Buying off the plan

If you’re looking for a new home, you’ve probably heard the phrase ‘buying off the plan’ before. But what does ‘off the plan’ mean exactly? And is buying off the plan something you should consider when looking for your next property?

We will delve into the advantages and things to look out for when buying an off-the-plan property. Let’s get started.

What does ‘off the plan’ mean?

In simple terms, buying off the plan means purchasing a property that hasn’t yet been built or is in the process of being built. You’re essentially buying a blueprint or plan of a property that will be constructed at a later date.

This purchase typically comprises a land package, which means you buy a piece of land and pay for the construction of a house on that plot. However, there are also options to buy units or apartments off the plan, where you own the building, but not the land.

What are the benefits of buying off the plan?

Many buyers and investors love buying off the plan. They enjoy having a hand in customising a property, and new properties are appealing to tenants.

There are many advantages to buying properties off the plan, and these benefits aren’t always available when you’re purchasing an existing home. Here are a few ‘off the plan’ advantages.

Savings

Buying off the plan can offer significant savings. Property developers will often offer incentives to buyers who purchase early in the development process. Generally, throughout the sales process of the development, prices can increase based on demand or development costs. By the time a building is completed, the market may have already moved forward, and the value of the property increased. 

By getting in early, you are much more likely to secure a lower price than you would if you waited until the property was complete and on the market.

Customisation

Buying off the plan may allow you to customise your home to your specific needs and preferences. You can often choose from a range of finishes, fixtures, colour schemes and fittings to create a space that reflects your style and tastes.

This level of personalisation is not usually possible with a pre-existing property, where you may have to settle for features and finishes that don’t quite match your vision, or spend money to update existing details to your taste.

Builder guarantee

Different states have different legislation, but – generally speaking – a builder or developer will offer certain guarantees and protections on a new build that are not possible for pre-existing buildings.

In NSW, vendors selling off-plan are obliged to provide buyers with a disclosure statement outlining important information such as the latest possible settlement dates and other conditional events. They also have to draft documents regarding by-laws, proposed finishes, and so on.

Furthermore, any new build should be fully up-to-date with the most recent legislation and building codes for the region, which can provide a buyer with great peace of mind.

Things to look out for when buying off the plan

If you’re considering buying property off the plan, you also need to be aware of some of the potential issues before committing yourself.

The developer

One of the most important things to consider when buying off the plan is the developer’s track record. You’ll want to ensure that they have a good reputation and a history of delivering high-quality properties on time and within budget.

You can do this by researching the developer online, reading reviews from previous buyers, and checking their credentials with industry organisations, including your trusted real estate agent.

Location

It’s also important to think carefully about the location of the development. While an off-the-plan property may seem like a great deal, it may not be worth investing in if it’s located in an undesirable or poorly connected area.

Before you buy the property, research the neighbourhood and surrounding amenities (such as schools and public transport links) to ensure that the property will be a good long-term investment.

In addition, it’s important to do your homework regarding climate change-related risks. Make sure your property isn’t in a flood- or fire-prone area, or likely to be affected by coastal erosion or flooding.

Time to completion

Another factor to consider is the timeframe for completion. While buying off the plan can offer significant savings, it’s important to understand there may be delays in the construction process.

This could mean that you may not be able to move in when you originally planned, which could impact your living arrangements (and finances). Make sure you have a clear understanding of the expected completion date and build in some buffer time to allow for potential delays.

Sunsets Clauses

A sunset clause in a real estate contract establishes a deadline for completing a property transaction. If the deadline is not met, either party can terminate the contract without penalty. While this clause provides a safeguard against indefinite delays, it's crucial to understand how it operates, particularly in off-the-plan developments where timelines can be unpredictable.

Developers often include provisions allowing them to extend sunset clauses in the event of unforeseen delays, such as adverse weather, strikes, or council-related issues.

However, there are cases where developers may exploit sunset clauses to their advantage. For instance, some may intentionally let the deadline lapse to terminate the contract, allowing them to resell the property at a higher price in a rising market.

This underscores the importance of thoroughly researching the developer before entering into a contract. Reviewing their track record, reputation, and approach to past projects can help protect your investment and ensure a smoother transaction.

What about financing when buying off the plan?

When it comes to financing an off-the-plan property, you might need to approach things differently than you would with an established property.

First, you’ll need to pay a deposit at the time of signing the contract. This is usually between 5% and 20% of the purchase price.

Once you’ve paid the deposit, the balance of the purchase price won’t have to be paid until settlement, when construction is completed. So, you might have extra time to save while you are waiting for the property to be finished. This may lower the amount you need to borrow.

Speak with your financial advisor, who will help you understand your options and ensure that you can secure the financing you need.

Additional things to consider

Once you have a good understanding of what ‘off the plan’ means and the process involved, make sure you take a look deeper at the legal, financial and tax implications of an off-the-plan purchase.

Legal considerations

There are certain legal considerations you need to be aware of (for both you and the developer). These might include:

• Penalties for withdrawing after you sign the contract.
• Consequences if there is a delay in completion.
• Understanding what happens to your deposit if the project doesn’t go ahead.

Other buyer rights include being informed of any changes to the layout or design of the property by the developer, as and when they happen. Buyers may also get a longer cooling-off period for off-the-plan homes.

Home Building Compensation (HBC) cover

Builders or developers must have Home Building Compensation (HBC) cover or provide proof of exemption. This protects buyers if the developer goes bankrupt, has their licence suspended, or is incapable of completing the project for any other reason.

Financial considerations

Although you will initially pay the deposit (typically between 5% and 20% of the purchase price), you won’t pay the remainder of the contract price until the build is completed. This gives you more time to save, potentially reducing the amount that you need to borrow.

Progress payments

Once the deposit is paid, the balance is typically paid in various stages throughout construction. These are called progress payments, and they are based on specific construction milestones. Make sure you have a clear understanding of timelines and progress payment schedules.

Additional costs

There are other additional costs for buying off the plan you should be aware of. Stamp duty, also called land transfer duty, is payable for all property purchases. Contributing factors for stamp duty cost are the state or territory that you’re buying in and the property price.

When buying a property off-plan, it may be possible to defer the transfer duty payment for up to a year depending on the state or territory. It also depends on whether you’re buying as an investor or as an owner-occupier. Off-the-plan purchasers may also be eligible for a reduction in transfer duty as first-home buyers.

Conveyancers or property lawyers will handle off-the-plan purchases, but their fees will vary. However, it is generally recommended you seek legal support from a property lawyer due to the risks involved in off-the-plan purchases.

You can expect to pay more in legal fees for off-the-plan properties than for an existing property due to the extra conditions involved. Fees may be around $3,000 to $5,000.

Once your home is built you will need to take out building insurance. The cost will vary depending on your location, your coverage type, and your risk profile.

Tax implications

There are also tax considerations to keep in mind when buying off the plan.

Tax benefits

Tax benefits when buying off-plan might include a reduction or deferral of stamp duty, depending on where you live and the purchase type (for example, investment property or home purchase).

If you are an investor, you may be able to claim tax deductions on depreciation as it is a new property. You may also be eligible for deductions on property management fees and loan interest.

Tax costs

Selling the property at a profit will trigger Capital Gains Tax. This is also payable if you sell the property before completion.

Builders and developers are required to pay Goods and Services Tax (GST), but this cost is usually passed on to the buyer. It’s important to check if the purchase price includes GST as this can add significantly to your financial commitment.

Plan ahead

If you’re considering buying off the plan, it’s best to speak with a registered tax agent or your accountant. Discuss the tax implications for your particular financial position and make sure you’re prepared and comfortable with your purchase.

Your property lawyer or conveyancer will be able to tell you about the transfer duty owed. They can also advise on any exemptions and concessions that can be applied.

Tax mismanagement has serious legal and financial consequences so always get professional advice before signing.

Summing up

Overall, buying off the plan can be a great way to get into the market, save money, and create a custom home that reflects your personality and preferences. It’s also a great way to attract quality tenants for your investment property.

However, it’s important to do your research and take some precautions to ensure that the property you’re buying is a good long-term investment.

By working with a reputable developer and experienced real estate agent, researching the location and surrounding amenities, and securing appropriate financing, you can feel confident in your decision to buy off-plan.

If you have any questions, trust the real estate experts. We have decades of experience helping buyers and investors purchase properties. Contact us today – we’re here to help.

FAQs

What does off the plan mean?

Buying off the plan means committing to buying a property that hasn’t been built yet, or is currently under construction. There are many benefits for potential property investors and homeowners who are interested in buying off the plan, but there are also many things to consider.

Can I customise an off-the-plan property?

Yes. One of the benefits of an off-the-plan property is being able to choose fixtures or adapt the interior style of the house to suit your tastes.

Can I get a home loan for an off the plan property?

Yes, you can get a home loan for an off the plan property. A deposit of around 5% to 20% is also required. This can be in the form of a deposit bond which protects your deposit but also allows the builder to access and use the funds.

Once the deposit is paid, the balance is usually paid in stages throughout construction.

What are the biggest risks to consider when buying off-plan?

The biggest risks to consider when buying off the plan are the property developer going bankrupt, the potential drop in the property’s value before it’s built, the completed property not meeting your expectations, and construction delays.

Can I sell my off the plan property before it's completed?

Your contract should state whether you can sell the property before it’s built. Make sure you understand the legal and financial implications, as well as market conditions, before proceeding.