Risks when purchasing off the plan properties

Buying off the plan is where you enter into a Contract to purchase a property prior to the completion of the construction of the dwelling or prior to the registration of the plan of subdivision(strata or otherwise).

There are risks associated with purchasing off the plan and the COVID-19 pandemic has highlighted some of the risks that need to be considered before you enter into an off the plan property purchase Contract.

This article sets out below some of the risks:

1. You are to a certain extent at risk in relation to the quality of the building work. Before entering into a Contract you should consider the builder and developer’s reputations and carry out any due diligence that you can in that regard;
   
   
2. It is often difficult to ensure that you are paying an appropriate price for the property;
   
   
3. Changes in values of the property between the time you enter into the contract and the time that settlement is required to take place. Even if you have obtained a loan approval in principle at the time of entering into the Contract this will then be subject to a valuation of the property being done at the time that the property is completed and around the time of settlement. If the property market in general has dropped or your financier’s lending criteria have changed this could mean that your loan approval may no longer apply or the amount your lender is prepared to lend you could be significantly less than what you believed at the time you entered into the Contract;
   
   
4. Your financial circumstances might have changed. The pandemic has highlighted that where for example people at the time of entering into a Contract had a secure job but now during the pandemic are on JobKeeper for example or have lost their job then this could mean that they no longer qualify for their loan approval;
   
   
5. If the circumstances have changed dramatically in 3 or 4 above this could result in you not being able to complete the purchase at all (if you are no longer able to qualify for a loan) or you might have a significant shortfall between what you are required to pay for the property and the total of what you are able to borrow from your financier and your cash reserves;
   
   
6. You need to be clear about what you are purchasing and the Contract needs to have a detailed list of finishes, fixtures and appliances. Ideally the list should include things such as the brands and model numbers of appliances. You cannot merely rely upon any advertising material that has been provided to you prior to entering into the Contract;
   
   
7. There may be rights for the developer to make changes to the plan of the property or the finishes of the apartment. Certain variations may give you an entitlement under the Contract to pull out but others may not do so. It is entirely dependent upon the terms of the Contract;
   
   
8. Sunset Date – the Contract will usually provide a time limit by which the property must be completed and in the event it is not then usually it is the purchaser who has a right to pull out of the Contract. However the developer may have provisions in the Contract which allow the developer to extend the Sunset Date or be able to pull out of the Contract(although the law makes it more difficult for a developer to pull out merely because the project is not completed by the Sunset Date);
   
   
9. If you are selling another property in order to buy the property being purchased off the plan it is extremely difficult, if not impossible, to arrange for a simultaneous settlement of your sale and your purchase. Therefore there can be issues in relation to whether you should be selling your property well before the expected time for completion of the project, leaving you then in a position where you may need to rent for a period of time, or where you may have to complete the purchase prior to selling your existing property. Usually under the Contract for purchase it will provide for settlement to take place within 21 days of the date of notification that the plan has been registered and an occupation certificate provided. This would not give you sufficient notice to be able to sell your property within that period of time to enable a simultaneous settlement of your sale and purchase;
   
   
10. Building defects – although there are a protections under the Home Building Act in relation to defective building works and Home Owners Warranty Insurance is provided to give protection (this only applies where buildings are three stories or less in height) there can be expenses incurred in getting the defects fixed either by the builder or alternatively by making a claim for compensation against the builder. There is now provision for a builder to provide a bond in relation to any building works undertaken to give some form of security and protection for purchasers but whether this is enough to cover the cost of defects is another issue;
    

Sound legal advice is essential before entering into an off the plan purchase and the Property Team at Solari & Stock can guide you through this often complicated process. To make an appointment with one of our Property Team contact us on 8525 2700 or click here to request an appointment.

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