified solicitor / conveyancer for analysis.

Decision

Before committing to anything

Three things have been done

Mr and Mrs Smith have received advice from their advisers about structuring, etc

Mr and Mrs Smith have a finance pre-approval in place

Mr and Mrs Smith have sent the contract to their solicitor

They now wish to proceed with purchasing the property ‘off-the-plan’

Organise a deposit

Before committing to anything

Mr and Mrs Smith have a number of options – they will need to confirm these with their solicitor

Pay 10% or $40,000 - a lot of people do not like this option (especially people who don’t have access to $40k

Obtain a bank guarantee – you will generally need to have an existing banking relationship to get one of these

Obtain a deposit bond

Exchange contracts

When you are ready

Mr and Mrs Smith have now entered a contract – they are NOW committed (subject to any cooling off period – ask your solicitor)

The vendor’s obligation is to get the property ready within a certain timeframe (the very last day they need to have it ready is known as the sunset clause)

Mr and Mrs Smith’s obligation is to have the funds ready for settlement when the property is completed

The property gets developed

Over time

The vendor / developer performs all the necessary steps in getting the development completed. This includes all the necessary council approvals, etc

Keep an eye on things

Over time

Mr and Mrs Smith needs to keep a close eye on the progress of the development.

It is important that they keep in contact with the real estate agent and their solicitor to monitor this. If they live close to the property, it would be good to drive past and see how it is going (even talk to one of the builders on site)

Keep ‘finance smart’

Over time

Mr and Mrs Smith have a property settlement coming up and will need a loan.

It is important for them to obtain unconditional approval, therefore, it is WISE NOT TO DO THINGS which may hinder this process – eg

New commitments – do not commit to new borrowings – eg, new car loans, credit cards, etc

Salary risk – do not move to a job which places their income levels at risk

Spend savings – do not spend some money that you had planned to contribute to the purchase

Defaults – do not default on existing commitments in place (eg, loans, utility and phone bills, etc)

Home loan health check

A few months before completion

Mr and Mrs Smith would be well advised to call Vision Home Loans about 3 or 4 months before the expected completion of the new property. This gives Mr and Smith plenty of time to sort through any issues that may arise.

Vision Home Loans will talk with Mr and Mrs Smith and their solicitor to determine whether it is a good time to commence the process of unconditional approval (in complex situations it is a good idea to start this early)

Development ready

Property is ready – just waiting registration

The developer has fulfilled their part of the deal – the property is ready (subject to inspections that Mr and Mrs Smith may perform with the assistance of a qualified inspector).

When the property is ready – the developer’s solicitor generally lets all the solicitors acting for the purchasers know that the property is ready and that strata title is being submitted to the Land Titles Office for registration

Notice of registration

Property is ready

Mr and Mrs Smith (via their solicitor) should receive Notification of Registration.

The original Contract for Sale should have noted how many days after this date that settlement needs to occur

Mr and Mrs Smith NOW HAVE A DEADLINE for settlement.

If they miss the deadline, penalty interest starts to be charged (which is expensive). If they delay settlement, the developer may be in a position where they can terminate the contract and demand 10% be paid to them by Mr and Mrs Smith

Unconditional approval

ASAP

Vision Home Loans will look after Mr and Mrs Smith through the unconditional approval process

Settlement

Settlement / completion date

The lender lends money

The developer gets their money

Mr and Mrs Smith get the keys to their new investment property

Everyone is happy

Investment property ownership

Post – settlement

Mr and Mrs Smith will own an investment property and will need to consider all the things relevant to a landlord – see your local Real Estate Institute link

Off the plan – the do’s and don’ts

We are heavily involved in obtaining finance for clients who have purchased in a development which is coming up for completion. Accordingly, we are frequently asked about the pros and cons of off the plan purchasing.

We recommend a small list of do’s and don’t for off the plan purchasers:

The DO’s

DO your own due diligence on the builder / developer – ensuring they have a reputable track record
DO get your own solicitor to run through the contract with you – off the plan contracts must have clear and comprehensive provisions regarding construction, timing, fit out, defects and practical completion
DO be careful if you buy a property outside of your ‘knowledge base’ – avoid becoming a victim of two tier marketing. This involves organised schemes designed to ensure that ‘out of town’ buyers pay a higher price for a property than would a more ‘savvy’ local
DO keep an eye out for the completion of the property – drive past the development site every month / speak to your solicitor – ensure you get your finance ready in plenty of time. Many developments can finish well ahead of schedule – (eg, the dry spell is great for building)
DO remember that investing in property is long term
DO take your time with your pre-settlement inspection – consider taking a builder with you

The DON'Ts

DON’T assume the property will increase in value between when you sign the contract, and final settlement – many people are expecting to make large, short-term gains. The potential for this has generally come off the boil.
DON’T assume that you will be able to sell the property between when you sign the contract and when you have to settle your purchase
DON’T succumb to high pressure sales tactics