Buying ‘off the plans’ – Part 1

Property | Print Article

March 2022

What is it?

Buying a property that has not yet been built, or is in the process of being built, is commonly called buying ‘off the plans’. There are quite a few differences compared to buying a property that already exists. Buying off the plans is often a way to buy into a new development, such as an apartment or a house and land package, and can be a good option for a purchaser struggling to find an existing property in a tight property market.

The developer will provide the plans (often concept plans) and building specifications, which are included in the agreement for sale and purchase. An off the plans purchase usually includes the purchase of the land as well as the construction of the dwelling, electrical and plumbing work, kitchen, and bathroom installation including appliances and fittings, lighting, flooring, heating, and landscaping. While some developers may allow purchasers to choose upgrades, such as tiling, gas appliances and carpet (the cost of which is added to the purchase price), usually the developer will not allow changes to such things as the plans, specifications, exterior colours, window joinery and cladding.

Pros and cons

For many first home buyers, and even those looking to buy an investment property, buying off the plans can be an attractive proposition. The price is agreed before the property is built, it gives the purchaser time to save towards the purchase price and, provided the market is buoyant, property prices may increase over the time it takes the property to be built. Another benefit to buying off the plans is that the purchaser can often choose the fixtures, fittings, and interior colours.

The Government recently announced tax changes, extending the bright line tax period to 10 years and removing the ability for investors to claim interest deductions. However, to encourage developers to continue building new properties, the Government has indicated all buyers of new builds, including off the plans purchases, will have a shorter bright line period (five years) and off the plans investors will be able to claim interest deductions. Some councils offer incentives too. For example, Wellington City Council offers a rates remission of up to $5,000 for first home buyers of off the plans purchases (https://wellington.govt.nz/property-rates-and-building/rates/remission).

However, it’s not all upside. In some cases, it can be two to three years from an agreement being signed to a property being completed. Some purchasers buy off the plans, expecting to on-sell the property when it is built. If property prices fall during the time it takes to build a property, such buyers may find they cannot sell for a profit. Other risks include the property not meeting a purchaser’s expectations once completed, the development taking longer than anticipated to complete, and the property not being built if the developer’s business fails during the development.

Practical considerations

Buying off the plans requires you to have a bit of imagination. It’s possible that you won’t be able to see your property for years after you’ve put down your deposit! You’ll need to look at the plans and think about all the things you’d look for in a built property. For example, where is the laundry? What’s the sun going to be like? Will the layout work?

Buying off the plans also involves an element of trust. It would pay to check out the developer before you commit to anything. Try to find out what else they have been involved in and how that went.

Be aware that delays are par for the course in construction projects. That was true before the pandemic and it’s only been made worse since. This means that you’re unlikely to have certainty about the settlement date until the very end of the project, so you’ll need to be able to promptly get everything ready for settlement, including your funding.

If the property is not a unit title, you’ll also need to arrange your own insurance. This can prove difficult in townhouse developments with shared walls. It’s worth having a chat with your insurer before you sign, so you know what their requirements are.

How can your lawyer help?

Purchasing off the plans can be a great way to get on the property ladder, and the time between signing the agreement and purchasing the property can help you save towards the purchase price. But off the plans agreements can be complicated so it is important to get good advice before signing such an agreement. Your lawyer can help you understand the terms of the sale and purchase agreement and any covenants or other documents proposed to be registered on the title.