Legal Settlements WA


Risks of buying an apartment off the plan – that is before it is built

From the Australian Financial Review – 25 September 2015
Standing defiantly in front of the South Yarra apartment development that cost her $51,000, Joan Carville has a simple message for her fellow property investors: Don't buy a Melbourne apartment off the plan.
Carville, a working mother of two in her late fifties, learned the hard way about the dangers of buying in Melbourne's inner city apartment market, where cries of "over-supply" continue to reverberate.
In 2011, she lost her entire $37,000 deposit and racked up more than $14,000 in legal fees after failing to settle on a tiny $375,000 studio apartment. She had bought the unit off the plan two years earlier, on the advice of her financial adviser, but fell afoul of unforeseen changes to lending rules.
"Buying off the plan is very risky. Your circumstances can shift and change, but when it comes to settle, there is no wiggle room to negotiate," she told the Australian Financial Review.

There is an element of risk in every financial transaction and contract. Therefore, in every transaction there must be prudent calculation of that risk and risk management put in place.

To achieve proper risk management you must first identify the risks and then put in place effective steps to minimise the risks and get competent advice.

The Risks

Buying a property or Apartment off the plan means you are making a binding Contract with the Developer/Builder of the property you are buying.

The major risks are –

Your Financial Capability to complete the Contract and buy the Apartment?

An adverse change in your finances (less income) will adversely affect your ability to obtain finance so that you can complete the purchase of the Apartment or property.

Generally, upon the Apartment being completed you have an agreed period of time within which you must complete the purchase.

If you do not settle on time, you will face penalties and losses.

Therefore, make certain any contract has a clause in it that can reduce this risk for you in case your financial circumstances change for the worse. A clause that makes completion of the contract subject to your financial circumstances at the time of settlement of the purchase so that if needed you do not have to settle the contract if you are financially not able.

Have the contract conditions drafted by a legally trained (lawyer) person acting in your interest and add the appropriate clause to the contract.

Check on the Developer/Builder.

You are about to enter into a legally binding contract with the Developer/Builder.

Check beforehand that the developer/builder:

  1. Is reputable.
  2. Has a good track record.
  3. Is financially strong and have the capability of completing the construction of the Apartment.

You should also ask for the Developer/Builder to provide a list of previous buyers that you can speak to about the Developer/Builder and their experience with him.

Ask for a list of properties that have been built previously by the Developer/Builder that you can inspect to see the quality of the construction.

Have a legally trained person (lawyer) carry out a proper due diligence on the Developer/Builder before you enter into the contract.

Changes in values of the Apartment due to changes in the market.

Buying an Apartment off the plan means that you are making the prediction that the completed property’s future value is more than that which you are paying the Developer/Builder at the time of entering into the contract.

Realistically, this is an impossible prediction.

So, if the market value falls while you are waiting for the property to be completed, you are caught as you will be required to pay the higher sum/value you agreed earlier in the contract.

There are a number of ways to reduce risk in this respect, but, a properly negotiated and drawn contract can go a long way.

A clause in the contract could be include that required an independent licenced valuation to be carried out on the property on its completion.

In addition, with a clause that made settlement of the contract and purchase of the property subject to that independent licenced valuation and provided for the event that, if a significant change in value had occurred and the value is now greatly less than the agreed contract price agreed, then in that event you are not required to proceed with the purchase of the property.

Have the contract terms drafted by a legally trained person (lawyer) acting in your interest and add this clause to the contract.

Are you getting the Apartment you agreed to purchase?

Reduce the risks and make certain any contract has:

The common area and its property fixtures and fittings should be identified including the specifications of finish.

For instance, if the marketing and sales material for the Apartment promises ‘river views’ then this must added as a clause of the contract.

Then if the completed Apartment does not match as represented to you, you may be able to rescind (terminate) the contract and recover any monies such as a deposit paid to the Developer/Builder.

Have the contract conditions drafted by a legally trained person (lawyer) acting in your interest and add this clause to the contract.

If the Developer/Builder wants to vary the terms of the Contract (he needs further time to complete construction) or the agreed contract price.

Price/Viability –

A Contract may allow the Developer/Builder to increase the agreed contract price because of claimed unexpected increase in building costs of the Apartment.

If the Developer/Builder choses to enforce this clause and increases the contract price, you may either accept the increase in the price or terminate the contract. Generally, the deposit you paid should be returned to you.

Delay/Sunset –

A Contract may allow the Developer/Builder to increase the agreed time in which he needs to complete the construction of the Apartment because of claimed unexpected delays.

Therefore, reduce risks by having the contract checked that it includes two clauses.

If there is a Price/Viability clause – ask for this clause to be deleted.

If there is a Delay/Sunset clause – make certain that the clause is clear and stipulates that the contract ends if the Developer/Builder doesn't complete construction on time or wants to alter or vary the plans and construction.

So, if settlement can't occur on the agreed date and the Sunset clause has expired, the parties terminate the contract and any deposit moneys (plus interest) will be returned to you.

A Sunset clause must be explained to you and you understand its meaning.

Have the contract terms explained to you by a legally trained person (lawyer) acting in your interest and make certain that the appropriate clauses are added to the contract.

Contact us to assist you for and agreed fixed cost.