Off-The-Plan Purchases

October 6, 2014

What is “off-the-plan”?

OTP purchases generally refer to the purchase of a property before it has been built. This can mean that the property is still in the design and planning stages and construction has not yet begun or is about to begin. Potential purchasers can review the design and building plans but are not able to see or inspect the actual property.

OTP purchases typically involve apartment buildings; however, the term can also refer to the purchase of a lot in newly subdivided land. For example, this can be a large block of land divided into five separate lots with individual buildings on each lot.

 

Benefits and incentives

There are plenty of incentives and benefits involved with purchasing a property OTP.

Reduced stamp duty

InVictoria, stamp duty is payable on the value of the land and building as at the date the contract is signed. Accordingly, if construction has not commenced, the amount of stamp duty payable will be significantly lower in comparison to land with an existing building.

Furthermore, the Victorian government currently offers bonuses and a reduction in stamp duty for brand new properties, allowing for savings of thousands of dollars. This concession is based on the value of the building works performed after the contract has been signed. For example, if you have purchased an OTP lot for $600,000 and the construction cost of the building is $200,000; the value of the land will be calculated at $400,000. Accordingly, you will only have to pay stamp duty on the adjusted value of the land, which is $400,000.

Lower purchase price

Many OTP vendors are developers who tend to offer competitive “bargains” to tempt potential purchasers, as they often need assistance with their up-front costs to ensure that the project is a success. Due to the competitive nature of OTP projects, developers can be quite keen to sell as many properties as early as possible. Therefore, it is a good opportunity to get in early and negotiate a better price. Sometimes, you may also be able to negotiate smaller deposit payments or use bank guarantees.

Time

In OTP purchases, purchasers receive the benefit of “locking in” an agreed purchase price many months (sometimes years) before full payment is required. Settlement may not take place for an extended period of time, allowing you plenty of time to organise your finances and shop around for a suitable mortgage.

Capital growth

OTP purchases typically allow for an increase in property value by the time settlement comes around. If you signed a contract for a property prior to construction and the market experienced growth between the time you signed the contract and settlement, you would expect to enjoy an increase in the value of your property.

Tax benefits

If you bought an OTP property as an investment, there are potential tax benefits involved. For example, you may be able to claim tax depreciation for fixtures and fittings in the building and other expenses. It is important to seek advice from an accountant about these benefits prior to signing an OTP contract.

 

Risks

With the savings and benefits associated with OTP purchases, it is easy to be enticed into signing the contract to purchase. However, there is some uncertainty and risks involved in OTP purchases that you should consider before agreeing to purchase any property.

Changes to the Plan

With OTP purchases, developers may be required by the council or other relevant authorities to make necessary changes to the Plan of Subdivision. Sometimes developers do not expect these changes and may have to amend individual lot sizes to satisfy the requirements. In turn, this can affect your lot and you may end up with a smaller lot size than you originally purchased.

Unsatisfactory finished product

In OTP contracts, the vendor can be a developer who enters into a separate building contract with a builder for construction on the development. Accordingly, you may have little say in the workmanship or the type of materials that are used on your property. This can result in poor quality of works that will affect the value or cause defects in the future.

Furthermore, as the physical property does not exist at the time of signing of the contract, it may be difficult for you to visualise the finished product. You will be required to make a judgement based on the display suites or artists’ impressions and sometimes, what you have in mind may not be the end result that you get.

Cancellation by the vendor

OTP developments can be risky and uncertain ventures for the vendor. Therefore, OTP contracts generally provide an “out-clause” for the developer to cancel the contract. For example, the development may be refused by the council or other relevant authorities. The developer can also decide that the development is not a successful project and choose to cancel the contract.

In other cases, some contracts may specify that the Plan is to be registered within a certain period of time. If the Plan is not registered by that time, the vendor will have a right to cancel the contract and refund the deposit monies to you.

Decrease in market value

Due to the extended time between signing of the contract and settlement, there is a possibility that the property market could drop significantly. If you are obtaining finance, this can have a harsh impact as valuations on the property may be lower than expected and you might not be able to borrow as much as you anticipated, while remaining liable for the full contract price.

Long delays

OTP purchases usually come with a lengthy registration period (sunset clause). This means that the vendor has an extended period of time to complete the construction and register the Plan with the Titles Office. Therefore, if you have bought an OTP property with an expectation to move in by a certain date, you may not be able to do so if the settlement date is delayed. These long delays also prevent you from cancelling the contract until after the sunset clause has expired.

Changes to your personal life

With a lengthy expected settlement time for OTP purchases, your personal circumstances could change, yet you would still be required to pay at settlement. For example, you may lose your job, marry or divorce or have a child – all significant financial events that might affect your ability to pay at settlement.

 

What else should you consider before signing on the dotted line?

Research

It is always important to conduct your own research and background checks prior to signing the contract. This can include visiting the developer’s website and obtaining the company’s business numbers and contact details. You can read reviews of the developer’s past projects and their success rates. You can also try visiting the developer’s other developments to inspect the quality and speak to the developer’s previous clients.

You should visit the site of the development and check the location so that you are aware of other factors nearby that could affect your property upon completion. This includes noise, visual obstructions, traffic and even pollution, depending on the nature of other properties in the vicinity.

You can also carefully inspect the display home, models and plans to ensure that you are satisfied with the estimated finished product. Sometimes, you may be able to ask for the licence number of the builder and conduct a licence check on the builder. This will enable you to obtain information about the builder’s experience, and find out whether there are any conditions imposed and whether there have been any suspensions of licence.

Cooling-off period

In Victoria, purchasers have the option of pulling out of a signed contract within three business days if they change their mind about the purchase. However, if you decide to cancel the contract, the vendor is entitled to retain $100 or 0.2% of the purchase price, whichever is the higher.

It is also important to note that the cooling-off period begins the day you sign the contract – not the day that both parties sign. For example, if you sign the contract on Monday, 11 May and the vendor signs on Tuesday, 12 May, the cooling-off period ends at 5.00pm on Thursday, 14 May.

Inclusions

As OTP purchases usually involve buildings that are yet to be constructed, you should always check the contract to find out what is to be included in the construction. This is usually negotiated prior to signing the contract and can include items such as window furnishings, dishwashers, painting and decorating, car parks, storage units and air-conditioning. Some OTP contracts also provide for landscaping as part of the package. It is important to ensure that the contract includes everything you want in the end product.

Owner’s corporation rules

As OTP contracts frequently involve large developments, it is likely that an owners corporation will be created once the Plan has been registered. An owners corporation takes care of common property and aims to manage, maintain and repair the common property for the benefit of the lot owners.

Common property can be used by many different owners and the owners corporation usually imposes rules that owners, as residents, are required to abide by. Prior to signing the contract, it is important to ensure that you read these rules to ensure that you can abide by them.

Rates and levies

Similar to buying any real property, you should be aware of the rates and levies that are payable on the property. The risk with OTP purchases is that the estimated rates and outgoings payable on the property are current at the time of signing of the contract and can change drastically by the time of settlement. There may also be the developer’s unpaid land tax which is then payable by the purchaser at settlement.

If an owners corporation is involved, there will also be an additional levy payable to the owners corporation for maintenance of common property.

Loan approval

If you are obtaining finance to fund an OTP purchase, it is important to note that loan approvals usually lapse after about three months. Therefore, you will need to consider re-applying for a loan prior to settlement to ensure that you have enough money to fund the purchase. Lenders may change their mortgage requirements so you will also need to ensure that you have the most recent information. Lenders may also have a minimum size/area requirement in the end product before approving or settling the loan.

Complexity of documents

OTP contracts and section 32 vendor’s statements are usually quite lengthy and complicated and can contain many special conditions. It is quite common for lawyers to find that their clients have purchased an OTP property without being aware of the restrictions and covenants imposed. This can include the hefty penalty interest that will apply in the event of a default.

If you require assistance or legal advice in relation to an OTP purchase, please feel free to contact our office to make an appointment on 9870 9870 or email office@hutchinsonlegal.com.au

 

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