RISKS IN BUYING OFF THE PLAN

 Another example in the media recently is the developer whose proposed development had increased in value since they sold off the plan some time before resulting in the developer altering their plans by reducing the size of many units while increasing the number in order to realize a financial gain by the developer.    The amended plans were approved by Council and the purchasers of the units were left with substantial loss of size of the units with no compensation and the only option to rescind. The developer was then able to resell the smaller units at an increased price to new buyers and also sell more units than they had included in the original plans.

In light of the increased number of client’s buying off the plan, we have put together some tips to reduce some of the risks or, at the very least, remind our clients that these risks exist and allow them to make informed choices.

The contract: 

Off the plan contracts contain many similar provisions which a buyer should be aware of:

1.  Settlement date: Be aware that settlement may be delayed by the developer for various reasons including the inability to obtain appropriate council approvals or even as a result of the weather.  Sometimes these delays can be substantial and recognizing that a buyer often waits 2 to 3 years even without any delays, an extension of that time is always significant:

2.  Size of the property: Nearly all off the plan contracts contain a special condition which allows the developer to alter the size of your property to a certain degree without paying any compensation for the loss to the purchaser.  If they reduce the size significantly, the only option you have is to accept the reduced size or rescind the contract.  You will receive your deposit back but there will be no compensation for the losses incurred such as legal fees or loss of opportunity where the value of the unit has increased over time;

3.  Fixtures and fittings: Almost all off the plan contracts will also contain special conditions which allow the developer to change or replace the finishes originally agreed to by the purchaser.  Normally the contract will contain a schedule describing the quality of the finishes which are often important to the buyer.  All buyers should be aware that a developer can replace the contracted finishes usually with something of equal quality and value, even if the buyer does not like or agree to the new brand offered;

4.  Possible strata expenses: It is important to review the plans of the building generally noting that the inclusion of lifts, gymnasiums and other premium common property items will increase the cost of upkeep in terms of strata fees in the long-term;

5.  Defects: Buyers should always be aware of the defect provisions in a contract noting any restrictions in being able to claim for rectification of any defects found once the buyer has moved in.  These provisions often contain a time limit after which a buyer is unable to claim for rectification;

6.  Strata Management: Many off the plan contracts contain provisions that ensure the strata management is carried out by a management company preferred by the developer and a buyer is constrained to vote in accordance with the developer’s directions. These contracts are often very lucrative and the buyer is usually bound to vote in accordance with the developer’s wishes for a certain period of time;

7.  Interest rates: Interest rates are currently at an all-time low but may increase by the time the property is completed resulting in higher payments on the buyer’s loan. 

Due Diligence:

When buying an off the plan property, one of the most important steps is a buyer’s responsibility to undertake due diligence on the developer and all relevant parties to the transaction.

The following are some tips that could be completed in order for a buyer to check the bona fides of a developer before executing a contract:

*  Ask how long the developer has been working in this industry;

*  Perform an ASIC search of the company to ensure they are registered;

*  Review the developer’s website for information on previous developments.  You could visit those developments or check out the display suite and review the quality of existing developments:

*  If the developer employs a builder who is a 3^rd party, it is important that the buyer inquire into the background of the builder to determine if they have undertaken residential development previously and the quality of those developments:

*  A simple Internet search of the names of the developer and the builder is an interesting tool, in particular, a search could reveal court actions against a developer or feedback on forums which is either negative or positive: and 

*  There is always a risk in buying an off the plan property that the purchase price paid no longer represents the actual value of the property when it is finished in a falling property market. If this occurs it may be difficult for a buyer to obtain the full amount of financing required to complete the contract.  Research the property market to ensure the price paid is for market value and estimate expected future market value.

Conclusion:

Essentially, there are risks in all property transactions; however, it is the buyer’s responsibility to undertake the appropriate inquiries as detailed above in order to determine if the benefits outweigh the risks.

In all circumstances, buyers should seek advice on the contract provisions from a solicitor and complete their own due diligence research on the developer, builder, architect and designers involved.

Useful Links:

Fair Trading website:

http://www.fairtrading.nsw.gov.au/ftw/Tenants_and_home_owners/Buying_property/Buying_off_the_plan.page

VISIT OUR WEBSITE FOR MORE INFORMATION ON BUYING & SELLING:

http://AandTLegal.com 

By Nicole Armitage, Principal Solicitor of A & T Legal (02) 9186 2533.

16 September 2015