Issues for Purchasing Property Off the Plan

Buying units off the plan is back on the radar.

Many property investors “having a go” have returned to the market place and signed up to buy property now at today’s prices, but pay for it down the track.

In the rush to secure a bargain though many are missing a couple of major pitfalls which go right to the heart of the risk of this strategy.

Let’s examine these issues carefully.

 

Uncertain Settlement Date

A major issue with the purchase of units off the plan is that the settlement date will be linked to the completion of the building, its final approval by the local authority and registration of the complex at the Titles Office to create separate titles for each of the units.

The Developer will then require settlement to take place as soon as possible.

[sam id=32 codes=’true’]It is common therefore for the Contracts of Sale to state that settlement is to be as early as even 14 days from registration of title.

It goes without saying that almost always this period will be grossly inadequate and will place you in a position where you have to ask for an extension of the settlement date with the Developer.

If an extension is granted to you, you will often pay for it dearly by the imposition of high penalty interest eg. up to 20%.

However if you are street smart at the time you negotiated the purchase, you would have already asked for a more reasonable time for settlement eg. 30 days from the registration of the title.

You will usually get it too because the Developer is keen to make the sale to you then.

If you have to agree however to a 14 or 21 day settlement (and I strongly recommend against it) see if you can sneak a clause in that gives you the right that (if you can’t meet that timeframe) to then ask the Developer for an extension and a more reasonable penalty.

Without such a clause, you have no right to insist upon an extension or delay of settlement and you will be at the mercy of the Seller as to whether they firstly give you an extension and if so, how much you pay for it.

 

Finance Approval

No lender will be able to give you a definite finance approval for the purchase of a unit off the plan until the unit has been completed.

They will then engage a Valuer to value the unit and a loan approval will be linked to a percentage of that valuation, or the purchase price, whichever is the lesser.

Therefore including a finance clause in the purchase of a unit off the plan will only give you the comfort of obtaining an indicative or approval in principle letter from your lender subject to the valuation at the time of completion of the building.

You should understand that if the unit values are less that the purchase price eg. the market has fallen between the date of purchase and settlement, then obviously the lender will be advancing a lesser percentage of the purchase price and you will need to make arrangements to find the short fall yourself.

Be aware of this possibility.

If you can’t find the short fall and can’t settle the purchase, then of course you will be in breach of your obligations under the Contract and the very least that will happen to you is that you will forfeit the deposit.

If the loss on the re-sale of the unit by the Developer in those circumstances is more than the amount of the deposit then they will be entitled to sue you for the greater loss to them.

Of course, the reverse too may be the case and your research may pay off when, come settlement date the lender’s valuer values the unit at more than the purchase price.

The lender may then be prepared to lend you more than what you initially expected because of the real increase in the value of the property since the date of the Contract.

That would be a classic example of someone getting the commercial decision right, that is, buying and securing the unit today at a purchase price calculated today but paying for it in a couple of years time when the values have assumedly increased.

[post_ender]

 



Want more of this type of information?


Rob Balanda

About

Rob is a partner in the Gold Coast based law firm MBA Lawyers. He is a highly regarded educator of property investors and estate agents and the author of the "Made Simple" series of books and CD's.
Visit www.ClausesMadeSimple.com


'Issues for Purchasing Property Off the Plan' have 1 comment

  1. September 26, 2013 @ 4:00 pm Dean

    Nice article Rob. It’s fantastic when the research comes off and the client experiences the latter.

    Reply


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