Buying off the plan: Important things to consider

Finance , Property Nov 22, 2022

6 min read

off the plan
off the plan

For many people, buying a property off the plan is very appealing. You get a brand-new property, with fixed costs and with some good government cost exemptions can be a very price savvy way of getting into the market. Before you jump in, here are some things to consider.

But first, what is buying off the plan?

Buying off the plan means you are buying a property that is under construction or is yet to be built. You may buy direct from the developer, or you may purchase through a real estate agent who is working for the developer to make the sales. Many new builds across Melbourne and Australia are in newly developing communities and suburbs which includes things like brand new shops, schools and public transport/infrastructure.

Other developments might be a few streets within a suburb, or the development may be concentrated to a single building. So as you can see there is a pretty big scope when it comes to what constitutes an off the plan development, but the underlying concept is that you’re buying an unfinished property, so essentially buying the property sight unseen.

The power of choice when buying off the plan

One major benefit when buying off the plan is that you get to have a say in the property along the way. This can range of being able to choose the exact floorplan, fit out and features you want.

Depending on the developer and property you might get to choose everything from paint colour to tiles on the roof. Or you might find you have a bit less say in some of these things as the property has been architecturally designed, in which case you’re buying into the vision of the designer and developer.

Both options can result in beautiful homes, it simply depends on what you’re hoping to get out of the experience.

There can be significant cost savings

Thanks to the power of wholesale pricing, buying off the plan can be a lot cheaper than if you were to attempt to complete the same build as an owner builder, or through a small-scale builder.

It can also be very handy if you happen to commit to building prior to an uptick in the property market, by the time you settle your property may have risen in value, earning you a capital gain from day one. It’s important to know the reverse can happen. If you commit to building and then the market takes a hit, your property might be worth less than you paid for it. This can have implications when it comes to your home loan and may result in a shortfall (i.e., you must come up with the difference between the value and the loan you can secure from the bank).

Stamp duty savings and government incentives

In Victoria, stamp duty for off the plan purchases is calculated paced on the dutiable value which is the contract price minus the construction or refurbishment costs, which reduces the amount of duty you are required to pay.

Better yet, if you’re a first home buyer you may be eligible to receive a first home buyer stamp duty exemptionand/or the First Home Owners Grant.

You’re buying well into the future

Another important thing to remember is that you are committing to buy in the future as some developments can take years to be completed. Of course, changes can happen with both the developer, in your own circumstances and in the market at large and are compounded over long stretches of time.

Take for instance one client we had who committed to buying off the plan back in February 2020. At the time, the anticipated completion date was to be December 2023. When we first spoke to them, our clients had a joint borrowing power of $1.1 Million. Unfortunately, since then their developer has collapsed with the downturn in the construction industry, fortunately for them another developer has taken on the project, but the finish date is now set to be late 2024. Which may not be a bad thing, because with interest rates as they are right now, the client’s borrowing power has dropped to $850K despite no changes to their financial situation.  It also gives our clients longer to add to their deposit and close the gap if there happens to be one. We won’t know what this will look like until much closer to settlement though, so it’s important to continue growing savings until then just in case.

Another thing to consider is whether the property is designed to meet your needs now or whether it is going to meet your future needs. For instance, if you are planning to expand your family then a two-bedroom apartment might not fit the bill in 3 years’ time.

Pick a reputable developer

As in any industry, different developers have varying reputations. Where possible it’s a great idea to work with an established developer who has a solid reputation and who works with other good quality businesses in the construction industry. This also gives you the opportunity to look at their completed projects – how are they performing five years later? Can you speak with a previous client to understand what their experience was like working with the developer?

Of course, this doesn’t mean you’ll have a seamless experience, but where possible it allows you to manage risks. Market conditions can affect any business, you need only look at the collapse of Caydon in mid-2022 as proof of this.

Understanding your off the plan contract

As highlighted above, there are a lot of things that can happen between signing a contract and moving into your brand-new home. For this reason, it’s important to have a conveyancer or solicitor look over the contract as part of completing the due diligence process. Off the plan contracts are notoriously more complex than those for established properties and you’ll often find there are many clauses in there which favour the developer.

Having it professionally reviewed will ensure you understand your rights and responsibilities. It’ll also mean you understand whether you are liable for any costs should the project not meet certain deadlines, any exit or cancellation clauses and the treatment of your deposit.

Buying off the plan?

In all, there are lots of things to love about buying off the plan, and with careful management and a strong understanding of what can happen throughout the process you can enter into a contract with confidence.

Apply for pre-approval

Photo credit: Samuel Property