We have seen a steady rise in off-the-plan property purchases. An off-the-plan purchase is when the purchaser enters into a contract to purchase land or property on the basis of a proposed plan of subdivision or, on the basis of designs usually well before substantive construction works have commenced.
There are numerous advantages and disadvantages in purchasing property off-the-plan. This article will comment on two advantages and disadvantages associated with off the plan purchases and discuss potential traps/problems that purchasers may face.
One of the most significant advantages in an off-the-plan purchase is the ability to secure an appreciating asset with minimal outlay. Over the last 5 years property prices have continually and steadily increased, whilst there is speculation that property prices may stagnate, it is more likely than not the property value will increase, even minimally. Generally speaking, when purchasing off the plan a 10% deposit is required, the balance of funds are not due until settlement which, dependant on the circumstances may be 8-24 months away and, contingent on the plan of subdivision being approved and individual titles for each lot being issued or, when occupancy permits have been issued.
A residual benefit to this is the additional time purchasers have to organise their finances. Following the Financial Services Royal Commission into Bank, Superannuation and Financial services a majority of traditional lenders have revised and tightened their lending criteria, a by-product of which are stricter loan to value ratios. Generally speaking an acceptable loan to value ratio is 80%. The additional time under an off-the-plan transaction allows purchasers the ability to save additional funds towards the balance owing at settlement therefore minimising the chances of finance not being approved.
A significant area of concern in most property purchases is financing. One of the major disadvantages associated with off the plan purchases is not being approved for finance and, incidentally, the requirement of a speedy settlement for off-the-plan land purchases. Settlement is usually required within 14 days of individual titles being issued in land purchases. The consequence of not being able to settle when required by the contract may result in you incurring penalty interest and additional legal costs or, the contract being terminated and your deposit being forfeited to the developer with the potential for further action to be taken against you for any loss or damage the developer may have suffered as a consequence of your inability to settle.
We have noticed three recurring areas of concern in off-the-plan purchases, namely, the application of the small lot housing code, developers design guidelines in new estates and construction and completion requirements.
The Small Lot Housing Code was introduced in 2011 with the primary aim of furthering development of smaller houses. The small lot housing code essentially eliminated the need for a planning permit on lots less than 300 square meters where a clear set of house design and siting standards are met. The Code is in use in the City of Greater Geelong, City of Ballarat, Shire of Baw Baw and Shire of Cardinia. Your Contract of Sale will often specify whether or not the Small Lot Housing Code applies, if applicable and no planning permits will required however you should not rely on any representations and always obtain legal advice specific to your proposed purchase.
Contracts for purchase of land in new estates especially off-the-plan purchases are often accompanied by binding developers design guidelines. The Developers guidelines, as the name suggests, specify the types of properties that may be constructed. The design guidelines are often strict and provide minimum and specific allowances for building height, property set back, number of garages and car spaces, design of fencing and use and colour of material. All proposed designs will need to be submitted to and vetted by the developer and, any designs that do not conform with the developers design guidelines will often be rejected. Needless to say, if contract is subject to design guidelines you may not be able to construct or recreate your dream property. It is imperative that any design guidelines are thoroughly examined and understood. It is important to note that the design guidelines will be binding on any purchaser of the specific lot including subsequent purchasers whether by nomination or on-sale.
More often than not contracts involving off-the-plan purchase of land in new estates will have provisions requiring commencement and completion of construction, usually the provision provide that construction is to commence within 12 months of settlement and completion with 12 months of commencement. Unaware purchasers face financial implications in form of damages payable to the developer (calculated weekly) as a consequence of any delays with both commencing and completing construction.
Prospective purchasers need to be aware of their obligations under an off-the-plan purchase. If you or anyone you know is considering purchasing off-the-plan please contact our property and conveyancing department for a contract review.
Please note the above is intended to be commentary and general information. Commentary and general information should not be relied upon and substituted for legal advice. Formal legal advice should always be obtained, if you would like to receive advice specific to your circumstances please contact our office on 9743-1333.