Getting a Loan for ‘Off the Plan’ Apartment Purchases

We are seeing many new apartments under construction in and around Perth, and in other capital cities around Australia. Sales of these are usually ‘off the plan’. When you buy an apartment 'off the plan', you are contracting to purchase a property before it has been built and/or has a property title of its own.

How Does an ‘Off the Plan’ Apartment Purchase Work?

Given the apartment usually does not exist at the time of purchase, the Contract of Sale is typically rather large and legal. It incorporates all of the plans and specifications of the apartment to be completed, as well as all the legalities around the sale conditions.

An initial deposit is required to secure the property, which has traditionally been 10%, but we have seen many apartments sold and lesser deposits requested in the current market.

The timing of the apartment is ready to settle can vary greatly. It can sometimes be years away! Settlement dates for ‘Off the Plan’ purchases are usually based on the date the property is completed and titles issued. Often this is 14 calendar days or 10 business days from the date of issue of the property title, but can sometimes be longer.

What are the Finance Risks of Buying an Apartment ‘Off the Plan’?

Preapproved finance is valid for a term of 3-6 months, depending upon the lender. However, settlement timeframes are usually much longer, so if property completion and title issue are longer than this timeframe your preapproved finance will have expired! "Off the Plan'’ Sale Contract terms are typically cash unconditional. This means you are agreeing to a settlement of the apartment within the terms of the contract, regardless of whether you have approved finance in place or not.

How Does a Bank Value an ‘Off the Plan’ Apartment Purchase?

Given the new apartment is usually not completed when you agree to purchase, bank valuations cannot be conducted until the property, including common areas, is completed. If the contract is cash unconditional and the valuation amount is short of the contract price, then more equity/cash may need to be contributed.

What Happens If You Can’t Get Finance and Cannot Settle?

In the case of a cash unconditional contract for an ‘off the plan’ apartment purchase, if finance cannot be obtained, and you the purchaser cannot meet settlement, the developer may cancel your contract and resell the apartment. If the apartment then sells for less, you could lose your deposit and be sued for the difference.

What are Some Finance Safeguard Tips for ‘Off the Plan’ Purchases?

Ask if your contract can be subject to finance. If so, you have a parachute should a problem arise. For example, a loss of job and you can no longer afford to purchase the apartment. There will be cases where developers cannot accept ‘subject to’ contracts, but it can’t hurt to ask if you are worried about being able to get finance at the time of settlement, whenever that may be.

Ask if your contract can be subject to bank valuation. If you are tight on cash or equity then this can safeguard you. If the property does not value to at least the level of your purchase, then you may be able to negotiate with the developer to have the purchase price match the current valuation.

Should I consider an ‘Off the Plan’ apartment purchase?

‘Off the Plan’ apartment purchases can be a great way to secure a new property at today’s prices without having to pay for the property until it is completed and ready to settle. If you are considering entering into one of these contracts here are a few tips:

  • Ask the selling agent/developer lots of questions around the anticipated timing for the property to be completed and contract obligations.
  • Get independent legal advice on the contract so you know exactly what your obligations will be under the contract.
  • Be confident that you check your financial capacity as at today and consider any changes in circumstances going forward that may affect your ability to obtain finance at the anticipated settlement date. If possible, try to incorporate a subject to finance clause in the contract to safeguard you.
  • Check recent and comparable apartment sales in the area to ensure you are getting good value for your apartment purchase.

If you are considering an ‘off the plan’ apartment purchase, talk with your Finance Manager who will be able to talk through your finances to ensure you are comfortable with the risk, both today and at the anticipated time of settlement.