Risks and rewards of buying off plans
Q: What do we need to know about buying off a plan?
A: It’s easy to be dazzled by the architectural splendour, glossy finishes and dreamy lifestyles promoted by advertising material about new housing developments. Buying a brand new home off the plans can seem extremely attractive, especially if you’re struggling to find a property in a tight housing market.
If you decide to go down this route it is absolutely crucial to enter the process with your eyes wide open. Reading the fine print – starting with the photo caption advising you that ‘‘some images are an artist’s impression’’ – is just the beginning.
There are many benefits to buying off a plan. Not only are you signing up for a new home that should meet all the latest building specifications, but you are buying something at a set price with an initially low outlay.
A long settlement period (while the development is being built or finished) gives you time to get your finances in order. In theory, if the market remains buoyant then the property will increase in value over this period so you will be getting more than what you paid for at the outset.
However, the process is not without risks. If the market falls, then you may encounter problems if you try to sell. Also, the property may not meet your expectations and the build may take longer than expected.
You are entirely reliant on the developer, so you are at risk if their business fails and/or the development is on-sold to another company. Some financial institutions place limits on loans to people buying off plans, which can have an impact on your financial situation.
This means that buying off plan requires all the same due diligence and care as buying an existing property, and then some. Not only do you need to be able to visualise a property from a set of drawings, but you must be confident that it will be built to the specifications and timeline set out in the contract.
If you’re keen to proceed with buying off a plan, start by putting in some solid research. Don’t be swayed by pre-sale sweeteners and flashy show homes that may bear little resemblance to the actual finished product.
Do your homework about the developer and the construction firm – find out what their track records are, examine their credentials and look at any previous developments they have been involved in. Remember that you are giving these people your hard-earned money and you need to be confident that they will deliver the goods.
Generally, buying off a plan means providing a deposit upfront to secure the property. The remainder of the money is due on completion, but you will have to prove that you have the finance from the outset. While the long lead-in period gives you time to save money, there is also a risk that interest rates may go up or lending criteria may change. Discuss these issues with your bank or financial adviser to make sure you are prepared for these situations.
If a real estate agent is involved in selling properties in a proposed development, they can help you navigate the process. It’s also important to engage a lawyer to help you understand all the details of the sale and purchase agreement and any covenants on the title. These may extend to the ‘look and feel’ of a development or new subdivision, and include restrictions regarding fences, landscaping, exterior colour and cladding choices and may even include car parking restrictions for you or your visitors.
Developers will approach selling off plans in many different ways. Some contracts are designed to allow the buyer to choose their own floor plan; others may allow the developer to change the layout without checking first. It’s important that you understand that every aspect of the property, from the expected timeline to the finishes used, must be spelled out in the contract.
It is vital that you get legal advice before you sign anything. If you don’t go through these details very carefully before you sign you may be in for some unpleasant surprises later. Remember to check the contract to see if there is a ‘‘sunset clause’’ that specifies what will happen if the development is not finished in time. You should also ask what will happen if the developer goes into liquidation and the project is sold to another company.
The last thing you want is for your dream home, not to mention your deposit, to vanish into thin air.
Kevin Lampen-Smith is the chief executive of the Real Estate Agents Authority (REAA), the independent government agency that regulates the New Zealand real estate industry. If you have a question about buying or selling property, send it to susan.edmunds@fairfaxmedia.co.nz. For independent advice on buying or selling property, check out www.reaa.govt.nz.
You must be confident that it will be built to the specifications and timeline set out in the contract.