Buying off the plan and selling while under construction
Buying off-the-plan and selling while still under construction
Often a developer will sell land “off the plan” to have sufficient funds to construct buildings. Usually a minimum number of buildings will need to be sold before construction can begin.
A deposit is usually paid when a contract is made between the developer and the purchaser, with the full amount due by settlement or upon completion of the building. Payments may also be made at different stages of the building. The building stages include:
• First fix
• Roof and brickwork
• Internal linings
• Second fix (internals)
Buying off the plan is appealing as it can save money, and is a popular option for first home buyers for many reasons. This type of purchase can be more complex than a regular transaction with advantages and disadvantages that need to be considered. An off the plan purchase can occur at various stages, either at the drawing and planning stage, at demolition of a site, or prior to full construction.
The advantages of buying off the plan include:
• Purchasers may have more say as to the design of the building which can suit their personal preferences;
• the building works are locked in at the market price at the time of entering into the contract;
• first home buyers who are building their own home can apply for the $15,000 First Home Owners Grant (FHOG) in South Australia, which will be received upon commencement of the building works (find out more here);
• the governments “Off the plan Concession” applies to purchases of off the plan apartments located anywhere is South Australia where the contract is entered into between 20 June 2016 and 30 June 2018 (find out more here);
• a $10,000 pre-construction grant for off-the-plan apartment purchases may be available for contracts entered into between 22 June 2017 and 30 September 2017 (find out more here); and
• purchasers will only pay stamp duty on the land not on the future value of the improved land and buildings.
Of course, there are some pitfalls to be aware of also:
• The purchaser must be confident that they are happy with the floor plans, advertising and artist’s work, as they are not able to see the finished product;
• dealing with matters of opinion relating to the final finishes and overall quality of the building work as well as changes to unexpected plans and specifications;
• a completion date that is uncertain and may be later than expected due to construction delays;
• contractual terms that are complex and difficult to understand; and
• the financial risk of an uncertain market value at the end, due to slow price appreciation or depreciation.
Understand the obligations on each party:
It is vital that each party understands the legal obligations imposed on them upon entering into a contract and that independent legal advice is sought. Some common things to understand can include:*
• whether changes can be made to the design and finishes;
• what will happen if the building isn’t completed on time or at all and whether this will prevent settlement from taking place;
• how to deal with delays and extensions of time;
• whether the property will be party of a community plan and what obligations this places on the vendor and purchaser;
• how outstanding rates and taxes will be paid by the parties at the time of settlement;
• how the deposit will be paid, held and managed, in the event of termination of the contract;
• what warranties apply and how defects will be managed at the time of completion;
• if the development plans are not approved or unsuitable;
• how inspections of the property will be carried out and by who; and
• what the full costs are.
Selling while still under construction
It is also common for a purchaser to sell the property before settlement and/or building completion. This may be popular where there is the potential for a high return when the property value has increased substantially over the construction period or if the purchaser’s financial position has changed since entering into the contract and they will have financial difficulty in making repayments on a loan that has been taken out.
The conditions contained in the contract of sale will stipulate the requirements and obligations in order to re-sell before the purchaser has obtained title to the property. The developer may place restrictions on the ability to re-sell, so it is important to understand the contract conditions before you sign it.
Re-sales are usually managed by a real estate agent or off-the-plan agent, which also means that commissions are usually payable. Other factors to consider include capital-gains tax implications**, and legal costs of preparation of the contract of sale.
*this is not an exhaustive list and each party should refer to the specific contract for comprehensive terms and conditions and seeking independent legal advice.
** independent financial and tax accounting advice should be sought.
– Lauren Robbins Registered Conveyancer | Owner