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Buying off the plan? Good idea or not?

As Sydney’s property market hits another all-time high, fears of property developer greed are revealed.

What is buying off-the-plan?

Ultimately you are buying a bundle of rights to purchase something that is not yet in existence.

Usually a unit that has been designed, but not yet built or the plans of subdivision have not yet been registered.

It sounds too good to be true, you buy a brand new property, that will be purchased at “today’s price” and by the time it comes to settle, you should have a property valued at much more than the purchase price.

You also have a longer time to research which mortgage will offer the best rates. But you have to also consider how your life may change in two years. You could get married, have kids, divorce, be made redundant…Do you really want to commit to buying something that you haven’t even seen in a couple of years’ time?

Property developments can take several years to complete. There have been instances of Developers intentionally and deliberately delaying the progress of the development to lawfully terminate contracts for financial gain through the provision of a “sunset clause”.

What is a sunset clause?

In NSW a sunset clause allows for either party to terminate the contract if the development is not completed by a key date. This is usually two (2) years following exchange of contracts.

If the purchase wanted to consider exploring alternate property investments and the development had been delayed, they can terminate the contract and seek to have the deposit refunded.

If property prices in the area have substantially increased since the time of exchange and the sunset date has come and gone, the vendor may further delay the development and on-sell the same property for a substantially increased profit.

This exposes a purchaser who committed themselves to a purchase of property many months or years ago to an uncertainty.

This is perfectly legal under the current legislation and allows property developers to take advantage of the fast paced property market that has exceeded expectations in recent months.

What is the NSW government doing about this?

In response to these concerns, NSW Fair Trading and NSW Land and Property Information (LPI) are consulting on the extent of the problem and looking at potential measures in response. In reviewing the current laws and any possible changes, the NSW Government will seek to ensure a fair and balanced system, with necessary safeguards for buyers and sellers making off the plan property transactions.

Minister for Innovation and Better Regulation Victor Dominello recently announced a public consultation on the use of sunset clauses in off the plan property contracts.

Mr Dominello said the NSW Government was considering reforms to the Conveyancing Act 1919 (NSW) including an option allowing only the purchaser to rescind off the plan contracts; and another option requiring a vendor who terminates a contract under a sunset clause, and resells the same unit, to pay damages to the purchaser equal to the difference on the sale price between the two contracts.

NSW government is seeking public feedback in relation to buying property off-the-plan and survey responses and Submissions are to be lodged by 14 October 2015.

What are the other dangers of buying off the plan?

In addition to being ripped off by the Developer, you may also encounter difficulties with getting your bank to come to the party. If you commit to purchase a property and get pre-approval from your bank at the time of exchange then two years later you are given fourteen (14) days’ notice to settle by the Vendor, your bank may not be obliged to provide the mortgage as promised.

With Loan Value Ratios (LVRs) changing from 90% to 70% or 80% your borrowing capacity may be diminished. On a $1 million purchase, this could mean having to come up with an additional $100-200,000.00 in two (2) weeks.

Banks only lend on the value of the property at the time of settlement. You may agree to buy a property for $1 million dollars and expect the property prices to continue to increase at a steady rate. But it is more likely that the Sydney property market is due to plateau for a few years.

Lessons can be learned from the Gold Coast high priced towers a decade ago. Not only did property prices fall, but banks tightened their LVRs and investors were locked into paying through the nose for a property that’s value spiralled downwards as administrators stepped in and quick exits were made.

With so much interest in the Australian Property market from overseas and with our dollar providing overseas investors such great value for their money, prices are unlikely to drop, but the banks will be placing more and more restrictions on investor loans.

What should you consider?

Like any purchase, make sure you have the deposit ready to pay and have KREISSON look over the contract before you sign anything. The Contract sets out all your rights and obligations. In addition to this, they are interpreted by the Courts in a particular manner and it is best explained by a solicitor.

However, the Contract should accurately reflect what you are expecting to purchase. As you cannot inspect the property, you need to envisage what you are buying, not what the agent is selling, but what is written into the Contract.

You should do your homework into the Developer and have a look at their previous work. Find out if their other buyers were happy with the end results. Do they have a good reputation? Does the builder have a good reputation? Find out what stage the development is at and check with Council what still needs to be addressed. Make inquiries as to the insurance of the project. Who is the insurer and what level of insurance is in place.

Only offer what you can afford now. Seek advice from your accountant as to what the best structure to purchase the property in. You may also like to negotiate your options in relation to payment of the deposit. Bank Guarantees or Bonds do expire, so you would need to take this into consideration when negotiating the sunset date.

You also need to pay stamp duty within 15 months from the date of exchange. Not on settlement. Ensure you take into consideration the full costs of purchasing before you commit to the purchase.