Hazards To Avoid When Buying Off The Plan Property

Buying off-the-plan property is a type of property transaction where one buys a property before it has been built, securing ownership of it before others would normally attempt to buy it. This allows one to buy a property before the market raises its value further, and allows developers to sell stock to help finance the construction of the project.

It is arguably the most future-focused tactic in the market and, therefore, preparedness for what could go wrong is arguably the most important thing to have. Here are five hazards that could be put your off-the-plan property investment into jeopardy.

Unfinalized Plans

Just because you’ve seen some drafted outline of the house that you are imagining to one day appear on the land that you’ve purchased doesn’t mean that it will work out. First of all, hold your breath until those designs have been submitted to the local council for approval. What about the construction company or designer – will they notice any structural flaws in the blueprint that will send them all back the drawing board, costing you more by the hour? Will your budget be able to support that? A costly delay is more likely than ever to occur because construction is frequently interrupted by Victoria’s COVID-19 lockdowns, they lower the amount of workers per site and limit the space they can work with.

A plan isn’t ever finalized until it is executed.

Make sure that you look at the track record of everyone involved in the construction of your building, ensure that their plans are plans that you can trust. There is no official “end of build date” on the contract, only an estimation. Even with the estimation, a developer will usually try and negotiate for more flexibility with time. Make sure you hold your developer to their plans, show them you expect professional, measured work and search for signs of integrity wherever you look.

Final Valuation

As discussed above, what is on the plan may not be what becomes reality. Furthermore, given the time that it can take for the property you purchased off-the-plan to be constructed, many other external factors may have also changed.

It’s for this reason that final valuations are critical and insisted upon by banks who finance off-the-plan purchases.

This has not always been the case, and before 2016, property valuations were accepted based off the plans, however since 2016, lenders will need to conduct a final valuation prior to settlement, once the property has been completed.

This change means you now have to wait for the property to be complete to be valuated and you need the property to be valuated to acquire your loan. Yes, while the loan can be “agreed to” at the beginning by your lender (in the planning stage of development), it is subject to the bank’s valuation of the completed property. This only increases the need for everything to go according to plan during your property’s development. If there is a section of the house that has not been completed by the valuation, the “mostly complete” house can still be given its final valuation but that could potentially mean that one of the most valuable, “finishing touches” of the house will be excluded from its valuation, lowering the value of your property.

If the property’s final valuation comes in at under what you agreed to pay for the property, your finance could also fall through.

It is crucial that your off-the-plan contact is reviewed BEFORE you sign and you completely understand the terms and conditions of your finance.

Sunset Clause

A sunset clause is something that can be employed in a contract in the interests of protecting a buyer of off-the-plan property. Specifically, what they are protected from is being stuck in a bad situation where a developer is taking too long to build said property. With a sunset clause, contracted plans are given a due date. If the date is passed and the contracted actions have not been completed by the parties in question, the buyer or seller of the property is able to cancel the contract with the partners that are proving to be too unreliable – hence the term “sunset.” It implies that the time has passed and the sun has set, quite literally, on the deal. A buyer is able to receive their deposit back in full if the sunset period has lapsed.

A sunset clause isn’t only there in the interests of protecting a buyer. Developers can also make use of a sunset clause to remove themselves from a contracted job, this is useful if they find they are unable to complete the development due to unexpected circumstances. To prevent developers from taking unethical advantage this power, it is required that they obtain written consent from either the buyer or the Supreme Court if Victoria to be freed of their obligations.

Where Is Your Deposit Headed?

As the investor knows, money will behave differently depending on where it is stored. The same goes for your deposit. Take note of where it is going. Will it sit in a trust account? Will it go directly to the developer? Did your real estate agent offer you a trust account of your own for it to be stored in?

It is vitally important you understand where your deposit will be held.

Signing Without A Contract Review

As far as property investment goes, off-the-plan investments are becoming increasingly common. Despite this, they are very complicated. As a buyer, what you mainly have to work with is complex information on paper, information that is normally only fully understood by experts. This is why it’s important to consider having your contract reviewed by experts who can bridge the gap between the plans and reality, who can envision where the documents really leave you. And not only can they properly analyse and critique what is being communicated on your plans, they can also identify what key details are being omitted. An inexperienced reader is likely to be satisfied with whatever information is presented regarding building materials whereas a savvy builder will be hoping to see specific quality materials listed, or at least, low-quality materials not being left any room, through word ambiguity, to be snuck onto a construction site. The more pairs of eyes reviewing your contract, the better.