Buying off the Plan - Risk and Return

Buying property “off the plan” is a risk and an opportunity all rolled into one.

It means that you are signing up to buy a property that doesn’t exist yet. The piece of

land you are buying is still just part of a bigger block which the Vendor is subdividing.

It has no Title yet.

If you are buying a land and build - same thing - the Vendor literally can’t transfer it

to you until it not only has a new Title but the house has been built and its got a code

compliance certificate from Council.

Sometimes this can all take a while. And therein lies the opportunity. Therein also lies the risk.

The opportunity is obvious: You’re signing up now but don’t pay for it until its done.

That can take two or three years. You are buying at today’s price, you cough up a

10% deposit at the start, and then pay nothing more until the end. Ideally by the time

you get to the end it could be worth more than it cost you.

Sounds great!

So what’s the risk?

Here are some risk factors:

Prices might not go up.

Property prices don’t always just keep chugging upwards.

I recall acting for someone who bought an apartment off the plan for $750,000.00.

He paid a $75.000.00 deposit at the time. He had it in mind that by the time it was

ready in two years the place would be worth about $900,000.00. Because that

was the sort of value increase that had been happening.

Then along came the global financial crisis.

Suddenly the bank didn’t want to lend anything more to the Vendor. So he couldn’t

pay his builder who then couldn’t pay his subbies so two years to complete became

three. Then four.

Nobody was buying so the $900,000.00 the buyer was hoping for was a pipe dream.

When settlement finally came around the buyer tried to get the money but the bank

wanted a valuation first. It came back at $650,000.00. So the buyer was going to get

much less money from the bank. He would have to top it all up with more cash of his

own. The problem was he didn’t have enough cash of his own.

You want to buy off the plan: that’s fine but just know that a lot can change in two or

three years and sometimes you won’t see it coming.

It might be ready sooner than you think

How good that you can buy it now but not have to pay for it for two or three years!

So what are you going to do if the Vendor really gets cracking and gets the job done

inside a year. Will it catch you off guard? Be prepared.

It might take longer than you think. This can also be a problem.

Remember you are under contract so your options are limited. You can’t go looking

at other properties. You’re stuck with this one. If you see something else you really

like, too bad.

Interest rates might go up

True story. Can you handle it if they do? Do your numbers still work?The bank might change tack.

Bank’s lending criteria can change. Or the government might introduced LVRs or

DTIs or some other acronym that sounds innocuous but is actually deadly to buyers.

You won’t lock a bank down to lending to you when you sign the contract. No lender

is going to guarantee you the money two years in advance. In that time stuff can

happen - you might lose your job or do something silly that affects your credit rating.

You are signing the contract trusting that you will be able to pay for the property two

years later.

The Vendor might pull the property from the market

Its possible. When you buy off the plan the contract usually says that the Vendor

can’t guarantee how long it will take to get to the finish line.

Most off the plan contracts also include a “sunset clause”.

A sunset clause states that if the Vendor isn’t able to convey the property to you by a

certain date you can cancel. Sometimes it also lets the Vendor grab an extra six

months if he’s getting close.

Sometimes though a sunset clause actually allows the Vendor to cancel, not just the

buyer.

If the contract gets cancelled because of the sunset clause that means you have

been out of the market for at least two years. If the market has risen you are now

worse off because it is going to cost you more to get a property now than it would

have two years ago.

So if the Vendor can cancel under the sunset clause you have a problem. He has

much more control over the timeline than you do. And if the market has risen and the

Vendor could sell the property for more now, do you think he might be tempted to

cancel?

Not all Vendors would but the odd unscrupulous developer might and realistically it is

very hard for most people to fight against that.

The flipside is that if the market has dropped the Vendor will do whatever he can to

get things done so that buyers can’t use the sunset clause to pull out. Especially if

the Vendor has spent a lot of money already and if there aren’t many other buyers

lining up to buy.

Bottom line, you need to check the sunset clause.

Don’t DIY this sort of thing. Contact Queenstown Law on 03-4500000,

russell@queenstownlaw.co.nz or claire@queenstownlaw.co.nz