Buying Off the Plan

This is one area where an investor can make great capital growth while waiting for the development to be built and paying out no mortgage along the way.

The concept is to purchase a property, usually an apartment or townhouse, in a development that will take between 12 months to 3 years to build. So you are buying the property at today's price but you don't have to settle till the project is finished. If you are a Prowealth Investment's Client you will purchase the property under today's market price and you will make capital growth prior to the finished product.

Deposit

Never release a deposit to the builder when exchanging your contract because if the builder goes broke and cannot finish the project for various reasons you will loose your money. You should look at exchanging contracts on a deposit bond which could cost between $600 - $5,000 depending on the building time on the contract. Some builders will not accept bonds so if you still want to go ahead and purchase you need to negotiate for a 5% deposit or lower and insist that the funds be invested on your behalf in a trust account.

Sunrise Clause

This is important as is dictates when the project will start. Many developers don't want to put this in their contract as you can rescind the contract if they don't start on time. The Clause usually will state that construction must start within a period of time from when you exchange. If it doesn't you can pull out and get your money back. The reason to have this Clause in a contract is many builders are instructed by their bank that they have to have 50% pre-sales first before the bank will release the funds to start building. So if you purchased the first one and the 50% presales aren't achieved then you are locked in the project permanently with little way out unless there is a Sunrise Clause in place.

Sunset Clause

This is also important as it dictates the completion of the project. This Clause gives you some protection that the project will be completed by a specific time. This Clause could be stated longer than the builder needs but it protects the builder against delays in supplies or weather conditions etc. The reason to have this Clause is it allows you to pull out of the project especially if the builder has run out of funds and puts the development on hold indefinitely. Without this Clause you are locked into the project till it is completed. Another reason is the majority of the time you will not be able to get a deposit bond without showing a copy of the Sunset Clause.

Quality of Finishes

Always go over in detail the Inclusions List prior to entering any contract of sale. Make sure you check what it says about every item, the colour of the paint, granite or laminex benches, down lights or batons, floor boards or carpet etc. It is also a good idea to inspect one of the projects the developer/builder is currently building or recently completed to look at the quality of workmanship and finishes.

Final Inspection

You must do a final inspection of the product before settlement. If there are any outstanding issues make sure your Solicitor communicates them to the Builder's Solicitor so the issues can be rectified before settlement or have your Solicitor hold back money from the settlement until the work is completed.

Be Aware

Many projects that are sold off the plan can include Put and Call Options on some of the contracts. This allows a person to purchase an off the plan property and on sell it prior to completion or settlement to make a profit from the capital growth. This is a good strategy to make quick cash and should be considered in your Investment Portfolio however like any investment there are risks to look out for. The risk greatly increases if more than 20% of the one project has Put and Call Options on the contracts. This means that more than 20% of the project has to be resold prior to settlement which is a big ask. If an investor holding the stock do not resell before settlement they have to settle so they need to make sure they have the funds available to do this. If settlement time is approaching and the investor doesn't have the funds to settle they will be looking to get out at any cost. This usually means that they will slash the price of the stock to attract a buyer but consequently this will have an effect on every investor as it will down value the whole project. When purchasing an investment make sure you ask the salesperson to give you a guarantee that no more than 20% of the contracts will have Put and Call Options.

In Summary

Buying Off the Plan is a great Strategy but you must be educated and know what you are doing to achieve the highest return for the smallest outlay and to protect yourself from getting tied up in a long winded project that falls over.

For more information or to discuss any of these topics in more detail please don't hesitate to call one of Prowealth Investment's Specialised Consultants on 02 4353 0664.