Pros and cons of buying a property off the plan
Thinking of buying a new house or apartment off the plan? Here are seven things to consider before you commit.
The prospect is beguiling. A brand-new home, complete with that delightful brand-new home smell – all yours to move into, when it’s built.
And therein lies the rub. Buying ‘off the plan’ means exactly that: the property hasn’t been completed – possibly the soil hasn’t even been turned – so you can’t walk through your prospective purchase. Daniel Peterson, chief executive of RACV partner iBuildNew, an online service that helps buyers compare new and off-the-plan property, says the federal government’s $25,000 HomeBuilder Grant has driven new interest in buying off the plan over the past year. But while there are many benefits to committing before construction, there are also pitfalls. Here’s what you should consider.
Being unable to inspect the property means you will have to rely on an artist’s impression, floorplan or possibly a display suite to get an idea of the finished product.
The power of new
“First and foremost, it’s brand new,” says Daniel. “You’re not living in a place that’s had any wear and tear, and you can also expect minimal maintenance for the first five years.” In addition, mandatory builders’ warranty insurance in Victoria means you’re covered for any structural defects for six years. Developers will often throw in a sweetener of a maintenance-free period in which any defects, from a leaky tap to an issue with an appliance, will be fixed without cost. Even if this isn’t advertised, it’s always worth asking.
This is the big drawcard. If the contract is signed before construction begins, land transfer (stamp) duty will apply only to the land value rather than the finished product. The amount of stamp duty rises the closer to completion that you sign the contract (read more about it here). Normally the discount applies only to owner-occupiers rather than investors, but if you sign before 1 July 2021, you can take advantage of the Victorian government’s stamp-duty waiver which provides a 50 per cent discount on stamp duty for the purchase of Victorian residential property with a dutiable value of up to $1 million.
Locking in the price
Buy off the plan and with your deposit (usually 10 per cent of the total contract but sometimes as low as five per cent) you’re effectively insuring yourself against the market rising over the time it takes to build. As Daniel points out, this can bring peace of mind in today’s overheated market. The flipside is there’s a risk of paying too much for a property if the market enters a decline, but “there’s a big chance you can enjoy capital growth before the property is finished”, says Daniel. Locking in the contract price also mitigates against any blowouts in the cost of construction. If you’re an investor, Daniel also points out that rental yields tend to be higher on a brand-new build: “Around four to six per cent compared with two to three per cent for an established home,” he says.
How do I know what I’m buying?
Being unable to inspect the actual property means you will have to rely on your imagination to a certain extent to get an idea of the finished property. While many builders offer display homes, 3D virtual tours and other tools to help bring the vision to life, it’s never going to be quite the same as walking through an actual home. Buyer’s advocate Nicole Jacobs of Whitefox Advocacy recommends enlisting the advice of a design expert if visualising dimensions and the liveability of a residence isn’t your strength. On the other hand, buying off the plan also means you have more input into the property's design – especially if construction hasn’t begun. “But think early and go early if you’re going to change anything,” advises Nicole, “or it might cost you more.”
Help! The builder or developer has gone bust
While your deposit will be held in a trust account in the case of such an eventuality, the financial collapse of a developer or builder can be devastating for the aspiring home owner. Daniel says it is essential to do due diligence when choosing a development. Make sure you research previous projects completed by both the developer and builder. “Only work with developers who have a proven track record with significant projects,” he says. “There’s a big difference between a five-townhouse development and a 100-apartment high-rise tower.” Nicole recommends visiting an existing development and asking residents about their experience: “That information is gold.”
What about building delays?
Buying off the plan can involve an intricate balancing act between moving out of your current home and into the new property once it’s completed. “A timeline is a key selection criterion,” says Daniel. “A first-home buyer might have a lease expiring or, if you’re downsizing, you’ll need to time the selling of your home to fit with the completion date.” While delays can happen for any number of unforeseen reasons, investigating the developer's and builder’s track records will go at least some way towards mitigating the risk.
Enlist the experts
Repeat after us: caveat emptor. Yes, that’s just a fancy way of saying buyer beware, but it means that the buck stops with you, quite literally. “The contract is so important,” says Nicole. Once it’s signed, you’re stuck with the fine print – so make sure you get expert independent advice. Daniel points out that some less-scrupulous developers might sell a ‘turn-key’ property (in other words, it will be ready to simply move in and enjoy when settlement occurs) but the fine print excludes things like window furnishings, driveways and fences. While in many cases it is not possible to change the contract, Daniel says, “Always study the specs so you’re fully aware of what might not be included.”