What Are the Risks and Benefits of Buying Off-the-plan Properties?

What does buying off the plan mean?

Buying a property off the plan means buying a property that has yet to be constructed, such as an apartment in a complex that’s yet to be built or a house on a block of land that’s yet to be subdivided. In this scenario, you can’t view the property you’re purchasing. Even though you may be able to inspect a display apartment or home that is promised to represent or be similar to what is for sale, you really only have a construction plan to look at when making your purchase decision.

When you buy an off the plan property, the sales and home loan process is different to what happens when buying an existing property.

What can you buy ‘off the plan’?

The phrase ‘buying off the plan’ is most commonly used when referring to apartments, units and townhouses, although off-the-plan houses, often referred to as ‘spec homes’, may also be available in some cases.

What happens when you buy ‘off the plan’ property?

For the buyer, the decision whether or not to purchase off the plan is made on the basis of what the developer promises will be constructed. Potential buyers are usually supplied with a wide range of information about what the property will look like once it’s constructed, to help them visualise their purchase. This can include design blueprints or plans, artist renderings of interiors, architectural models of the exterior and display suites.

Buyers are usually only required to pay a deposit to the developer or their real estate agent when signing a contract to purchase the property. The deposit is usually around 20% of an estimation of what the property will be worth once it is built, although this can differ from project to project. The remainder of the price can be broken up into progress payments timed to construction milestones, or simply just paid to the developer on completion.

When it comes to getting a loan to pay for the purchase, you may need to have a deposit or a predetermined portion of the total contract price already saved, or have suitable equity. However, this varies across lenders depending on many factors. The lender will also typically re-value the property prior to the final payment being made to the developer.

What are the pros and cons of buying a property off the plan?

Potential advantages of buying off the plan may include:

 1. Property may go up in value during the build

The property market may go up while your property is being built. When you buy off the plans you commit to a price when you sign the contract. This “locks in” the price. It doesn’t matter if it takes 12 months or four years to build, the price will generally be the same. But the property market can still go up in value during this period.

2. Lower maintenance costs

New properties are far less likely to require major repairs and maintenance in the early years of ownership compared to decades-old properties. But don’t assume that is always the case. It’s important to have home insurance and savings to draw from if needed.

3. Ability to tailor new property to personal preferences

Another pro is the potential to engage with the developer to make alterations and additions prior to the build or before completion, thereby avoiding the need to retrofit an existing property. Keep in mind, this is usually only applicable to high-end, prestige properties.

Check the terms and conditions with your developer before entering into any contract.

4. Smaller deposit and more time to save

It’s often the case that only a small deposit is required, as the settlement usually occurs 12 to 24 months after the purchase agreement.. This is a major benefit for first-time buyers, who can take that extra time to build their savings and reduce the size of the mortgage needed for the purchase.

Allowing for construction time means there is a gap between paying the contract deposit and handing over the rest of the purchase price upon completion. The extra cash you accumulate during this time could then help you boost your deposit, provide more of a buffer should you encounter financial difficulty or alternatively it could help with moving costs.

There may also be some cases when a lender does not require you to make a deposit payment upfront, which would give your savings more time to earn interest while the property is being built.

Potential disadvantages of buying off the plan may include:

1. Risk that the end product doesn’t meet expectations

There’s always the risk of the unknown when buying off the plan, that includes the quality of construction, appliances and fixtures, as well as the aspect of the property and its amenities. This is all assuming too that the development is completed.

That’s why it could be a wise investment to seek out advice from a suitably qualified professional such as a property lawyer, when considering buying an off the plan property. They should be able to assist you in understanding any terms and conditions before entering into a contract and to help you navigate any issues that may arise.

It could also be worth considering taking out Home Warranty Insurance, which gives an off-the-plan buyer financial protection should their new home require expensive remedial work.

2. Development does not go ahead

In some cases, if a developer decides that a project is no longer viable, they can cancel the project. Typically, this means that buyers who have paid a deposit receive their money back. Not only does this send the buyer back to square one when it comes to finding and securing a property, it can leave them out of pocket financially, due to lost deposit investment opportunities/interest and higher market home prices.

3. Construction delays

If you’re buying a property as a place to live, unexpected delays in construction could mean you’re unable to move into the property as planned, leaving you in need of temporary accommodation. Or, if you’re an investor, delays could leave you unable to rent it out as originally planned, resulting in lost rental income.

In most off-the-plan contracts there is a safety net for buyers called the sunset clause. This sets a time limit on the contract, so if the property is not completed by a certain date, the contract becomes voidable, meaning the buyer can choose to walk away and have their deposit refunded.

However, unscrupulous developers have also been known to stretch out construction to hit the sunset clause so they can make use of it themselves, so they can resell the apartments for increased profit in a rising market.

Given the financial implications of a sunset clause, it could be a good idea to check whether your contract has such a clause, how long the developer has to finish the build and if the timeframe matches up with your expectations and requirements. A professional conveyancer or property lawyer will be able to provide assistance here.

4. Risk of property value dropping after settlement

Property market supply-and-demand forces can also impact a property’s potential sale price after settlement. This means that buyers might not achieve the sale price they want – or need – to cover the cost of buying the property, which could leave them out of pocket.

What can an off-the-plan buyer do to help protect themselves from risks?

To protect themselves from potential risks, buyers should:

1. Evaluate the credibility of the builder
2. Consider how changes in the local property market and other economic conditions could impact the value of the home
3. Obtain independent legal advice on contract documents
4. Understand the rights and obligations associated with body corporates and apartment living
5. Consider an independent building inspection
6. Know where to seek assistance

One of the most important things to do before buying a property off the plan is to do your research. This could include investigating:

1. The property market and any predicted rises or falls
2. How the development market is faring, such as supply chain issues or other pressures that may impact the financial health of the sector
3. The area in which you would like to buy, such as (if you are an investor) the average rent and supply of properties, now and into the future
4. Any other aspect that could help you to make a decision armed with the right information.

It’s also a good idea to do a thorough examination of your financial position and think about strategies for action if something were not to go to plan. A professional financial adviser may be an option to consider.

About the reviewer of this page

This report was reviewed by Canstar Content Producer, Caitlin Bingham. Caitlin is an experienced writer whose passion for creativity led her to study communication and journalism. She began her career freelancing as a content writer, before joining the Canstar team.