Buy now, pay later! The glossy brochures are so enticing. A beautiful new home with all the bells and whistles. You get to pick the paint and finishes. These are some of the pros of buying “off-the-plan”. This means that the home may not yet be built, and is only identified by its location on a plan of subdivision. Recent legislative changes have tried to minimise some of the risk to buyers, but off-the-plan contracts are still notoriously complicated. So, what are some of the cons? Here are just a few:
Be prepared to wait
The agent may give you an estimated completion date, but that is not a binding promise. The legislation provides that vendors have 18 months to register the plan of subdivision, and contracts may extend this to 6 years or longer. Either party may terminate the contract if the plan is not registered by that date. This provision is known as the “sunset clause”.
The risk is that subdivision may not be approved at all, or that settlement will be delayed for a long time. Perhaps the vendor can’t sell enough apartments. Maybe a disgruntled neighbour takes the developer to court over the plans. What if the developer goes bankrupt? You are locked in even if delays are apparent long before the sunset date.
You may want the extra time to save money for the purchase. But if it’s a lengthy delay, you need to make contingencies for your changing circumstances, such as having a baby or losing your job. Pre-approval may be limited and finance is not guaranteed. Plus, if the contract is terminated you may be priced out of your chosen area by that time. You’ll get your deposit back but no extra compensation.
In some cases, dodgy developers would delay settlement until after the sunset date, enabling them to terminate the contract and re-sell the property for a higher price. The law changed on 4 June 2019 to prevent vendors from doing so in relation to residential premises without giving at least 28 days’ written notice to the buyer and obtaining their consent. These requirements apply retrospectively from 23 August 2018.
Expectations vs reality
When buying house and land packages off-the-plan you need to have a good imagination. With some developments, you may be fortunate enough to see a model home, or some parts of it. There should at least be fixtures and fittings to inspect, colour schemes to choose, and possibly even flexible layouts. But you won’t be able to walk through the real thing until a week before settlement.
A common complaint is that it’s smaller than anticipated. Measurements are hard to judge on paper. It may also be darker, noisier, or simply not feel like home. Plus, the finishes and fixtures are not guaranteed. Contracts usually allow the developer to substitute appliances like for like. Perhaps the model you chose has been discontinued. So be sure that you look at the benchmark brand rather than the model itself. Unfortunately, if you decide that you just don’t like the place once you finally see it, you can’t change your mind about buying it.
Also risky is the quality of the build. Just because it’s brand new doesn’t mean that you can rely on the standard. You’ll have to proceed with settlement even if defects are apparent. The contract will not be subject to building inspection and you have no contractual relationship with the builder. If the apartment is over 3 stories you won’t even have builders insurance. You’ll be reliant on enforcing legislative warranties, which may not be easy.
The last minute rush
After all that waiting and wondering, you finally receive notification that the plan of subdivision has been registered. Then comes the “fun” part. The contract usually provides that you have only 14 days to settle. What if you happen to be on holidays? You’ll need to time every trip very carefully for possibly up to 6 years!
If you’ve ever had any dealings with a bank, 14 days is a very short time for all the paper pushing that’s necessary to obtain a loan. You have to be organised and ready to go (which is hard when you have no idea when settlement will be). If you or your bank are not ready to settle, you start paying penalty interest per day of delay, including weekends and public holidays. The standard contract allows for 12% pa on money owing, but some contracts raise this to 20%. Costs can add up quickly.
People often asked for my services only at this point. They didn’t get legal advice before signing the contract and now it’s almost too late. If you are considering buying off-the-plan please get your conveyancer involved from the beginning. Off-the-plan contracts are often hundreds of pages long, and you need an expert’s guidance. We may be able to negotiate some of the above restrictions, or at least warn you about them. We will be by your side for however long it takes to complete, and help you through the process.
Aliza Taubman is the Principal Solicitor at Prime Property Lawyers
Thinking of buying or selling a property in VIC? Contact us for more information.