Risks Buying Off-the-Plan

What are the risks associated with buying off the plan?

For every upside to buying off the plan, there’s a potential downside.

For example, let’s look at the main advantage to buying off the plan as listed above ie: that the purchase price agreed in the contract could end up being a lot less than the value of the property when construction is completed, thanks to the natural propensity for prices to increase over time.

​As you might have guessed, the exact opposite is also a distinct possibility. That is, if property prices drop during the time it takes to build the property, a buyer could agree to pay a lot more for a property than it is worth by the time the property is complete.

This risk can be minimised by careful research of the location of the project and also ensuring the purchase price is at or below the current market value for the area.

I also recommend buying Titled Land when purchasing a House & Land Package as the Finance is applied for and approved at the beginning, rather than up to 18 months away when the land becomes Titled.

Your financial circumstances can change…

As loan approvals expire after 3 to 6 months, in the case of a longer Land Titling date or One-Part Contract property, the purchaser applies for loan settlement funds when the property is nearing completion.

As this can be 6 to 24+ months away from the initial contract signing, the financial and/or employment circumstances of the purchaser could be less favourable than at the time of signing the contract(s) and the purchaser may no longer be eligible for finance.

To offset this risk, contracts are signed ‘And or Nominee’ which allows the purchaser to ‘Nominate’ a new purchaser or to add a co-borrower.

Change in Finances | Blaq Property | Off-the-Plan Specialists
Drop in Valuation | Blaq Property | Off-the-Plan Specialists

The Lender Valuation could fall short of the contract price…

When it comes time to apply for settlement loan funds, the Valuation ordered by the bank may come in lower than the contract price. In this case, you may have to find funds to ‘top up’ the loan amount and meet the contract price.

Or you could nominate the contract to someone else or add a co-borrower to the contract.

A low valuation is a possibility for any type of property – new or old – as valuers are very conservative.

​It does not necessarily mean the property is worth that, it is simply the ‘worst case scenario’ price to minimise the bank’s risk.

The ‘Market Value’ is often higher, and if you plan on keeping the property in the longer term, once the property has finished being constructed and is then considered an ‘established’ property, a bank valuation will likely be higher.

Apartment or Land Developer might go bankrupt…

In addition to researching the current market conditions, buyers need to do their due diligence on the developer before they sign a contract, as the biggest risk they face when buying off the plan is losing their deposit if the developer goes into administration during construction.

Prospective buyers should ask the developer for evidence of past projects, contact people who have previously built with them, check for negative media reports, and, if possible, visit previous projects to assess the quality of the developer/builder’s work.

A good builder/developer is keen to protect their reputation and will ensure clients are satisfied with their service and quality of delivery, but be reassured that when purchasing a new residential property you are covered by Domestic Building Insurance, which is an independent Policy the builder/developer is required to take out on your behalf. This will cover the property for structural defects for 7 years after completion – whether the builder/developer remains in business, or not. – see more Domestic Building Insurance information here

Your FREE 8 STEP Off-The-Plan Property Buyer's Guide Will Show You:

How To Harness the Investing Power Of Off-The-Plan Property in a Low-Stress Way

The sunset clause expires before the project is completed…

(Applicable to land and apartment not the actual house build.)

A sunset clause is a statement in the contract of sale that effectively puts a time limit on the contract’s validity. Should the developer fail to complete the project (either a land subdivision or an apartment build) by the date outlined in the sunset clause, the contract is declared null and void and the deposit returned to the buyer.

The clause is meant to protect the buyer from excessive delays. But, in recent years, some developers have purposely run over the time outlined in the sunset clause, so that they can terminate the contract and attempt to re-sell the apartment for a higher price.

As of June 2019 and backdated to 23 August 2018, Victoria have addressed this with new legislation that requires the written consent from the buyer, or permission of the Supreme Court of Victoria.

See More Sunset Clause information Here 

And Here 

Note: NSW has had this Legislation in place since 2015.

Simply put, it’s yet another reason to interrogate the developer’s reputation and past history before you sign a contract.

If you have questions or concerns please contact me here!

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