Buying off the plan can mean a block of vacant land that is part of a subdivision or a house or unit being built for sale where the land on which it stands is not yet registered as separate titles.
Selling property “off the plan” allows a land owner to develop the land in a less-expensive way as the developer can negotiate lending rates with their Bank at a lower rate if some of the land, houses or units are already sold to buyers.
This is an advantage to the land developer and can also be attractive to a prospective purchaser who buys into an “off the plan” property in the early stages of the development.
There are however risks for the buyer of property “off the plan” and a diligent purchaser should take care when entering into this type of purchase contract.
A contract for the purchase of property “off the plan” is a contract that does not have a precise completion or settlement date due to the incomplete nature of the building project and the subsequent separate registration process for the titles to the land or new buildings.
“Off the plan” contracts have several clauses that are different to a standard contract for a registered lot. The major difference is the timeframe for the owner to complete the subdivision or the building on the land.
A standard contract will have a precise date for settlement to occur (either an exact date in the future or a completion period say “60 days after the contract is dated”). An “off the plan” purchase contract will still have a timeframe and it is usually stipulated that settlement will occur within a number of days following completion of the building project and registration of separate titles for the property being purchased.
Off the plan contracts also often include a provision called a “sunset clause” which is a timeframe in which the contract must be completed – say within 24 months of the date of the contract. This means that completion or settlement can be anytime in that 24 month period after the signing of contracts, subject to the land becoming registered as a separate title or the building works being finished. If the date is exceeded the parties can terminate the contract.
If you are buying a block of land “off the plan” in a subdivision the contract will usually include a clause allowing a variance of the area of that land that you will own on completion of the purchase. This is because the local council and the land title registering authority have the final say on the area of the lots in the subdivision and they may require the land owner/developer to change the areas. This reduction is usually capped in the contract at “less than 5% of the area” in the contract and does not normally occur, but if it does your land area may be reduced and the purchase price is not reduced if the areas are changed.
You should keep in mind that like the economy, property market conditions fluctuate and with long-term building projects such as luxury high-rise units, the value of the units may change prior to completion of the building and your contract. The price you agreed to pay stays the same regardless.
Paying a deposit
A deposit could be tied up for some time between signing the contract and settlement.
Paying a deposit by way of bank guarantee may be a better choice than a cash deposit when buying “off the plan”. If you terminate the contract your bond or guarantee can be cancelled and you do not need to take steps to recover your cash deposit.
The developers financial position
Construction companies and land developers who become insolvent or go bankrupt during construction can leave a trail of destruction behind them. Rising building and material and labour costs may force a site closure and you may be locked into a contract for a home that is not finished and will not be built to completion.
In some states the builder will be required to have insurance which may provide some compensation for defective work or loss due to a bankrupt builder. You should seek legal advice to see what protection is offered before signing a contract.
While an early buyer “off the plan” has the best choice of the land or homes available in a project and has a longer time to on-sell the property for potential profit the strategy is not without risk. There are many factors to consider before entering into a contract and our property experts can help guide you through this process.
If you need any assistance contact one of our lawyers at email@example.com or call +61 2 9212 2422 for a no-obligation discussion and for expert legal advice.