The term ‘off the plan’ refers to the fact that the property being purchased does not currently have its own Certificate of Title on the Day of Sale. There are two types of ‘off the plan’ purchases:
1. The purchase of a vacant block of land.
This is usually the purchase of a lot in a large-scale residential development (a housing estate). You purchase the land and then make your own arrangements to build a house on the land.
2. The purchase of a dwelling which is incomplete as at the Day of Sale.
The dwelling may be partially finished and ready to move in to soon, or it may be a vacant block, with the dwelling still to be built. It may be a stand-alone house, townhouse, or apartment.
APARTMENTS
The most common type of ‘off the plan’ transaction is when a large-scale developer sells residential apartments prior to construction having started. Given the scale of such developments, selling ‘off the plan’ is usually the only way to proceed, as a bank will not provide the many millions of dollars required to complete these developments until it is sure that the developer will make a profit. What this means is that, generally speaking, a significant amount of time can elapse between the date the Contract of Sale is signed, and the date settlement takes place (when the property is finished). In some cases, the timeframe can be more than two years.
‘Off the plan’ transactions carry with them both advantages and risks for the potential purchaser. Following is a short summary of those advantages and risks.
ADVANTAGES OF PURCHASING
‘OFF THE PLAN’
Minimal Upfront Investment:
When purchasing an existing dwelling most vendors require the payment of a 10% cash deposit upfront. Generally speaking, developers of ‘off the plan’ projects will be more inclined to accept a deposit bond or bank guarantee. These can be obtained for a fee far less than 10% of the purchase price. Secondly, as you will not be obtaining finance immediately (because the settlement is usually a long time away), you do not need to have saved the other 10% before you sign a Contract.
Purchaser Incentives:
Sometimes a developer will offer incentives to purchasers in order to get a number of pre-sales (pre-sales are required so that the developer can obtain finance to start the project).
Potential for Profit:
A potential benefit of having such a long delay between the Day of Sale and the settlement date is that there is a possibility that the property market will improve significantly. This means that by the time settlement falls due, the property may be worth significantly more than what you contracted to pay for it.
Stamp Duty:
This is the most well-advertised advantage of purchasing ‘off the plan’. Where you buy a property that is partially complete, including where construction has not yet commenced, you will only be required to pay stamp duty on a proportion of the total purchase price. This stamp duty concession is limited to purchasers who intend to occupy the property as
their principal place of residence.
RISKS OF PURCHASING ‘OFF THE PLAN’
Being Locked In:
When you sign a Contract to buy a property ‘off the plan’, it will be a condition of that Contract that the Vendor has to have the plan registered by a certain date. This date is called the Sunset Date and is often at least 2 years from the Day of Sale (but can be as far as 5 years away). A purchaser can only withdraw from the Contract if the plan is not registered by the Sunset Date, so they are ‘locked in’ until that date.
Potential for Loss:
In the same way the market may improve between the Day of Sale and the settlement date, so may it deteriorate. In this case, a purchaser may end up with a property which is worth far less than what they contracted to pay for it.
Contractual Terms:
Vendors who sell large-scale residential developments ‘off the plan’ ensure that the Contracts that are prepared contain numerous special conditions that operate in the Vendor’s favour. These conditions can often be quite unfair for a Purchaser but are generally non-negotiable as a Vendor does not want to leave itself exposed to claims by many Purchasers.
Dissatisfaction with Finished Product:
Often the reality of the finished product upon completion of the development is starkly different to all the glossy marketing material proffered by the selling agent at the time the Contract was signed.
Changes to the Building:
Another condition of the Contract of Sale will be that the Vendor can make alterations to the building plans where necessary. Although there is a limit on what changes can be made, that limit still leaves scope for some significant changes to be made to what you may have originally thought you were buying. Such changes include changes to floor covering, fixtures and fittings, external finishes and, in limited circumstances, changes to the layout of the apartment. This can often leave purchasers dissatisfied and with no legal recourse against the Vendor.
CONCLUSION
As with all property transactions, ‘off the plan’ purchases carry with them both risks, and the potential for rewards. The main difference with ‘off the plan’ transactions is that the potential risks and rewards are somewhat greater than if you were to purchase an existing dwelling.
Ultimately, you should give careful consideration to any property transaction into which you propose to enter, especially an ‘off the plan’ purchase.
