Buying property off the plan: pros, cons, and key considerations

If you’re in the market for a home or investment property, you’ve likely considered whether buying an established property or a new one would best suit your purposes. Some would-be buyers might be disappointed by the properties they’re seeing on the market but don’t really want to build one because of the commitment involved. That’s when buying off the plan can be a worthwhile option.

What does it mean to buy off the plan?

In simple terms, ‘buying off the plan’ means buying a property that hasn’t been built yet. Buyers might have to base their purchase decision on documentation associated with a future build, such as concept designs or floorplans, as well as a site visit where construction may or may not have started.

If the property is being created by an established property developer, they may set up a display home or suite to give potential buyers an idea of the property. Smaller developers, on the other hand, may only have artists' impressions or display boards to provide a sample of the fixtures and fittings.

Developers will generally sell ‘off the plan’ to raise funds during the construction process, in many cases as part of their finance requirements. Some purchasers have good experiences with so-called off-the-plan purchases, but they’re not always plain sailing. Let’s check some of the pros and cons.

Pros of off-the-plan buying

There are many benefits of buying off the plan including:

1. More time to save

A major benefit of buying off the plan, particularly for first home buyers, is that you don’t pay for the home up front as you would an established property. Generally, buyers are required to put down a deposit and the balance is paid on settlement. Sometimes this can be months, or even a couple of years away.

This can allow more time for you to get your finances in order and put a concerted effort into saving your money to keep your future home loan as small as possible. For some, having a set savings target and a date for settlement can be a great motivator for stashing cash aside. It also allows purchasers more time to research the home loan market to ensure they get the best mortgage available to them with features that meet their needs.

2. Purchase price discounts

As we’ve touched on, many developers sell off the plan so they can finance their projects, and some may offer discounts or incentives to lure buyers to sign up. These can be marketed to ‘early birds’ or are sometimes on the table if the developer is keen to sell stock still on their books before the project begins or after work has commenced.

3. Possibility for capital growth

‘Possibility’ is the key word here. In a rapidly rising market, buying off the plan can set a purchaser up for instant capital growth without them have to do too much at all. When you buy off the plan, the purchase price is essentially already agreed upon, so if home values rise while the property is being built you might stand to make a nice capital gain.

In some cases, off-the-plan purchasers may even choose to on-sell their property before their settlement date and pocket the profit that goes with it. Though, capital gains are never guaranteed.

4. New home advantages

There are many pluses with buying a brand new property.

They generally come with a builders' guarantee or warranty. Essentially, this means the builder has to ensure the property delivers everything promised in the contract in working order to a suitable standard of workmanship.

New properties also tend to come with more energy-efficient systems for utilities, promising ongoing benefits in reduced bills and better environmental outcomes.

They also generally require less maintenance and fewer repairs. This can remain the case for several years, while established properties often come with various levels of wear and tear.

Finally, buying an off-the-plan property typically gives you more control over fittings and fixtures, colour choices, and sometimes even layout. These are choices you don’t have when buying an established home.

5. Stamp duty savings and government grants

Many state and territory governments offer considerable stamp duty concessions to buyers purchasing off the plan for properties up to a set value (these can vary between the states and territories). In some jurisdictions, there’s even no stamp duty payable on off-the-plan purchases.

Many government grant programs also apply to people purchasing off the plan, particularly first home buyers. In some states, the purchase price must be under a set value to be eligible, although in other jurisdictions there are no value limits.

6. Contract protections

Most off-the-plan contracts will give the purchaser some rights (many of which are statutory, or required by law). These generally include:

• Allowing purchasers to exit the contract if certain subdivision conditions have not been met by a ‘sunset’ date noted in the contract. This includes the purchaser receiving a full refund of the deposit, as well as any interest earned.

• Giving purchasers the right to end the contract if they're not satisfied with certain subdivision plan changes (although this likely doesn’t apply to architectural or floorplan changes – more on this below).

• The developer or builder can’t end the contract unless the purchaser agrees or they obtain a court order. This is designed to prevent developers from stalling projects with the aim of scrapping existing contracts and reselling the property at higher prices.

Seek professional legal advice before signing anything (more on seeking legal advice below), especially if these conditions aren’t made clear in the contract.

Cons of off-the-plan buying

But of course, there are also inevitable pitfalls of purchasing off the plan. Here are some downsides:

1. Possible drop in property values

Just as purchasers can stand to do well in a rising market, they can also take a serious hit if property values fall by the time they come to settle on the property.

A revised property value will effectively see them having to pay more than what their property is worth. This can also affect their loan-to-value ratio (LVR) when they apply for a home loan, perhaps even leaving them needing to pay hefty lenders mortgage insurance (LMI) charges they may not have foreseen.

2. Delays in construction

Construction completion dates can be affected by many factors, such as approval hold-ups, materials shortages, labour issues, and poor weather. Settlement dates may be pushed out considerably, potentially putting buyers under unplanned financial pressure and disrupting other plans.

3. Contract variations

Despite off-the-plan property buyers having some statutory rights, the vast majority of contracts allow considerable flexibility for developers to make amendments to plans and specifications that may be necessary to complete the project.

These can include changes to internal floorplans, fixtures and fittings, or to your car parking arrangements. You might not always get what you thought you were getting.

4. Your financial position may change

If there’s a change in your financial position in the time since you put down your deposit, you may not be able to borrow the amount you’d planned to. In a worst-case scenario, this could see you unable to proceed with the sale, meaning you would likely lose your deposit and could be forced to cover any other losses the developer incurs as a result of your withdrawal.

5. Risk your developer could go bust

If the worst happens and a developer goes bankrupt and enters administration, buyers can lose their deposits. This can happen before construction has even started or at any time during the building process. Before you sign a contract, ensure the developer has arranged suitable insurance, but that insurance likely won’t cover all possibilities.

6. The completed property could disappoint

For many reasons, when the property you purchased off the plan is finished, it may not meet your expectations. This may be because it has turned out quite different to what you’d pictured, or that you hadn’t accounted for things like natural light, positioning of facilities, or even what's sprung up around the development since you signed your contract.

While there are some protections for buyers, under many contracts, developers are allowed to change their original plans to ensure the project can be completed. These changes can even include cutting down your floorspace (although there are limits on how far developers can go before having to pay compensation) or putting in different fixtures and fittings.

While there are some comebacks for issues of quality or poor workmanship, there may be little you can do about some of the property’s other shortfalls.

Tips for buying property off the plan

• Research the developer
  Before you sign anything, do your homework on the developer and their track record. If you can, look at any of their previous projects to get an idea of the quality of their constructions and ask after their reputation in the market, as well as their financial credentials.

• Be clear on market value
  Developers can put a sale price on the property, but it may not align to its market value. Be sure to do your due diligence to ensure the price is reflective of the current market. Some developers will put a premium on price so be sure you’re comfortable paying it, particularly given settlement may be some years away when many personal and market factors may change.

• Get legal advice on the contract
  It can be well worth the money to pay a solicitor to review the contract of an off-the-plan purchase before you sign it. It’s best to engage someone with experience in off-the-plan contracts as they are quite different to regular property contracts. Legal professionals can spot unreasonable terms and conditions, add clauses that will better protect your interests, and ensure you understand exactly what you’re signing up for. It may be enough to make you rethink your decision – or at least take into account the risks.

• Get your finances in order
  It’s wise to have a clear understanding of your financial position before you sign a contract and hand over any deposit. A mortgage broker will be able to assess your finances, calculate how much you’ll be comfortably able to borrow, and find you a lender to best match your particular circumstances. Obtaining pre-approval for a home loan can also put you in a stronger position to negotiate with developers leading through to settlement.

• Inspect before settlement
  Most off-the-plan contracts allow for a buyer walk-through of the completed property before settlement. You can bring a professional building inspector with you if you choose. It’s also wise to bring a copy of your contract so you can cross-check the fittings and fixtures are as outlined. Issues can be identified and raised at this point. Your legal representative can help you negotiate getting rectifications if required.