Many Australian expats living overseas will consider buying an off the plan apartment. There are many benefits in doing so and the developer promote these benefits. What the developer generally fails to advise is the negatives involved. This article will explore both the positives and the negatives of purchasing off the plan.

What is off the Plan?

Off the plan is when a builder/developer is constructing a set of units/apartments and will look to pre-sell some or all of the apartments before construction has even began. This type of purchase is call purchasing off plan as the buyer is basing the decision to purchase based on the plans and drawings.

The standard transaction is a deposit of 5-10% will be paid at the time of signing the contract. No other payments are required whatsoever until construction is complete upon which the balance of the funds are required to complete the purchase. The length of time from signing of the contract to completion can be any length of time really but generally no longer than 2 years.

What are the positives to buying a property off the plan?

Off the plan properties are marketed heavily to Australian expats and interstate buyers. The reason why many Australian expats will purchase off the plan is that it takes a lot of the stress out of finding a property back in Australia to invest in. As the apartment is brand new there is no need to physically inspect the site and generally the location will be a good location close to all amenities. Other advantages of purchasing off the plan include;

1) Leaseback: Some developers will offer a rental guarantee for a year or two post completion to provide the buyer with comfort around prices,

2) In a rising property market it is not uncommon for the value of the apartment to increase resulting in an excellent return on investment. If the deposit the buyer put down was 10% and the apartment increased by 10% over the 2 year construction period – the buyer has seen a 100% return on their money as there are no other costs involved like interest payments etc in the 2 year construction phase. It is not uncommon for a buyer to on-sell the apartment prior to completion turning a quick profit,

3) Taxation benefits that go with purchasing a brand new property.

These are some great benefits and in a rising market purchasing off the plan can be a great investment.

What are the negatives to buying a property off the plan?

The primary risk in purchasing off the plan is obtaining finance for this purchase. No lender will issue an unconditional finance approval for an indefinite period of time. Yes, some lenders will approve finance for off the plan purchases however they are always subject to final valuation and verification of the applicants financial situation.

The maximum period of time for a pre approval is three months. This means that it is not possible to arrange finance prior to signing a contract on an off the plan purchase as any approval would have long expired by the time settlement is due. The risk is that the lender can decline the loan when settlement is due for one of the following reasons:

1) Valuations have fallen so the property is worth less than the original purchase price,

2) Credit policy has changed resulting in the property or purchaser no longer meeting bank lending criteria due to credit score.

3) Interest rates or the Australian dollar has risen resulting in the borrower no longer being able to afford the repayments.

If you can not finance the balance of the purchase price on settlement you may forfeit your deposit AND potentially be sued for damages should the developer sell the property for less than the agreed purchase price.

During the global financial crisis banks around Australia tightened their credit lending policy. There were many examples where applicants had purchased off the plan with settlement imminent but no lender willing to finance the balance of the purchase price. Here are two examples:

Should I buy an Off the Plan Property?

The author recommends that Australian citizens living overseas considering purchasing an off the plan apartment should only do so if they are in a strong financial position. Ideally they would have a minimum of a 20% deposit plus costs.

Before agreeing to purchase an off the plan unit one should contact a specialised mortgage broker to confirm that they currently meet home loan lending policy and should also consult their solicitor/conveyancer before fully committing.

Off the plan purchasers can be great investments with many many investors doing very well out of the purchase of these properties. There are however downsides and risks to buying off the plan which need to be considered before committing to the purchase.