What does buying off the plan mean?

When you enter into a contract to purchase a property before the construction is complete, you are buying off the plan. Often, buying off the plan occurs before construction has even commenced. It means you are making a decision to purchase based on the developer’s floorplans and promise of the property.

What are the benefits of buying off the plan?

Firstly, there are the financial benefits. You pay significantly lower stamp duty with off-the-plan apartments (OTPs) because you only pay stamp duty based on the value of the vacant land.

OTPs may also be a more affordable way in to a popular area where established properties are too expensive.

OTPs often include a range of modern amenities you wouldn’t find in established properties such as a pool and gymnasium (although you probably pay a premium for these features).

OTPs provide an element of certainty because unlike an auction, the price is set.

Buying off the plan allows you to customise your apartment and choose from a range of options the development is offering. This is not the case if you’re buying in an established development.

What are the risks of buying off the plan?

The reality is you never really know what you have bought until the day you move in. But with the latest 3D imaging you should be able to get a pretty accurate picture. Look at your contracts very carefully in the event the end result doesn’t meet the developer’s promise.

By the time the property is complete, market rates may have dropped and you will still be required to pay the balance on the agreed rate on the contract. Of course, the reverse applies as well.

What precautions should I take?

Do your homework on all parties involved in the project. Research the developer, architect and builder; look at what projects they’ve done before and find out if they usually work together. If you can, physically inspect their work and also inquire about vacancy rates in their developments.

Sometimes you can judge a book by the cover. A well-designed and comprehensive Sales Suite can be a good indicator. It should have the answers to all your questions about the completed development, including fittings and fixtures, appliances and finishes.

Apart from the aesthetics and quality of the construction, remember to consider other elements such as noise, storage, security, rubbish disposal and landscaping.

Organise a pre-settlement inspection. An independent builder can inspect the property on your behalf.

What should I look out for in the contract?

Take your time dissecting the contract. OTP contracts are a lot more complex than standard sales contracts. It’s better you have a solicitor look over it to make sure you are protecting yourself.

Some things to watch out for:

• What are my obligations and what are the penalties?
• Can I sell my apartment before the project is finished?
• Can I get my deposit back if the project is delayed?

What are the terms of settlement?

Buying off the plan usually requires a cash deposit of 10% of the purchase price. This 10% is held in a trust account by the developer’s solicitor. Typically, there is then no more to pay until the project is complete.

The bottom line is don’t rush in and do your research. Your hockingstuart expert can advise you along the way.

A check list for Property Investors:

Are my finances in order?

This may seem like an obvious place to start but too often we see hasty buyers jumping head first into an investment before they have their financial situation under control. Using a financial advisor or accountant is a great way to examine your whole circumstances and make sure there is enough flexibility in your budget to cover untenanted property, interest rate rises and other incidentals.

Choose a loan that meets your needs.

There are plenty of loan products available, and the selection process is rather daunting. Fixed or variable interest rate? Interest only? A mortgage broker is often advantageous as they can choose from a suite of lenders to match your needs.

It’s important to know the loan-to-value ratio (LVR), which is the ratio of the amount borrowed to the value of the property, and to understand the costs and benefits of mortgage insurance.

Negative gearing or positive gearing?

The aim of gearing is to get the best tax returns for your investment while you own the property or when the property is sold.

Negative gearing occurs when the income generated from the rental income of a property is less than the loan repayments and running costs required for that property. The advantage of negative gearing is that losses are tax-deductible. If the saving on tax is more than the tax you would pay if the property was returning a profit, then clearly negative gearing is the preferred option.

Positive gearing is the opposite – where rental income exceeds your repayments and costs. While you benefit from the extra income, make sure you factor in capital gains tax when you sell the property. Your accountant or tax advisor will help you decide which is best.

Are there others you can invest with?

If your looking for a property purely for investment purposes, then pooling resources is a great way to make a more substantial splash in the market. As long as all parties agree to the terms outlined by a solicitor, it’s a common way of investing.

Your hockingstuart agent has plenty of experience in these matters and is more than happy to discuss these points in greater detail.