Buying real estate requires a sizeable investment no matter where you are buying and so it can be a very daunting process at the best of times. Buying off the plan is no exception and can sometimes be even more stressful. Perhaps this isn’t the case at the beginning of the process, when you are looking at those impressive glossy promotional brochures, or even at the time of signing the contract, when you are contemplating taking ownership of something brand new and beautiful. As you get closer to settlement however, the nerves can set in and buyer’s remorse can take hold in some cases. Our experience has been however the if you do your homework this is less likely to occur.
So, what are the most important issues you should turn your mind to when buying off the plan?
- Who are you buying from? The reputation of the developer/seller is of paramount importance. Are they experienced with this sort of development? Do their projects generally reach a satisfactory conclusion and do they finish on time? Does the finished product look like it did in the brochures? How good are they with follow up work after settlement e.g. fixing defects? How accommodating are they if you were to require a short extension for settlement? Do their developments usually value up to align with bank valuations? These are all very important questions to ask and to investigate. Buyers may not realise that when buying off the plan the developer/seller has a lot of flexibility both to cancel the contract and to alter things if they need to e.g. the design, the layout, the number of stages the development is constructed over, the size of the lots. The buyer on the other hand has very limited rights to cancel the contract except after a very long period of time if the seller hasn’t met statutory deadlines to complete the development. Therefore, you do take a leap of faith when buying off the plan, and being able to trust the developer will do what they say they are going to do is a very important consideration prior to signing on the dotted line.
- If you are borrowing money to fund the purchase price, as most people do, how much are you borrowing? Will the contract be subject to finance? What is the deadline for you to advise the developer/seller as to the outcome of your finance application? There is a widely-held belief that if you have a pre-approval she’ll be right mate. The simple fact however is that how much a bank will lend you depends on what the valuation of the property is. Therefore, if you are buying off the plan the bank usually won’t be able to determine how much they will lend you until the development is complete, which is when they carry out their valuation. This usually puts you at odds with your obligations under the contract of sale which, if it is subject to finance, will generally require you to advise the developer/seller that you have finance unconditionally approved, well before the development is complete i.e. often within two weeks of signing the contact. How can you do this, though, if you are not sure how much they will agree to lend you? Because of this practical consequence of buying off the plan, buyers who are borrowing a substantial proportion of the purchase price take the risk that their financier will under value the property and therefore not lend them enough money to settle. If this happens, and the buyer can’t settle, then they will be in default of contract and the developer/seller among other things, could take their deposit and sue them. For this reason, buying off the plan is generally a strategy adopted by seasoned property investors who have plenty of equity in their home etc. and who are still able to complete the contract regardless of whether the bank undervalues the finished product.
- Even if the price that you are paying for the property can easily be justified now, will the property you are buying, be worth the same at settlement? Often if buying off the plan, settlement can be 2 or more years away and the market can dramatically change in that time, and sometimes it can go backwards. Buyers should be aware of this risk and under no illusions about the fact that you are speculating on property prices either remaining as they are now or going up in value. Consulting a valuer and carrying out Market research to attempt to understand future property trends is highly recommended (although always remember that no one has a crystal ball).
- Have you got enough deposit? Developers usually ask for 5 to 10 percent deposit and sometimes 20% and whilst the contracts often allow you to pay by way of bank guarantee you would not be able to raise a bank guarantee without being able to provide the bank with security over assets to the equivalent value of the guarantee. Therefore, off the plan purchases are not usually achievable with small deposits. The logic being that developers are putting aside the property for you, for a considerable period of time and want a lot of security to ensure you perform your obligations under the contract.
- Have you taken the contract to your solicitor to review before signing? Whilst you would expect to pay something to a solicitor for this service, it is highly recommended, given that there are a number of potential pitfalls.
Assuming you take the plunge, keep in contact with the developer and keep your financier informed as to how the development is progressing. Often the developer/seller is only required to give you two weeks’ notice calling for settlement and this can create a mad rush to the finish line, therefore preempt this notice by staying on top of how things are going and letting your bank know.
For more accurate advice and assistance please contact the GM Lawyers team on 07 3844 0188 or Email firstname.lastname@example.org