Purchasing “Off the Plan” in NSW: Benefits, Risks and What to Check Before You Sign

Buying “off the plan” means committing to purchase a property before it has been built (or before it is complete). In NSW, off-the-plan purchases are relatively common and can be a great pathway into the market, but they also involve unique risks compared to buying an existing property.

Off the plan often applies to units/apartments and townhouses. It can also include purchasing vacant land “off the plan” in a proposed subdivision, where the land cannot be transferred until the developer has installed required infrastructure (such as roads and services) and completed subdivision registration, to enable separate titles to be issued for the new lots.

This article explains how off-the-plan contracts generally work in NSW, the potential benefits, the key risks, and the practical steps that purchasers should take before signing.

What does off the plan mean in practice?

When a purchaser buys off the plan, they generally:

• Sign a Contract for Sale based on proposed plans and specifications, not the finished property

• Pay a deposit (often 10%) at the time that contracts exchange

• Wait for the duration of the construction or development period (which can take several months or years)

• Settle on the purchase, once the project is complete and the necessary titles/registrations are in place

For off-the-plan apartments/townhouses, that usually means waiting for construction completion and the strata plan registration.

For off-the-plan land, that usually means waiting for the completed installation of infrastructure/services and registration of the plan of land subdivision.

Because the property (or the lot) is not ready at exchange, the contract documents (and the detail within them) matter significantly.

Potential benefits of buying off the plan

Off-the-plan purchases can offer real advantages, depending on the development and a purchaser’s goals.

1.     More time to save and plan

There is usually a long gap between exchange and settlement. For some purchasers, this provides time to:

·         grow savings

·         plan for settlement costs

·         prepare finance (noting that loan approval is typically confirmed closer to settlement)

·         plan for a house build

2.     Brand new property

New builds usually come with fewer immediate maintenance & repairs and include:

·         modern design standards

·         new appliances and finishes

·         building warranties/defects regimes that can assist if issues arise

3.     Potential for capital growth

If the market rises between exchange and settlement, the property value might increase even before settlement.

4.     Choice of layout, aspect and finishes

Early in a project, purchasers may have more options – such as preferred floor plans, views, parking, storage, or upgrades (depending on the developer’s offerings).

5.     For vacant land: a pathway into a new community or estate

Buying vacant land off the plan can be appealing where purchasers want:

·         a particular location within an estate

·         a future build opportunity (subject to council and other requirements)

·         the benefit of new surrounding infrastructure or facilities once the subdivision is complete

Key risks to understand before buying off the plan in NSW

Off the plan contracts involve risk to the purchaser because they are committing before the final product exists.

1.     The finished product (or lot) may differ from what is expected

Most off-the-plan contracts include provisions allowing changes during construction or development. These can relate to:

·         unit size or layout

·         finishes and fittings (and permitted substitutions)

·         common property areas (gyms, pools, landscaped areas)

·         views/light (nearby construction or design changes can impact these features)

For off the plan land, changes may include:

·         adjustments to lot boundaries/area

·         changes to easements, restrictions on use, or covenants

·         changes to the location or extent of infrastructure works that impact amenity or access

 

2.     Risk of delay

Construction or works delays can occur due to inclement weather, labour shortages, supply chain issues, industrial action, approvals, challenges with authorities, construction finance issues, or builder insolvency.

Most contracts include “sunset date” provisions – these cover the latest date by which the construction must be completed and the plan registered, failing which the contract may be rescinded. Sunset dates usually can be extended by the developer in the case of delays outside of their control. Sunset clauses are significant and should be reviewed closely.

 

3.     Finance risk at settlement

Purchasers either assume or bear the risk finance will be available on settlement on the same terms as at exchange.

However:

·         interest rates can change

·         lending criteria can tighten

·         personal circumstances (affecting borrowing power) can change

·         the lender’s valuation at settlement may be lower than the contract price, meaning a purchaser may need to contribute additional funds to settle which aren’t easily available.

4.     Market risk

If the market declines between exchange and settlement, the property value may fall below the contract price. This can create:

·         funding shortfalls

·         reduced equity

·         pressure to settle on unfavourable terms

5.     Developer/builder insolvency and project risk

If a developer or builder becomes insolvent or goes into administration, the project can be significantly delayed, restructured, or (in the worst case) not completed at all. Contractual rights and deposit refund protections become critical, but that may simply not recompense the affected purchasers for their lost time out of the market.

We have seen a direct example this week, with the news that the major developer Bathla Construction Group has had administrators appointed and the future of their developments are currently uncertain. It can be an immensely stressful and anxious time for purchasers.

6.     Ongoing costs following settlement can be higher than expected

Purchasers sometimes overlook ongoing costs such as:

·         strata levies (including contributions to both administrative and capital works funds)

·         building management arrangements

·         embedded networks or exclusive service contracts

·         the potential for special levies (including for defects or rectification works)

7.     Defects and building quality issues

Unfortunately, even brand new buildings can have defects, sometimes major. Understanding:

·         how defects are identified and managed

·         the strata scheme’s role (if it applies)

·         available statutory protections

·         dispute avenue

is important when you are buying into a strata development.

Practical checklist: what to do before exchange

Before signing an off the plan contract in NSW:

• Have the contract reviewed early, before there is pressure of timeframes or marketing deadlines

• Check the plans and specifications – what exactly is being bought, and what can change?

• Clarify inclusions and exclusions – parking, storage, appliances, air-conditioning, finishes and any “upgrade” promises. Ensure it is all documented.

• For vacant land: is the lot to be created by a plan of subdivision, and what must happen before the title can be registered?

• Review the strata documents (if strata) eg. proposed by-laws, levies (if known), unit entitlement, building management and any exclusive-use arrangements

• Understand the sunset date and rescission rights

• Ask about the developer/builder track record and whether there are protections in place if delays occur

• Consider finance strategy - speak with a broker/lender/financial advisor early and plan for valuation risk

• Budget beyond the purchase price: transfer (stamp) duty and knowing when it must be paid, legal and settlement costs, finance costs, holding costs (like rates and levies and insurance), moving costs, and contingencies

Final thoughts

Off the plan purchases can be a very good, effective opportunity – particularly for purchasers seeking a brand new property or a longer lead time before settlement. However, the trade-off is increased contractual, construction/development, finance and market risk.

Getting advice and giving thoughtful consideration before exchange can really help a purchaser understand what they are committing to, where to negotiate where possible, and reduce unpleasant, unprepared-for surprises during the transaction.

This is general information only and does not constitute legal advice. Advice should be sought for your specific circumstances. Information is relevant as at the date of publication.