What is ‘off the Plan’?
Off the plan is when a builder/developer is constructing a set of units/apartments and will look to pre-sell some or all of the apartments before construction has even began. This type of purchase is call purchasing off plan as the buyer is basing the decision to purchase based on the plans and drawings.
The standard transaction is a deposit of 5-10% will be paid at the time of signing the contract. No other payments are required whatsoever until construction is complete upon which the balance of the funds are required to complete the purchase. The length of time from signing of the contract to completion can be any length of time really but generally no longer than 2 years.
What are the positives to buying a property off the plan?
Off the plan properties are marketed heavily to Australian expats and interstate buyers. The reason why many Australian expats will purchase off the plan is that it takes a lot of the stress out of finding a property back in Australia to invest in. As the apartment is brand new there is no need to physically inspect the site and generally the location will be a good location close to all amenities. Other advantages of purchasing off the plan include;
1) Leaseback: Some developers will offer a rental guarantee for a year or two post completion to provide the buyer with comfort around prices,
2) In a rising property market it is not uncommon for the value of the apartment to increase resulting in an excellent return on investment. If the deposit the buyer put down was 10% and the apartment increased by 10% over the 2 year construction period – the buyer has seen a 100% return on their money as there are no other costs involved like interest payments etc in the 2 year construction phase. It is not uncommon for a buyer to on-sell the apartment prior to completion turning a quick profit,
3) Taxation benefits that go with purchasing a brand new property.
These are some great benefits and in a rising market purchasing off the plan can be a great investment.
What are the negatives to buying a property off the plan?
The primary risk in purchasing off the plan is obtaining finance for this purchase. No lender will issue an unconditional finance approval for an indefinite period of time. Yes, some lenders will approve finance for off the plan purchases however they are always subject to final valuation and verification of the applicants financial situation.
The maximum period of time a lender will hold open finance approval is six months. This means that it is not possible to arrange finance prior to signing a contract on an off the plan purchase as any approval would have long expired by the time settlement is due. The risk here is that the bank may decline the finance when settlement is due for one of the following reasons:
1) Valuations have fallen so the property is worth less than the original purchase price,
2) Credit policy has changed resulting in the property or purchaser no longer meeting bank lending criteria,
3) Interest rates or the Australian dollar has risen resulting in the borrower no longer being able to afford the repayments.
Not being able to finance the balance of the purchase price on settlement can result in the borrower forfeiting their deposit AND potentially being sued for damages should the developer sell the property for less than the agreed purchase price.
Examples of the above risks materialising in 2010 during the GFC:
During the global financial crisis banks around Australia tightened their credit lending policy. There were many examples where applicants had purchased off the plan with settlement imminent but no lender willing to finance the balance of the purchase price. Here are two examples:
1) Australian citizen living in Indonesia purchased an off the plan property in Melbourne in 2008. Completion was due in September 2009. The apartment was a studio apartment with an internal space of 30sqm. Lending policy in 2008 prior to the GFC permitted lending on such a unit to 80% LVR so only a 20% deposit plus costs was required. However, after the GFC the banks started to tighten up their lending policy on these small units with many lenders refusing to lend at all while others wanted a 50% deposit. This purchaser did not have enough savings to pay a 50% deposit so had to forfeit his deposit.
2) Foreign citizen living in Australia had purchase a property in Redcliffe off the plan in 2009. Settlement due April 2011. Purchase price was $408,000. Bank conducted a valuation and the valuation came in at $355,000, some $53,000 below the purchase price. Lender would only lend 80% of the valuation being 80% of $355,000 requiring the purchaser to put in a bigger deposit than he had otherwise budgeted for.
Should I buy an Off the Plan Property?
The author recommends that Australian citizens living overseas considering purchasing an off the plan apartment should only do so if they are in a strong financial position. Ideally they would have a minimum of a 20% deposit plus costs.
Before agreeing to purchase an off the plan unit one should contact a specialised mortgage broker to confirm that they currently meet home loan lending policy and should also consult their solicitor/conveyancer before fully committing.
Off the plan purchasers can be great investments with many many investors doing very well out of the purchase of these properties. There are however downsides and risks to buying off the plan which need to be considered before committing to the purchase.