Buying a property off-the-plan, before construction has finished, can be an attractive opportunity. You get a brand-new property, built with the latest building code, while the price is fixed at the time of purchase.

However, buying off-the-plans is not without risks. If you decide to go down this route, it is crucial to enter the process with careful consideration.

In this article, our guest speaker, Joy Yuan from Turner Hopkins, discussed the risks of buying off-the-plan that you should address before signing on the dotted lines.

3 common risks of buying off-the-plans

Video Timeline

1. What does off-the-plan property mean? 03:16

2. How to minimize the risks when buying off-the-plans 04:40

3. Three common issues with buying off-the-plans and how to avoid the risks 06:49

1. What does off-the-plan property mean?

In New Zealand, buying a property “off-the-plan” means purchasing a property that the construction has not been completed yet. The decision to buy is made based on the concept plan. Potential buyers are supplied with a specification list that describes what the property will look like.

The vendor (developer)’s solicitor often drafts the sale and purchase agreement for buying off-the-plans. The contract has clauses that typically favour the vendor, such as the purchaser is not allowed to get out of the contract, while the vendor has the flexibility to make some changes when required.

So, before entering the process of buying off-the-plans, it is essential to seek help from a solicitor – review the agreement carefully to protect the purchaser's interests and minimize the risks.

2. How to minimize the risks when buying off-the-plans

(1) Due diligence

Before purchasing an off-the-plan property, it is important to work out exactly what you want and to carry out due diligence, including:

• The track record of the developer – You are backing them to complete the project to the standard they’ve promised. Is the developer experienced? How well has the developer completed the previous construction works? And whether it was delivered within the set timeframe?
• The old real estate cliche – location. Think about what’s happening in the area? How close are you to cafes, local amenities, and education providers?
• The copy of the plan and the specification list that are attached to the agreement – Have a careful understanding about the plan, particularly when the construction hasn't been commenced, and ensure you understand all the specification such as how big your future house is, what the floor area will be, and what specifications will be used, etc.

(2) Review the agreement by a solicitor

The next step is engaging a solicitor and reviewing your agreement before you enter the contract. For example, some agreements have a cooling-off period, such as the seller approval or purchase approval clause, but may be clauses stipulating that your initial deposit of $2,000 or $3,000 is not refundable even if you cancel the agreement within the period.

It can be challenging to have a comprehensive understanding of the process of buying off-the-plans, which is often much more complicated than buying an existing house. So, you should engage a solicitor at the very beginning, before you sign a contract, to review the terms and ensure that you are happy with what you are signing for.

3. Three common issues with buying off-the-plans and how to avoid the risks

Before committing to purchase an off-the-plan property, careful consideration must be given to the form of sale and purchase agreement. While it is never possible to cover every single risk in a property transaction, there are three common issues with buying off-the-plans.

(1) Deposit is not safe

You are required to pay a deposit to the developer when signing a contract to purchase the property, often between 10% to 15% of the purchase price, although this can differ from project to project.

It is essential that the deposit paid pursuant to an agreement is held in a solicitor’s trust account. The vendor cannot touch or access that money until settlement. Should the construction not proceed for any reason, you should be able to get refund for the deposit together with interests.

(2)  Construction delays

Some projects can take years to complete, and delays can and do happen. It’s important to factor in the potential delays when planning your future. In some worst-case scenarios, the vendor goes into receivership, thus resulting in the project not completing.

To minimize the potential risk, check and consider setting a “sunset clause” in the agreement in advance. In the event of the construction not being completed and the settlement not being triggered by the specified date, the party/parties becomes free to cancel the contract. As a purchaser, you want to ensure only you have the right to cancel, instead of both parties. Otherwise, the vendor may use the sunset clause as a reason to withdraw from the contract, should the project not proceed for any reason.

(3) Not meet expectations

When buying off-the-plans, sometimes, there is no guarantee that the property will look exactly as promised at the time of purchase. Here is an example:

When you are buying an off-the-plan apartment, there should be some provision about the measurement of areas. If the final size of areas is less than what you have signed up for, then you want to know how the purchase price will be adjusted.

Different version of the measurement adjustment clause can give you different adjustment results. For example, some versions specify that, if the final size difference is greater than 5%, then the equivalent value of the exceeding percentage can be reduced from the purchase price. But some other cases may be referred to a valuer for determination.

As a purchaser, you would prefer to see the version specifying, for example, if the final measurement is less than its estimated area, then the final purchase price should be reduced accordingly. Your solicitor should be able to negotiate with your vendor on behalf of you and ensure the important clauses checked with careful consideration so that you can reduce the risks of buying off-plans.

(4) Other issue - vendor conditions

For some large development projects, some vendors may include conditions in the agreement. Depending on the different stages of the property work, the agreement will be subject to the vendor’s conditions such as obtaining the finance approval or obtaining the resource and building consent.

As a purchaser, you need to have a good understanding about which stage the project is at. From the view of a solicitor, buying an off-the-plan at a very early stage is not recommended because there is no guarantee that the plan you see will be the final product plan. It would be better if the council have almost or already approved the plan.

As a rule of thumb, when you sign a contract to buy an off-the-plan, based on the floor plan and specification list, you should be able to draw a 3D plan of the house in your head including the layout, how you walk in, what kind of the door handle and all the details.

Buying property off-the-plan is a great way to buy into an exciting project – paying today’s price to secure a brand new home. To help you reduce the risk of buying, you should seek legal advice. Make sure your solicitor review each clause in the agreement and negotiate with the vendor if needed.

Joy is an associate at Turner Hopkins. She is very experienced in a broad range of legal matters. She has extensive expertise in commercial and property law. Her strong commercial and business sense ensure she gives the most professional and practical advice to her clients. Feel free to contact her via call 09 975 2624 or email: joy@turnerhopkins.co.nz

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Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action.