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Buying ‘Off the Plans’

Categories View all posts in Property
Post date Post author Shelley Funnell

What is buying “off the plans”?

Buying “off the plans” (OTP) means agreeing to purchase a house that hasn’t been built yet.  Usually there is no individual property title and in some cases, the developer doesn’t even own the land yet.

Risk

There are many more uncertainties when you buy OTP rather than buying an existing house.  The main risk is that you won’t get the house you are expecting, but that risk must be balanced against all the potential benefits and risks described below.

Pros

  • You are buying a turnkey property (meaning you get a completed house, ready for occupation).
  • The price is agreed before the house is built and you don’t need to make progress payments.
  • You can save money or accumulate KiwiSaver while you are waiting for settlement.
  • You will receive a brand new home built to the latest building standards. If the property is going to be rented, it should be built to the latest Healthy Home Standards (but your lawyer might need to request that).
  • Your deposit should be protected and held by a lawyer.
  • If you are a first home buyer, you may be eligible for a Kāinga Ora First Home Grant of $10,000 per person, and for Kāinga Ora’s First Home Partner scheme which allows for shared ownership with Kāinga Ora when you don’t have enough deposit or bank lending.
  • If you are an investor, there may be tax benefits such as a shorter ‘bright line period’ of 5 years and interest deductions for 20 years – but please seek accounting advice before you buy so that you understand the tax consequences for you!
  • You might pay less than you would for a completed house, because of the risks of buying in early. However that’s not guaranteed, and you should always seek expert advice.
  • You have the benefit of warranties under the Building Act and in some cases, a third party guarantee like the Master Build Guarantee.
  • You can cancel the contract under your sunset clause if the build takes too long and goes past the sunset date.

Cons

  • You can’t inspect the house before you buy and the finished house may be different to what you expected or to the show home. Most contracts allow developers to substitute materials and change the plans, sometimes significantly.  Quality can be an issue.
  • There can be a long wait from when you sign the contract to when you take possession, sometimes 2-3 years. You may end up waiting longer than you initially expected as many contracts allow developers to extend sunset dates.  During this time, market conditions, interest rates and your personal circumstances may change.
  • You can’t pull out of the contract if you can’t get finance at settlement or you just don’t want to buy the property anymore. If property values fall during the construction process, purchasers who were once able to obtain bank lending may no longer be eligible.  If interest rates increase during the construction process, it can affect how much you can borrow or the repayments you can afford to make.
  • If the developer runs into financial problems, the development may be cancelled or delayed. You cannot cancel the contract just because the developer is in liquidation which can be stressful.  If the development doesn’t proceed, you will always get your deposit back (sometimes with net interest) but during that time, market prices may have increased and you might not be able to buy an equivalent property so you are priced out of the market.
  • You usually need the developer’s consent to sell or transfer to a third party before settlement if you don’t want to buy the property.
  • Developers can usually transfer the contract so you may be dealing with a different developer on and after settlement.
  • If the developer is liquidated after settlement, there may be nobody to repair defects or address structural issues.
  • Depending on your sunset clause, some developers can cancel the contract and sell to someone else for a higher price, leaving you with your deposit but no house.

Do your due diligence on the developer

When buying OTP you must investigate the developer before you sign the contract. You should satisfy yourself that the developer has a good track record and reputation, and is likely to complete the development to the quality and standard shown in the plans and specifications.  The best contract in the world doesn’t protect you against a rogue developer.

How long have they been in the industry? How many properties have they built? If possible, visit some properties that were built by the developer to check out the design and quality and talk to some previous buyers to see if they are satisfied with their properties. If the developer is not the builder, you should make sure that the builder has a proven track record.   Is there a third party guarantee on offer?

Expert advice

Off the plan contracts are complicated and are almost always drafted in the developer’s favour – so there is no substitute for expert legal advice before you sign!  A lawyer will spot the risks and can answer any questions that you may have. If you need advice on purchasing OTP you can contact our team below.