Finding your dream home can be hard, especially in today’s property market, which is why more and more of our clients are choosing to buy “off the plans”. Essentially, you are agreeing to buy a house that has not been built yet. The advantage of this is obviously that you get a brand new house. It can also be more cost effective than buying a pre-built house of a similar quality. However, the contract and process involved can be a bit more daunting than your average house purchase. So what are some things you should look out for when deciding to buy off the plans?
Turnkey or Land and Build contract?
There are a couple of different types of contracts available when you’re buying off the plans. A turnkey contract will generally have one big contract, dealing with the subdivision, build and purchase of the property. The settlement day (when you pay for everything), is once the subdivision and house build are both completed (and we have received a Record of Title and Code Compliance Certificate). This means you pay for the property, then you get the keys immediately and move in – hence “turnkey”.
A land and build contract does things in two stages. The developer completes the subdivision, then you purchase the land as soon as a Record of Title is available. You then have a separate building contract and generally pay for the building process in installments. The land part of the purchase and the build are dealt with separately – hence why we call it “land and build”.
Each process has its advantages and disadvantages. The turnkey process can be a lot more hands-off for you, so you can let the process occur without too much oversight. You can then pay a fixed price in one lump sum on settlement day. This might be good if you’re buying as an investment and don’t want to be involved in the building process. With land and build, you will need to be more involved in the building process, and ensure you are making building progress payments at the appropriate times. This will also require appropriate loan structures with your bank.
What are your expectations for when the subdivision or build will be finished? What has the builder or real estate agent told you? Do these dates line up with what is actually in the contract? Developers and builders often give themselves a lot of flexibility in the contract, and are not held at all to the dates their real estate agents have promised. If there are start and finish dates in the contract, these are usually ‘expected’ dates, not hard dates. Dates can be pushed out by things outside the builder’s control, such as weather, materials or Council delays, and of course if you ask for any variations to the plans. How long are you willing to wait around for your new property? Even the most relaxed buyer will run out of patience eventually!
For all off the plans contracts we recommend including a ‘sunset clause’, which puts a final date on the contract, after which, if settlement hasn’t been completed, you can decide to cancel the contract and get your deposit back. The developer may sometimes have a standard sunset date for the entire development, sometimes up to 2 or 3 years in the future. While it might be unlikely that it will take this long, if you can’t afford to wait around that long, perhaps this development isn’t for you…
Provisional Costs and Prime Sums
Is your contract price the final price you will need to pay? Or are there sneaky estimates in the price quoted that could still increase?
A prime cost is an estimated allowance for materials based on a builder’s experience, where the specific materials are not specified. Examples are tiles, taps or light fittings. If the actual cost is above what has been allowed for, you will need to pay the additional cost. If the cost comes in lower, you pay the actual cost, perhaps minus an admin fee.
A provisional sum is an estimated allowance for materials, labour and associated work, often by specialist subcontractors. For example, your builder may make an allowance for kitchen cabinets based on an average market price. However, the final price will be set by the kitchen manufacturer and installer, based on a design and finishes agreed with the client. Make sure you know which prices in your contract, and which ones have room for movement!
Do you want to be able to make changes to the building plans as you go? You will want to make sure your contract reflects that, and of course, you’ll want to know how much that is going to cost you. Some contracts have an additional cost for each variation you make, while some contracts don’t allow for any changes at all. You will also want it to be clear when you need to pay any additional costs for variations.
Contracts also often allow for the developer or builder to make changes, for example if the Council requires changes due to building consents, or if some building materials aren’t available. Usually you can’t object to these changes unless they affect the value of the property. You will also want to check if there is any leeway for the developer to reduce the size of your lot. If so, you’ll want to make sure you can object or be compensated!
When will you need to pay the deposit, and who to? We like to make sure your deposit is safely held by the vendor’s lawyer, only to be released upon settlement. If the deposit is paid to the builder directly, or their real estate agent, the funds could end up in the builder’s bank account prior to the house being ready for you. This can mean it isn’t safe and available to be repaid to you in the worst case scenario that the house is never finished or the building company goes bust.
Checking these details yourself in a 40-page contact could be a bit overwhelming. We’re available to give you practical and understandable advice on any purchase or building contract. Contact us here.