Buying off-the-plan is a calculated risk.
An advantageous price and delayed full payment gets you in the market quickly.
If you catch a seller’s market, the apartment will gain in value during the construction phase. You’ll likely make good money for the price of a 10 per cent deposit.
Of course, it can go the other way.
You might think you have a great deal today, but you could be paying above market value by the time construction is finished. That can great real problems when it comes to getting your mortgaged finalised. Lenders will not finance more than a property’s value.
You could be scratching for cash to complete the deal or have to walk away, losing your deposit.
As a result, the transaction process and contracts are complex and specific. It is essential you obtain professional advice from a financial consultant, land valuer and solicitor or conveyancer so you know your rights and risks.
Here’s a general outline of your rights, although the specifics will vary in each State.
Honest dealings – Your purchase should not be made on the basis of misleading or deceptive conduct. Sales agents are not allowed to advertise a property for:
- A lesser price than other similar properties if that property is not available, or indicate a price range where the lower end is less than the estimated selling price
- Hold an expression of interest payment unduly
- Pressure you to buy another property at a higher price if the apartment you expressed an interest in (with a refundable payment) is sold to someone else.
Expression of interest – This can be made with a small, refundable payment (approx. $500). When a developer or their agents take this money, they must make clear in writing that:
- You have no obligation to buy the property
- Nor is the developer obliged to sell it to you
- Monies can be refunded.
This lack of obligation and refund means that payments can be made by multiple buyers for the same property. You must be informed if others have made a similar payment for the same property and be notified when it is sold.
Cooling off period – These vary from state to state. In NSW the period has just been extended to 10 business days. Ask your legal adviser for the duration of your cooling off period.
Rights under the contract – Always employ the professional advisory services before undertaking an off-the-plan transaction. Your rights are likely to be wrapped up into the Contract of Sale. Demand that the developer agrees to a defects liability clause that you’re happy with. Be very clear on the following before signing:
- Status of deposit if the construction does not proceed; and
- If the developer and/or builder go broke or lose their licence.
- Rights if construction is delayed
- Rights if the plan is altered
- Rights to on-sell the property before completion
- Changing finishes and colour schemes
- Selection of appliances
- Construction site visits
- Completion earlier than anticipated
Changes are common in developments and contracts will provide the developer with the ability to modify floor plans and even reduce floor space. If any alterations occur beyond the stipulations of the contract then it may be declared void. This is important because you won’t see your apartment until it’s finished. A new law in NSW will force a developer to provide a final floor plan 21 days before settlement so you can gauge the impact of any changes. The NSW Supreme Court can award damages if a complaint is found in your favour.
Variations to the contract – All “off the plan” contracts give the developer flexibility. For example, it may be necessary to make minor changes to the plans because of a council or engineering requirement. Ensure you have a provision that gives you the right to pull out if a variation significantly affects the property. Review these provisions in detail with your legal adviser and demand adequate protection.
Termination – You have limited rights to terminate. While these rights vary from state to state, we have taken advice from the NSW Fair Trading as a general guide. These rights are:
- Misleading and deceptive conduct
- Failure to disclose
- Changes / Variations to the disclosure statements; and
- Developer failing to complete construction before the sunset date.
Sunset clauses – If a developer misses the construction deadline set out in the sunset clause, the contract is void. You get your money back and ownership reverts to the developer. That’s great news for the developer if the market value has risen during the time of construction. They’ll make the profit, having sat on your money for months and months.
Head this one off: build into the contract an option to unilaterally invoke the sunset clause so you don’t miss out on any capital growth you’ve earned. Under some state laws, developers will need a buyer’s consent to end the contract using the sunset clause. If a developer insists on proceeding against your wishes, they’ll need to apply to the Supreme Court to justify termination. Equally, you cannot refuse to settle and wait for the sunset clause to take effect as a tactic to avoid purchase.
Insurance – Compulsory insurance schemes exist to compensate you if there is defective or incomplete work, or either the builder or developer has their licence suspended, goes broke, dies or disappears. In NSW, for example, this is known as home warranty insurance. Ask your legal adviser about this coverage. Insurance will also protect you against:
- The risk of non-completion of the work, and
- Breach of statutory warranties relating to the work.
Post-sale Access – Contracts will normally state the right of a developer to access the building, either to conduct remedies to building work or to continue to sell unbought apartments.
This article is for general interest purposes. Obtain professional legal and financial advice.