What does buying off the plan mean?

Buying a property off-the-plan means agreeing to purchase a property before construction or completion, and usually before the plan of subdivision has been registered and separate titles for the property issued.

The term off-the-plan’ comes from the idea that you are purchasing the property based on plans and specifications of the proposed final product.

Due to changes in stamp duty legislation in Victoria, it is generally not cheaper to purchase a property off the plan, and in many cases, can be considerably more expensive.

Due to the long time that can elapse between the day of sale and settlement with off-the-plan purchases, the property market can rise and fall, and individual circumstances can change. In the case of land estates, oversupply of land and resales by purchasers in adjoining land estates or previous stages can bring down property prices in the area and cause issues with bank valuations at settlement.

With apartments and units, low quality building works and amendments to the plans and specifications before settlement can both heavily effect the value of the finished property.

Purchasing a property off-the-plan may have certain tax advantages as you may be able to claim depreciation of appliance. Specific advice on taxation matters should be sought from your accountant.

Stamp duty is payable on the market value of consideration paid for a property (whichever is higher), However, there are some stamp duty concessions available to off-the-plan purchases.

Following amendments to the Duties Act in 2017, to qualify for a stamp duty concession on off-the-plan purchases you must occupy the property as your principal place of residence for a minimum of 1 year following settlement, and the market value of the property must be less than $550,000 at the time of sale.

Calculating the market value of the property at the time of sale can be difficult, as the vendor can, at their discretion, use the fixed percentage method or the alternative method calculate to calculate the value. For example, if you purchase of a townhouse for $1,200,000 off-the-plan and where only the foundations had been completed, the stamp duty using the fixed percentage method would be approximately $24,370, whereas the alternative method would calculate stamp duty to be $66,000.

The Sale of Land Act states that a deposit for an off-the-plan contract must not exceed 10% of the purchase price for the lot. However, where the contract is also considered to be a major domestic building contract, like where the vendor is also the builder, the deposit must not exceed 5% of the purchase price.

The contract for the sale of an off-the-plan property must contain a notice that the purchaser may negotiate with the vendor about the amount of deposit payable.

Purchasing off the plan maybe the right decision for some people more than others. Certainly, the stamp duty incentives for investors were a big selling point, until they stopped in 2017, but the opportunity to claim depreciation of assets may still be incentive enough.

For those who are wanting to purchase land to build or take advantage of the first home buyer grant, purchasing off the plan may be the only option.

Purchasing a property which is close to completion but not finished may be the best way to take advantage of the benefits of purchasing off-the-plan, while minimizing any potential risks.

A section 32 signed by the vendor must be provided to any interested party before they sign a contract to purchase the property. As an estate agent will commonly require an interest party present their offer on a contract of sale, it is essential that a vendor provide a signed section 32 to the estate agent as soon as possible.

Unfortunately, many contracts for the sale of off-the-plan properties contain dozens of special conditions in favour of the vendor which remove most of a purchaser’s rights provided for in the common form of contract or by Australian Consumer Laws.  These special conditions will usually require the purchaser to reimburse the connection costs for electricity, NBN and water which can costs thousands of dollars, in addition to requiring the purchaser to use an embedded electricity network which will prevent you from connecting electricity through your own preferred supplier.

If you are obtaining finance to assist with your purchase, there is always the risk your finance will not be approved at settlement due to changes in lending criteria, changes in your personal circumstances, or low valuation of the finished property.

We also note some buyers are willing to pay a premium price for property based on the marketing materials, without consideration to the accuracy of those materials. Commonly purchasers are not satisfied with the actual size of the finished property, claiming it looked bigger in marketing materials where the vendor may have used smaller than average furniture to make the property look bigger.

The biggest risk of purchasing off the plan is not being able to see the quality of build. Notwithstanding Victoria’s shocking record with combustible cladding, we commonly see cases where fire-proofing and water proofing was not installed, and major structural issues which appear years after settlement.

Getting out of an off-the-plan contact is usually harder then getting out of a contract for an established property due the fewer disclosures and documents that need to be given by the vendor in the sale of an off-the-plan matter and as such, less chance of a mistake in the documents that would give rise to rescission of the contract.

Two ways purchasers usually exit contracts for off-the-plan sales are under the sunset clause where the plan of subdivision has not been registered by the required date, or where there has been a material change to the proposed plan of subdivision and the purchaser has exercised their right under the Sale of Land Act to rescind the contract within 14 days of being advised of the amendment.

For purchasers who are unable to complete the purchase due to changes in their personal circumstances, it is recommended to seek the advice of their conveyancer as soon as possible. Other options available to a purchaser may be to enter into an agreement with the vendor to set aside the contract or to find a suitable person to assume the purchaser’s rights by way of nomination.

You can purchase a property off-the-plan using a self-managed super fund if the property meets the requirements of the Superannuation Industry (Supervision) Act, and in particular, where the SMSF is borrowing funds, that they meet the single acquirable asset rule of the limited recourse borrowing arrangement.

The ATO has clarified that a single limited recourse borrowing arrangement may be entered into to fund both the deposit and the balance of the contract price. However, where the property has multiple titles, for example, where the contract allows you to purchase additional parking spaces, these may not necessarily meet the single acquirable asset requirement, and you may be required to establish more than one bare trust and enter into an additional limited recourse borrowing arrangement.

Due to the additional risks that may apply to a SMSF purchase of property off the plan, a contract should not be entered into before seeking the appropriate legal advice from an experienced conveyancer, and financial advice from an accountant.