Buying a Australia property “off the plan” simply means purchasing a property before its completed. Its somewhat similar to buying a building under construction here in Singapore.
Australia – off the plan
Typically the purchaser pays a deposit – usually 10% of the purchase price to secure the property and sign a contract for sale. No payment is required until the property is ready for settlement, which could be 3-4 years away. The deposit is held in trust.
Singapore – Building Under Construction
Purchaser usually pays a booking fee of 5%-10% of the purchase price for an Option to Purchase. Within the 3 weeks validity period, purchaser can chose to exercise the option by signing all the copies of the Sale and Purchase Agreement and return to the developer, and pay the developer the balance down payment (ie 20% of the purchase price less the booking fee paid).
If the option is not exercised, developer will usually forfeit 25% of the booking fee and the balance will be refunded back to the purchaser.
Most Building Under Construction projects follow a progressive payment schedule. Payment is required at completion of each stage. Purchasers can get a bank loan to finance the payment.
What to consider when buying a off the plan project
1) Developer Reputation and track record
Always research the background of the developer and its track record. Make sure the developer does not have a list of court actions against them. And that they have proven track record in building what they are developing. Its not enough to base your research solely on the developer website. Look for reviews, blogs and if there is a Singapore sales office, you should take time to visit them and talk to their staff. If you have a relative or friend in that area, ask them to do a physical site visit and share with you what are the developments that could impact your purchase.
2) Financing your purchase
It is common that many savvy investors will try to sell their purchase before settlement to make a tidy profit. However this strategy is only for those willing to take big risks with their investments. If the value of the property falls during construction, the investor may need to sell the unit at a discount and realised a loss.
And if you are not able to take over the purchase at settlement, you will lose your entire deposit and may be pursued by the developer for the balance of payment or for any shortfall should the property be resold at a lower price.
To mitigate this risk, you may consider taking up a bank loan earlier. Generally Singaporean or Non Australian can apply for a bank loan with a Singapore bank as soon as they signed the contract for sale with the developer. An interest only loan is typically available for properties bought for investments.
For example, some Singapore banks used to offer loan quantum of up to 70% purchase price for projects in Southbank, Melbourne couple of years old ago. But the quantum has reduced to 50% for some projects. Unless you have secured your loan early, you may have to come up with more cash down payment when the project is completed.
Typically cancellation charge for the loan is between 1.5%-3%.
3) Rental Guarantees
It is a good idea to treat rental guarantees with suspicion and do the numbers several times to be sure they really add up.
Some rental guarantees are factored into the sales price and once the guarantees expired, yield will revert to market forces.
Before accepting the contract, ask the developer what is the discounted price without rental guarantees.
4) Development Risk
One of the biggest risks is that a developer or builder will go under before completion or that the project will fail to get off the ground. When you pay your 10% deposit to secure your purchase, it is held in trust either by the selling agent or vendor’s solicitor. If the project is unable to proceed, purchaser will get their deposit back.
5) Delivery or handover
On completion, when developer hands over the unit to the purchaser. There may be issues in the final product. Colour scheme, kitchen appliances, flooring, wall finishings etc could be different from what you think you have purchased. To avoid disputes, you should study in details the schedule of finishes for all parts of the property. If there is any things that you like to change or clarify, you should do this before you signed the contract.
If you like to find out how to finance your Australia property, do email us at firstname.lastname@example.org