After a bumper few years of steady growth, the media surrounding the Australian property market has more recently taken a more bearish view of the months ahead. Set to the backdrop of historically low interest rates, this view is not however held by all commentators in the market. It would appear the most affected segment of the market being off the plan apartments – where a combination of increased taxes on foreign purchasers and a reduction in borrowing ratios in some developments has both sellers and buyers more than a little worried.
Our role as your personal legal representatives it to act in YOUR best interests, so below I attempt to set out a timely caution to purchasers in this market as to some of the key considerations that should be taken into account when buying off the plan.
Buying off the plan is not like buying an existing house or apartment. As our Customer Concierge department remind clients entering into transactions of this type, you are in fact buying a set of rights and responsibilities. The Contract of sale and disclosure document that accompanies it details both the responsibilities of the seller and your responsibilities. It is important as a buyer you understand these in full when entering into any agreement to purchase.
Set out below are five key macro considerations which need to be resolved prior to any purchase decision. Micro detail should be left to your practitioner to advise on a case by case basis.
Essential Macro Considerations
- Buy from a reputable builder Buying off the plan necessitates entering into a contractual agreement with another party – the builder / developer. Like all contracts, agreements of this nature depend heavily on the intention of both parties. In other words, it is important that you KNOW who it is you are contracting with. Often people over look this important step in the interests of price.
However, when you are relying heavily on the future execution of an Agreement and the preferred outcome is a successful build and delivery of your apartment it is essential that you all parties interest are aligned. To this end, as a purchaser the reputation of the seller is important – ie the brand.
Why? Well the truth is, branded builders who are responsible for ongoing sales of property suffer more from reputation damage by failure to deliver than do smaller unknown developers. Generally speaking, larger developers rely on their brand to continue to move stock in the future and are less likely jeopardise their reputation over a single apartment sale.
- Have the contract reviewed As mentioned earlier, when buying off the plan you are buying a set of rights. Your job as the buyer is to understand the context, the location, the aspect etc and to determine that this lot is for you. Your advisers responsibility is to deep dive into the detail and ensure you are protected and getting what you expect to get.
I often use the example of finishes as a great example. There are tiles and then there are tiles. By failing to describe with any given detail, a less scrupulous developer has the ability to substitute any old tiles for the lovely tiles you saw in the display suite – you know, the one that persuaded you to buy in the first instance! In OTP contracts, the devil really is in the detail and prudent micro advice should always be a part of the plan.
- Valuation Purchasers of Off the plan apartments must understand that favourable valuations in the future are not guaranteed and that increasingly conservative positions taken by mainstream lenders may affect their ability to borrow the desired amount at settlement.
It is therefore essential that purchasers signing contracts for off the plan purchasers have recourse to adequate funding should their ability to borrow be limited by a change in the macro economic environment, their job and or the lending policies of major banks from whom they borrowed. In other words, it is essential that buyers act carefully and consider the broader environment when making these purchases.
- Timing As lending requirements by the banks tighten, the burden on developers to meet minimum sales requirements set by the bank before being able to access the next stage of their funding may mean that the initial delivery schedule is dramatically affected. This should be brought to your attention by your practitioner when you have your pre signing contract review. However on a practical level, if you are selling in order to move, you should be acutely aware that buying off the plan can be delayed and the delays are largely outside of your control.
If you are working on a non-negotiable timeline, you should take steps early to get the information you need or make the necessary alternate arrangements.
- Views For a lot of us, the idea of moving into an apartment block comes with the romance of a fantastic view. Buyers should be aware however that views are not an entitlement and that these can change, sometime even before moving in. Understanding what is happening in the local area should be a part of your macro analysis. Talk to council. Walk the neighbourhood. Make your own inquiries to ensure what you think your going to get on a practical level in terms of views will remain.