Pros and Cons of Buying Off the Plan
What does it mean to buy “off the plan”?
Buying off the plan means that you are buying a lot on an unregistered plan of subdivision. For example, a landowner may own a large paddock and would like to divide the land into smaller residential lots to be sold off, or a landowner may own a large piece of land and is intending to build a 7 storey building with multiple units in that building to be sold off. Instead of waiting until the land is dived into small lots or the 7 storey building is complete, the landowner enters into contracts with buyers on the basis that the landowner will use his or her reasonable endeavours to sub-divide the land and if he or she is successful the sale will be completed. There are benefits and risks for purchasers in buying off the plan. These benefits and risks need to be carefully assessed by each purchaser and on a case by case basis.
What are the benefits of buying off the plan?
Stamp duty savings
One of the most common reasons given for buying off the plan is the stamp duty savings. Stamp duty is payable on the value of the land and building as at the date of the contract of sale. Therefore, if construction or refurbishment is yet to be commenced, a reduced amount of stamp duty is payable as the value of the works performed on the property as at the date of the contract of sale will be minimal. If the sale takes place after construction has commenced, the value of the land and building as at the date of the contract of sale will be assessed and that is what the stamp duty will be assessed on. Alternatively, if all works are completed before the contract is signed, it is unlikely that there will be any stamp duty concession.
Some purchasers buy off the plan because of possible tax benefits. Off the plan purchases can realise significant depreciation tax savings that are greater than those available on existing buildings, if purchased for investment purposes.
Depreciation expenses that can be claimed may include building, furniture and fittings.
Lower purchase price
Landowners are often required to sell as many properties as early as possible to obtain the funding they need to undertake the subdivision. As such, prices are usually very competitive at the commencement phase. However, as demand increase and the development takes shape, similar properties purchased closer to completion will be more expensive than those purchased early.
Lock in the price
The price of the property can be locked in as at the contract date. One or two years down the track the value of your property will most likely have grown. Generally speaking, property values increase between the period of buying off the plan (signing the contract) and the date the development is completed.
What are the risks associated with buying off the plan?
Complexity of documents
Contracts and Section 32 Vendor’s Statements for off-the-plan matters are usually lengthy and can be extremely complicated. It is not unusual for purchasers of off the plan contracts not to be aware that the transaction is subject to very restrictive terms and conditions. Legal advice should be sort prior to entering into an off the plan contract.
Cancellation by the vendor
Landowners run the risk that permission for the development may be refused or that the development may become financially unviable. In such cases the landowner needs to be able to cancel the sale contracts. For example, if a condition in a planning permit is too onerous for the vendor to perform in their reasonable opinion, then the vendor will be able to terminate the contract by giving notice to the purchaser. The same generally applies if the vendor is unable to obtain finance for the development.
Unable to cancel despite long delays
Generally either party can end the contract if the plan of subdivision is not registered within the specified period however, neither party can cancel until this period has passed. Under the Sale of Land Act 1962 (Vic) the prescribed period is 18 months in which to register the plan of subdivision, but another period of time can be specified. It is essential to determine at what point the contract of sale allows a party to end the contract and at what point in time the contract will automatically terminate.
The dimensions may change
Local council or other authorities may put conditions on the granting of approval for a development. For example, the landowner may be required to set aside some land for public open space. If the developer has not anticipated this, the plan may have to be amended. It may be a simple matter of amending all of the boundaries of the individual lots by a few centimetres in order to provide the extra land required for public space or it may require significant amendments to the plan of subdivision. Most contracts for off the plan purchases contain a special condition which prevents the purchaser from ending the contract on the basis of minor adjustments to the dimensions or area of the lot purchased. However, where there are substantial amendments, then the vendor is required to notify the purchaser and the purchaser can either elect to terminate the contract or elect to accept the amendments.
Finishes and fixtures may change
Most contracts for off the plan purchases contain a special condition which prevents the purchaser from ending the contract because of changes to the fixtures and fittings. Most contracts will allow the landowner to amend or change fixtures and fittings without reference to the purchaser.
You may not like it when it’s finished
It is possible that when the development is finished you simply won’t like it.
Perhaps it’s the unit on the 20th floor of a residential tower and sunlight reflected from other buildings causes problems. Maybe the air-conditioning unit or the goods lift create noise nuisance.
Published: 4 July 2014