You might have heard the term ‘off-the-plan’ being tossed around in discussions about real estate investments.
But what does it really mean?
In the simplest terms, buying ‘off-the-plan’ means purchasing a property before it has been fully constructed. You’re essentially buying based on the plans and architectural designs.
Consumers in Australia at times like buying property this way because of government incentives for first home buyers. It also offers a unique approach to property investment that, while with its risks, can be highly beneficial for both developers and buyers alike.
So why should you, as a potential investor, consider investing ‘off-the-plan’? To answer that question, you’ll first need to understand what ‘off-the-plan’ means in the context of the Australian real estate market.
The Meaning of ‘Off-the-Plan’ in the Australian Real Estate Market
In the Australian real estate market, the ‘off-the-plan’ meaning refers to the purchase of a property before it has been built. This could be an apartment, townhouse, or even a standalone house.
You, as the buyer, are essentially purchasing the promise of a property. You’re buying based on architectural drawings, floor plans, and the developer’s vision for the project.
The contract for purchasing a property before it’s constructed includes details about the property’s specifications, completion date, and price. You’ll pay a deposit upfront, usually 10% of the sale price, and the balance on completion. This model offers a unique opportunity for buyers to secure a property at the current price, benefiting from future property value increases, if any
It is important to understand this definition of ‘off-the-plan’ because it is the foundation for buying these properties. It also explains the potential benefits, risks, and legal considerations.
The Process of Buying Property ‘Off-the-Plan’
The process of buying ‘off-the-plan’ starts with you, the buyer, selecting a property based on the developer’s plans. You’ll likely view a display suite or a 3D model of the property, giving you an idea of what the finished product will look like.
Once you’ve chosen a property, you’ll sign a contract of sale. The contract will outline the property’s details, including the price and the expected completion date. You must review this contract with a legal professional to ensure you understand all the terms and conditions before signing.
The next step is to pay the cash deposit, which is typically 10% of the purchase price. This secures the property for you. After that, the property will need to be built.
During this time, you can arrange for the remaining financing if necessary. Once the property is completed, you’ll pay the balance of the purchase price, and the property is yours.
Potential Benefits of Buying Off-the-Plan vs. Established Property
One of the key benefits of buying off-the-plan is the potential for capital growth. During construction, if property values rise, you could own a property worth more than its purchase price.
Another benefit is the ability to customise the property. If you buy before the property is built, you may have the opportunity to choose finishes, fixtures, and other design elements. This could give you a more personalised home or investment property.
Lastly, there are potential tax benefits. If your situation allows, you can claim depreciation on the property’s fixtures and fittings. This will lower your taxable income.
Risks Associated with Off-the-Plan Purchases
While buying ‘off-the-plan’ can offer potential benefits, it also comes with its own set of risks. One of the main risks is that the finished property may not meet your expectations. Even with detailed plans and a display suite, there can be discrepancies between what you envisaged and the final product.
Another risk is a delay in construction. Any number of issues could cause the completion date to be pushed back, which could affect your financing arrangements. In a worst-case scenario, the developer could go bankrupt, leaving you with an unfinished property.
The property’s value might go down while it’s being built. If the property market experiences a downturn, you could end up with a property that’s worth less than what you paid for it.
Legal Considerations
To protect yourself when buying off-the-plan, make sure you know all the legal aspects. First, make sure there is a cooling-off period in the contract. This lets you change your mind within a certain time after signing.
Also, check for a ‘sunset clause’. By a specified date, the property must be completed. If it’s not completed within the proposed schedule, you have the right to withdraw from the contract and get your deposit back.
Make sure you know your rights and responsibilities when it comes to your finances, especially if you’re getting a mortgage. Make sure the contract gives you enough time to get financing and lets you back out if financing isn’t approved.
Note: Always seek legal advice on contractual matters.
Key Takeaways
- When you buy ‘off-the-plan’, you’re buying a property that hasn’t been built yet. You’re making the purchase based on plans, designs, and specifications. It allows buyers to secure properties at current prices.
- Potential benefits: You could make more money if property values go up while the building is being made. You can choose how the finishes and fixtures look. You can also get tax deductions for depreciation.
- Potential risks: There are risks when the property doesn’t meet expectations, construction gets delayed, and the market goes down, leading to lower valuations.
- Before signing, seek legal advice to understand contract terms such as cooling-off periods, sunset clauses, and finance approval provisions.
Speak to the experienced mortgage brokers at The Mortgage Agency to discuss financing options for your off-the-plan property purchase. Our expertise can help you secure the right loan for this unique investment opportunity.
FAQs
Can Buying an Off-the-Plan vs. Brand New Property Save You on Stamp Duty?
Purchasing property before it is built or even brand new can save you a lot on stamp duty compared to buying an existing property. In most states, duty only applies to the land value if the contract is signed before construction starts. It does not apply to the full property value. This can mean thousands in savings, especially for apartments.
Why Do Home Buyers Choose Off-the-Plan Properties?
home buyers in Australia are at times choose to buy ‘off-the-plan’ properties before they are built. There are several reasons for this.
- Potential capital growth – By securing the property early at today’s price, buyers can benefit if property values increase during the construction period. The finished property may be worth more than the original purchase price.
- Ability to customise – Buyers can customise fixtures, finishes, and design elements if they purchase off-the-plan. This allows for creating a more personalised property.
- Claim depreciation: Buyers can claim depreciation deductions on the property’s assets, such as fixtures and fittings, once the construction is finished. This can reduce taxable income from rental properties.
- Developer incentives: Developers often use incentives, such as upgrades and rebates, to encourage early buyers and increase sales. This allows purchasers to add value.
- Lifestyle facilities – New developments often boast amenities like pools, gyms, and community spaces that enhance the lifestyle offering.
When considering risks, think about construction delays, property not meeting expectations, and market downturns. If you want to know if buying off-the-plan is worth it, get legal and financial advice. While risky, it can be rewarding for savvy buyers who do their due diligence.
What Happens If the Developer Goes Bankrupt Before Completion?
One risk of off-the-plan purchases is the potential for the developer to go bankrupt before completing the project. But your money will be safe in the controlled account, and the developer can’t access it.
You can take ownership of the partially built property or sell your interest to another party. Much depends on how advanced construction is. You would need to negotiate with the bank to finance the development. To minimise this risk, do thorough due diligence on the developer.
