BUYING OFF THE PLAN
- Written by Melanie Toye, November 8, 2011
There are numerous benefits in buying off the plan. It’s a viable way to improve your investment portfolio, but there are some risks involved too. You have to do your research and weigh up your options and decide if it’s in your best interests.
Buying off the plan is when you purchase a property before construction has started by looking at the plans of a proposed development prior to an approval for a plan of subdivision. It can apply to the purchase of a house or an apartment. Buying off the plan also applies to buying a property while it is being constructed but not completed.
Buying off the plan also applies to purchasing a block of land before it has been subdivided. An example is when a land owner wants to divide a large lot of land but does not have the money to do it. The land owner can sell the lots first and then divide them later.
BENEFITS OF BUYING OFF THE PLAN
STAMP DUTY SAVINGS
One of the most common perceptions is that if you purchase off the plan you don’t have to pay stamp duty on the building. This is not always true. Stamp duty is paid on the value of the land, plus the value of the building at the time of the signing of the contract. If the building is half constructed, then stamp duty has to be paid on the value of the constructed part of the house. The stamp duty saving will be the greatest if you sign the contract before construction has started.
There are possible tax savings when you buy off the plan as an investment. The depreciation on the building, furniture and fittings is greater than on an existing building. Rental income can also be negative geared when borrowing the money to purchase the property. In order to negative gear, expenses, (which include interest paid on the loan) have to be greater than the net rental income from the property.
LOWER PURCHASE PRICE
It is common to get a lower purchase price at the early stage of a development. Developers are keen to sell properties in order to start raising funds. As more properties are sold the prices may increase as there is less supply and demand and competition for the remaining properties increases. Another factor to consider is that the best properties may be sold first.
Locking in the price is a major benefit of buying off the plan, and this is done by signing the contract. It may take 1 ,2 or 3 years for the property to be ready for settlement and in that period, property values generally increase. It also gives you time to save money to put towards the purchase.
OPTIONS ON DECORATING
Buying off the plan gives you the option of choosing your own colors and fittings and also putting forward suggestions to customize the way the property looks when finished.
BUYING OFF THE PLAN – TAKE CAUTION
Caution must be taken when buying off the plan and contracts must be read carefully. There may be clauses in the contract to protect the developer in the event that the development does not proceed. Developers take risks when they invest in real estate developments, They may not get approval to proceed with the development. They may not get a plan for subdivision. In this case there is a clause to cancel the contract. If a subdivision is not approved within a specified period of time which could be 18 months or 3 years, then either party can cancel the contract.
CAN THE CONTRACT BE CANCELLED
The developer can usually cancel the contract if a plan of subdivision cannot be registered within a specified period of time which is commonly between 18 months and 3 years from the signing of the contract. If there is no specified time put into the contract then both parties can cancel the contract after 18 months, if there is no subdivision approved. If the developer gets a plan of subdivision, then the purchaser cannot cancel the contract and has to settle at completion of development. Sometimes the completion takes much longer than anticipated and there is nothing that the buyer can do but wait for completion. The purchaser doesn’t know the settlement date so it’s very difficult in planning as to when to move in.
CHANGES TO LAND OR BUILDING
Sometimes councils may ask for changes to the dimensions of the land or building. The development cannot proceed unless these changes are made. There are normally clauses in the contract to make these changes and the purchaser cannot do anything about it. There are also clauses regarding appliances that you have chosen. If you have ordered a specific brand or model oven and that model is not available, then the developer can offer you another model or brand that is similar to the one you ordered. Another problem may be that you won’t like it when it finished.
CONTRACT & SECTION 32
The contract and section 32 are usually very lengthy and may be very difficult to understand. Australian Mortgage Managers has found that clients often are unaware that the purchase is subject to very restrictive terms and conditions, or that hefty penalty interest and costs can apply if the purchaser defaults.
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