One of the problems with buying off the plan is that no lender will be able to give you a definite finance approval on the purchase of a house or a unit off the plan until the property has actually been practically completed.
Therefore any approval from a lender to finance the purchase will be an indicative approval only, or approval in principle, subject to valuation of the property at the time it is practically completed.
If at that time the property values are less than the purchase price eg. the market has fallen even further between the date of purchase and settlement, obviously the lender will be advancing a lesser percentage of the purchase price and you will need to make arrangements to find the shortfall yourself.
“Oh No” you say.
Creative investors though are coming up with innovative solutions to deal with this possibility.
Read on if you want to educate yourself about this.
The “Silver Bullet” for Buying Off the Plan
Add the following Special Condition to your offer to purchase.
It will protect you if there is a drop in the property between the date you contracted to buy it and the date of settlement.
Would a developer agree to such a clause?
Three years ago they would not.
But today many of them will, and do.
This shows once again that it truly is a Buyer’s market.
“a. The Seller acknowledges that the Buyer has purchased the property on the assumption that the property has a value not less than the purchase price and the Buyer’s Lender will be financing the purchase on that assumption.
b. The Seller also acknowledges that the Buyers Lender will be engaging a Valuer to undertake a valuation of the property on or about Practical Completion of the property, and before settlement, and this Contract is subject to the Valuer valuing the property for at least 95% of the purchase price failing which the Buyer may terminate this Contract and in that event this matter will be at an end and the deposit refunded to the Buyer.”
When you read this clause, it is clear that the matter may not proceed if the Buyer’s Lender does not value the unit at at least 95% of the purchase price.
If the Buyer and the Seller are prepared to proceed with the sale if however there is an adjustment downwards of the purchase price, the following additional self explanatory paragraph could be added to the above clause.
It is a fair solution between the interest of the Buyer and the Seller and is another example of how you can be creative with your use of special clauses to move forward in the Real Estate Market.
Now that you are educated about this issue, add it to your catalogue of clauses that you have in your Investors Toolbox.
More power to you as an investor.
“c. Without limiting the Buyer’s right to terminate this Contract of Sale under paragraph (b) the Buyer may elect to settle the purchase of the property and if it does so, the purchase price payable on settlement will be reduced and calculated as follows:-
Purchase Price will be the Contract price less 50% of the difference between the Purchase Price stated in this Contract and the valuation referred to in paragraph (a) above.
(Example:-Property is valued at $360,000 and the Contract Price is $400,000. The reduced Purchase Price is:-
$400,000-$360,000 = $40,000 /2 = $20,000
Reduced Purchase Price = $400,000-$20,000 = $380,000.”
Finally, what if the property was valued at 50% less than the purchase price and the developer just did not want to be forced to sell at such a decreased price.
It is reasonable in these circumstances to add the following extra paragraph to the clause which allows the seller to terminate the sale:-
“d. If the Buyer elects to proceed and settle the purchase of the property at the Purchase Price calculated as set out in paragraph (c) then the Contract is further subject to the Seller being satisfied with the amount of the reduced purchase price failing which the seller may terminate this Contract of Sale and in that event this matter will be at an end and the deposit refunded to the Buyer.”
Subscribe & don’t miss a single episode of michael yardney’s podcast
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
Need help listening to michael yardney’s podcast from your phone or tablet?
We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.
Prefer to subscribe via email?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.