There’s no denying that buying property off-the-plan may sound crazy to some people. After all, you’re essentially putting a sizable chunk of money on the line for something that doesn’t exist yet. Although — as educated buyers are well aware — there are a plethora of benefits that go hand-in-hand with buying off-the-plan which can save you money in the long run, plus, guarantee you end up in the home of your dreams. Is the risk too high though? Are there ways to avoid the pitfalls that come with buying property off-the-plan? We breakdown the answers to all of your questions and provide the information you need to navigate the world of off-the-plan property purchasing.
Essentially, buying an off-the-plan property means purchasing straight from the building plans, often years before construction on the project even begins. It’s both as simple and as complicated as that. Purchasers make their decisions based on the plans, the artist renders, computer models, interactive displays/walkthrough renders and display units. Buyers pay a deposit on the property before the completion of the building, with the remainder of the purchase price not added until settlement. The deposit required can be anywhere from 5% to 20% and varies significantly between developers and individual projects. This leads on to a few key points. Firstly, you aren’t paying your mortgage while you’re unable to live in the home, or in the case of investors, if the home isn’t tenanted. Secondly, you lock in your purchase price at the time you pay your deposit, securing the price in the current market, even though it will be completed in the future. If you’re new to the idea of off-the-plan property, our three-minute guide to decoding off-the-plan property jargon is a great place to start.
One of the key benefits of buying off-the-plan property is the potential for huge stamp duty savings and first-home buyers grants which only apply to off-the-plan, new or recently completed property. Stamp duty is calculated on the market value of your property, however, as off-the-plan properties aren’t yet constructed, the value at the time of paying stamp duty is much lower than a completed property, and is sometimes even wiped completely. So you save on stamp duty, as well as any additional grants you may be eligible for varying from state to state. In Queensland, first-home buyers who purchase an off-the-plan property for $500,000 could potentially save $23,750 when combining stamp duty savings and the first-home buyers grant. In Queensland, stamp duty savings are limited to owner-occupiers, but investors can still benefit from off-the-plan purchases due to thousands of dollars of tax deductions which stem from depreciation. An increased depreciation means your holding costs on the property will be much lower, and you can claim a higher percentage of investment property expenses on tax.
For both investors and owner-occupiers, an off-the-plan property has much lower power bills (especially if the development is actively environmentally friendly) and, of course, much lower repair costs if the home is well-built. While older properties commonly have large ongoing maintenance fees and renovation costs, these are almost completely eradicated when you purchase an off-the-plan property.
The time between paying your deposit and moving into the property (and starting to pay your mortgage) can often give buyers a well-needed financial breather to save additional funds. Savvy buyers can utilise this time to build their savings back up, meaning when it’s time to settle their mortgage, they will be able to borrow less and be awarded lower repayment rates. This time frame also opens up the potential for capital gains on the property, which can add a cherry on top of off-the-plan purchases. With Australia’s property prices continuing to go up, buying off-the-plan can mean your home is worth more when you move into it than what you paid.
Buying off-the-plan also comes with more flexibility than any other type of property purchase. You can choose your floor plan and choose your colour schemes so that once the project is completed, your new home is quite literally built just for you. Many off-the-plan apartments offer complete or partial customisation of the floor plan as well. Don’t want the living area next to the main bedroom? Easy fix! Think it’ll be better to have the kids bedrooms down by the kitchen? No dramas!
Purchasing off-the-plan can sometimes allow you to liaise directly with the developer, rather than an external agent who’ll likely take a large cut of the purchase price home with them. By cutting out the middleman, developers often offer decent discounts and bonuses to reward buyers for purchasing which can be anything from $10,000 off, free furniture vouchers or even a free car!
Despite the multitude of benefits that can come with buying off-the-plan, some undeniable risks are well-worth keeping in mind. One of the scariest possibilities that off-the-plan buyers face is the builder or developer going bankrupt. This would result in them abandoning the project and your dream home never being completed. Although there are safeguards in place to ensure you get your money back, it does mean you’ve lost many months and even years where you could have been using that money for other investments or purchases. There are rare cases where builders have gotten away with not refunding deposits, so it’s important to check your contract for a full reimbursement clause before signing on the dotted line. There are plenty of other crucial facets of new property contracts to consider, so we’ve put together a separate guide here.
To secure your property purchase of an off-the-plan home, developers are generally satisfied as long as you have the required 5% or 10% deposit. However, placing a deposit without pre-approval on the full home loan can open buyers up to strife. If you can’t settle the property, the developers can seize your deposit. If they then sell the completed property for less than the agreed-upon off-the-plan price, they’re in a position where they can sue you. To avoid this, make sure you’ve got plenty of wiggle room around the minimum required deposit for settlement to account for fluctuations in market price and investigate your pre-approval long before settlement date arrives.
With the variable property market, there is a chance that your property will decrease in value during the construction period, meaning you’ve paid more for the product than you should. While this is the most difficult risk factor to mitigate, keeping an eye on the market trends and the most popular areas is key to ensuring you make capital gains on your off-the-plan purchase, instead of losing money. Furthermore, it’s worth keeping in mind that property moves in cycles (so what goes down, must come back up!).
Once upon a time, one of the biggest (and most publicised) concerns for off-the-plan property was construction extending beyond the “sunset period”. This would give the developers the ability to cancel off-the-plan contracts and sell the properties again for much higher prices. In 2019, this money-grabbing tactic doesn’t fly anymore and both the Queensland and ACT Governments have introduced measures to afford greater protection to off-the-plan buyers. There are many legitimate factors which may extend the construction period of a project, so you must keep an eye on your sunset period and ensure the developer updates your contract before that date draws near. You can learn more about sunset clauses here.
The final point of concern for off-the-plan property purchases is that finishes and fixtures may not be exactly what was promised. As you can’t see what you’re purchasing, you can’t check the work has been done correctly and to a high-standard before locking in the sale. If developers run into financial issues, one tactic is to reconfigure the finishes to a reduced standard, which can be done without notifying the buyers in some instances. Whilst this is easily avoided by choosing a reputable builder with a history of high-quality projects, it’s still your responsibility to check that your home is completed to an acceptable standard. This process is called the handover, and there are a lot of things to look for. We’ve put together a complete list of what to look for in a handover so you don’t get caught out with an off-centre window frame or dodgy tap.
With all of the above considered, it’s clear that purchasing off-the-plan represents a great option for some people, while others may not be prepared to navigate the risks. Our advice can be summarised in just one phrase: look before you leap. If you’re looking at buying off-the-plan, use this checklist to make sure you’ve crossed all of the T’s before signing on the dotted line.