The term “buying off the Plan” usually refers to purchasing property that is not yet registered as a single lot with the government department responsible for land title registrations.

Buying off the plan could mean a block of vacant land that is part of a subdivision or a house or apartment being built for sale.

Selling property “off the plan” allows a landowner to develop the land in a less-expensive way as the developer may negotiate lending rates with their bank at a lower rate if some of the land, houses or apartments are already sold to buyers.

This is an advantage to the property developer and may also be attractive to a prospective purchaser who buys an “off the plan” property in the early stages of the development project.

There are however risks for the buyer of property “off the plan” and a diligent buyer should take care when entering into this type of contract.

The 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 development project and the subsequent registration process for titles to be issued.

“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 property developer to complete the subdivision or construction of the building.

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” contract will still have a timeframe to settle and it is usually stipulated that settlement will occur within a number of days following completion of the project and issuing 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 must occur before the expiry of that 24 month period, subject to the satisfaction of each condition in the contract. If the sunset date is exceeded then parties may elect to terminate the contract, or it may automatically terminate, depending on how the sunset clause is drafted.

If you are buying property “off the plan” the contract will usually include a clause allowing a variation of the area of the property 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 property developer to change such areas. This variation is usually capped in the contract at “less than 5% of the area” and are rare, but if it does occur then the land area may be reduced without the purchase price being reduced proportionately.

When houses or apartments are sold “off the plan” the building is not fully built or construction may not start until after you enter into the contract. The usual concerns with this type of purchase are the progress of the building construction and the standard of the building work, which may be different to what you as the buyer contemplated. Remember you cannot see the finished product when you buy “off the plan” as the work will be done after you have signed the contract.

Often the developer will have a demonstration or “display home” to inspect showing you a model of how the buildings should look once completed, or they may have design guidelines and artist’s impressions of the building. These may not resemble exactly the finished building being purchased as some changes may be made during construction and you need to ensure that the contract provides some protection here. You should always carefully check the fixtures and fittings such as the stove, range hood, dishwasher, etc. and that the quality of all finishes is in accordance with a schedule of the building specifications, which should be attached to the contract.

Market fluctuations

You should keep in mind that property market conditions fluctuate and with long-term building projects such as luxury high-rise apartments, the value of the apartments may change prior to completion of the building and your contract. Notwithstanding any changes to the property market, the price you agreed to pay will stay the same and this could have a significant impact on financing the purchase price as your bank may not be satisfied with the security available in the event the property value has decreased.

Paying a deposit

A deposit could be tied up for some time between signing the contract and settlement.

Paying a deposit by way of a deposit bond (not always available in all States) or bank guarantee may be a better choice than a cash deposit when buying “off the plan”.

You should always seek legal advice if a request is made to release the deposit to the seller before the sale is settled. If you do pay a cash deposit you should stipulate in the contract who is holding the money and where it is being held, if possible it should be deposited in an interest-bearing account by the real estate agent.

The developer’s financial position

Construction companies and property developers who become insolvent or go bankrupt during a project can leave a trail of destruction behind them. Rising building, 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 completed by the seller.

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 available 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 an off the plan contract and our property lawyers can help guide you through this process.

If you or someone you know wants more information or needs help or advice, please call us on (08) 9335 9877 or complete the form below to request an Introductory Consultation.

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