Buying off-the-plan essentially means that you are entering into a contract to purchase a property prior to, or during the construction phase of the development. Hence the phrase buying off-the-plan, as there is no finished product for you to inspect. Because you can't actually see the finished product the contract is a more complex document, in other words there will be many more pages detailing what is actually going to be built and how it is going to be built. This is obviously for your protection. There are some good reasons why you may consider buying off-the-plan.
1. A better price
We all like to save money. When developers first offer their new products to the market they usually start with lower prices to encourage a faster sales rate. When construction commences, and the developer has met their construction finance requirements, prices usually rise. Therefore, for investors who commit early to the project there is often a good price incentive.
2. Tax benefits
As with all investment property purchases there are some significant tax benefits available. These benefits are greater when property is newer because there are more tax depreciations available. Those benefits are greatest when the property is brand new so buying off-the-plan maximises your available tax deductions.
3. Secure property at today’s price
When buying off-the-plan, an investor can secure property at today’s price yet often not have to settle for up to 18 months or in some cases even longer. What this means is that while you’ll pay a 10% deposit upon signing a contract, you don’t have to pay the balance of the money until the property is complete. In the meantime, especially in a rising market, you can enjoy the benefit of any capital growth that occurs on the property. Of course if prices were to fall, which has rarely happened in most areas of Australia, and certainly not for long periods of time, you have to wear that risk.Property is a long term investment. Providing you are buying with the intention of holding long term, buying off-the-plan works well for most investors.
4. Stamp duty savings
If you are buying off-the-plan property in Victoria there are substantial stamp duty savings available. The Victorian Government in an attempt to encourage new development has reduced stamp duty if you purchase before the property is built. As construction of the development occurs the rate of stamp duty increases until the building is complete and the full rate of the stamp duty applies. The concession is always greatest if the property is bought before construction commences.
5. Time
If you’re an owner occupier purchasing off-the-plan, you instantly have the added advantage of ‘putting things in order’ before you move in. Coordinating the sale of an existing property can be stressful, but knowing that you have some time before your new property is ready to occupy provides you with valuable time to plan for your move and can reduce your stress considerably.
6. Ability to save
If you buy property during the planning stages, or early on in construction, the extra time before settlement can be used to save money.
While the deposit needs to be paid when the contract is signed, the balance of the purchase price does not have to be paid until construction is complete. This means you don’t actually need your bank finance until settlement. Since construction can take 18 months or more, it’s easier to build a substantial nest-egg over time that can be used to help reduce your mortgage.
7. Greater choice
One of the greatest benefits of buying off-the-plan is that you get to choose your property from everything that is available in the development. Normally you don’t have that opportunity. If you are quick off the mark the selection is even greater. A wider array of choice means a greater opportunity to make sure you purchase an apartment with a superior position, aspect and floor layout. It’s quite common for example, for penthouses, corner units, those with the best views and ground-floor apartments with private gardens to be sold first. This in turn, can offer better potential for strong capital growth and maximise rental yields.
The dangers in buying off-the-plan Just as with all forms of investing, buying off-the-plan does have some dangers. In particular, at Which Property?, we emphasise that close attention to floorplan design can prove the difference between an apartment that has tenants queuing to move in (and never wanting to move out), and one that fails to keep tenants interested. A well designed property will always outperform a poorly designed property.
The designs of many apartments fail to meet good design guidelines and the lifestyle requirements of modern households.
As a guide to the overall size of an apartment, one-bedroom properties should be no less than 52 or 53m² internally plus a balcony space of at least 10m². Our preference however is for one-bedroom apartments which are upwards of 55m² internally, plus balcony for a total space of 65 to 75m². As a general rule, two-bedroom apartments should be no less than 75m² internally plus 10m² of balcony, but 85m² internally is a much more appropriate living space. Three-bedroom apartments should be no less than 100m² internally but once again 110m² is much more appropriate. Not withstanding this guide for overall size a larger property is obviously better than a smaller one, but will of course cost more. Regardless of this, a smaller well designed property will often outperform a larger poorly designed property.
More dangers:
reliability of the builder - will he finish what he sets out do? check him out, look at previous projects
quality of finished product -
timely completion - sunset clause
ready to let upon completion or you're exposed rental income wise - see article in API, add clause to contract
In conclusion
Buying off-the-plan, provides the smart owner occupier or investor with substantial benefits. Buying off-the-plan can seem daunting when you can’t physically touch the end product. There are dangers such as buying a property with a poor floorplan or in a noisy location but rest assured that all of the properties that Which Property? endorse are rated and not offered to our database unless they meet our strict criteria. As is always the case you can avoid the major pitfalls by thoroughly reviewing the property selection criteria and conducting some research.
The process
1. You select the apartment. The agent will take the apartment off the market on your behalf. Some developers require a fully refundable holding deposit at this stage (this usually ranges from $1,000 to 1% of the purchase price and is paid to a trust account) other developers require nothing at this stage.
2. Contracts are prepared and dispatched from the developer’s solicitor to your solicitor. This will be a solicitor that you have appointed to represent you for this purchase. As the buying and selling of real estate is a state issue in Australia your solicitor will most likely be based in the state that you are purchasing in as they will be licenced to undertake this transaction.
3. Your solicitor will check the contract, comment on it and advise of any changes that they are seeking on your behalf. This contract will be mailed to you to check, sign and return. The solicitors are available via phone, fax and email to discuss any questions that you may have pertaining to the contract.
4. You sign the contract and return it to the solicitor with a deposit of 10% of the purchase price.
5. The solicitor then exchanges this completed contract with the developer’s solicitor. The 10% deposit is generally held in a trust account and generally interest earned on this money is split between the purchaser and vendor at settlement.
6. You have now legally committed to purchase the property once it is complete.
7. Some solicitors will charge part of their total fee at this stage others will charge the full amount at settlement. The total solicitor’s fees are usually around $700 to $1200.
8. If organising finance, this process would generally begin around 4 months prior to the expected settlement date.
9. At settlement the property is paid for, plus all purchasing, finance and legal fees (either from cash funds from you or a combination of your funds and borrowed funds). Your solicitor will co-ordinate the settlement with the developer’s solicitor.
10. An agent is appointed to rent and manage your property.
11. The only cost to you over the exchange to settlement period is the cost of funding the 10% deposit and the cost of legal fees. Once settled the projected net cost is as per the projections provided.