Risks of buying property off-the-plan

Buying off-the-plan in New Zealand can be full of pitfalls. Pre-sale contracts for the purchase of off-the-plan properties are very complex. These are not standard sale and purchase agreements and are weighted in favour of the developer. In this post I highlight the risks and explain what to look out for.

Warning: Buyers keen to purchase property off-the-plan must surround themselves with property and legal experts to ensure that costly pitfalls are avoided.
 Contact me for a free due diligence checklist for buying property off-the-plan.
 

The price the buyer pays can change

There are often clauses in pre-sales contracts for new apartments and subdivisions which allow developers to vary the contract, and that includes the price. Years can go by between a pre-sales contract being signed and construction work starting. Meanwhile, the cost of labour and materials can increase significantly. It is not uncommon for the price to increase by $100,000 or more.

The contract is not unconditional

Unfortunately for the buyer pre-sale contracts are not unconditional contracts. They are always conditional upon the developer getting pre-sales, finance, and consents. The buyer however, is legally bound to complete the purchase if the developer delivers.

The contract can be cancelled if they don't pre-sell enough properties

Vendor condition clauses allow the developer to ask buyers to choose between cancelling their contract, or paying more if there have not been sufficient pre-sales or if the developer cannot get finance or if all the consents have not come through.

What the buyer sees or is told about the development is irrelevant

There are clauses in these contracts that state that any representation made to the buyer is of no importance and it is only the information included in the contract that counts. Anything the buyer has heard or seen such as brochures, billboards, show rooms or displays are not relevant to what is sold. The flashy show home may bear little resemblance to the finished product.

There is no guarantee of when construction will start or finish

Developers want flexibility around when they will start and when they will finish a development. If they have not sold enough units off the plan the development may not commence.

There is limited room for negotiation

Developers want flexibility on what is to be developed; the timing of the development and who is involved in the development. The Developer must minimise the involvement and control of the buyer so that they can make decisions on their own.

Therefore, the opportunity for the buyer to negotiate terms or lock down what they are getting is limited. The buyer may be able to negotiate some accuracy on the location of the property, the approximate size and the use.

There is no assurance of what else will be built on the site

In some pre-sales contracts, developers include clauses that enable them to add additional buildings to a site; additional floors to a building; to change the size of the sites and to replace materials.

Developers want the flexibility to complete units in stages and to change the timing and order of the development stages. They are usually only willing to commit to the completion of the property that the pre-sales contract relates to. The downside for a buyer is that they may find themselves surrounded by the noise and stress of construction after they move in.

The contract should require the developer to provide the communal facilities promoted, such as swimming pools and gym or allow the buyer to reduce the price or cancel the contract if they don’t.

Interest rates can increase

The buyer needs to consider the effect of increases in interest rates. It is difficult to estimate what the interest rate might be in 2 years’ time and whether changes in the economy or government regulation could affect lending criteria.

Property values can fall

If the property market drops between the time the buyer signs the pre-sales contract and finally settles, then the buyer may have difficulty finalising loan arrangements.

Property defects and poor workmanship

It is essential that the buyer ensures that the contract includes provisions for the developer to rectify defects and poor workmanship within a reasonable time frame.

Floor plans can be changed

Developers often insert a "material differences" clause, which allows them to alter the proposed floor plans or car park plans.

Materials and appliances can be changed

Buyers must ensure that an extensive list is obtained and included in the contract. Clauses are often inserted by the developer stating that if the same product is not available, they reserve the right to provide alternative materials or models. Buyers should ensure they substitute like for like.

Buyers must accept the record of title

The developer will also want flexibility with what will be on the record of title (previously known as certificate of title) for the property the buyer is purchasing. At the time that the buyer signs the pre-sales contract, individual titles are unlikely to have been issued. One or more titles will cover the land to be developed. A complex title is normal and it may have many things registered against it. It is important to understand which of these restrictions will remain on the title and whether any of these restrictions will impact the buyers use of the property. Covenants on the title may include the appearance of the development or subdivision; restrictions on fences, landscaping, exterior colour and cladding and may include car parking restrictions.

A clause will generally be included in the contract that states that the buyer has no rights to requisition the title. The buyer must accept the title the developer provides. NB. A title requisition is a request by the buyer for the developer to remove from the record of title (before the purchase is completed) an easement or encumbrance or some other restriction on the title, which the buyer was unaware of when the contract was signed.

Unforeseeable circumstances

Most contracts include "Force Majeure" clauses which provide an out for the developer. These clauses used to relate to things out of the developers control such as acts of god or government. Recently these clauses have expanded to cover the developer for changes to monetary and economic conditions. The developer can use a Force Majeure clause to extract more money from the buyer to cover funding issues or limited materials.

The buyers right to cancel

Under section 225 of the Resource Management Act 1991 - when the survey plan has yet to be approved, the buyer may cancel the contract at any time within 14 days, from the date the contract was entered into. NB. The survey plan defines the legal boundaries of a property - where one property ends and another begins.

The buyer may, after 2 years from the date of granting of the resource consent, or one year after the date of the contract, whichever is the later, cancel the contract, if the developer has not made reasonable progress towards submitting a survey plan.

In the case of a Unit Title, the buyer has the opportunity to get out of the contract if the developer has failed to meet its pre-settlement disclosure obligations.

Contracts will often provide for a 3-5% variation on the size of the unit. Buyers may be able to get out of the contract or renegotiate the price if the variation in the size of the unit is greater than the percentage specified.

Sunset clauses

Most off-the-plan pre-sales contracts contain sunset clauses that state what will happen if the property is not finished on time. Some clauses include the right to extend the sunset clause to give the developer more time to complete the construction. These clauses also provide an opportunity for the developer to cancel the contract and refund your deposit. This is sometimes done when the amount the property can be sold for on completion is significantly more than the price agreed in the pre-sales contract.

The developer may go into liquidation or bankruptcy

Buyers are completely reliant on the developer and at risk if their business fails or the development is on-sold to another company. Buyers should ensure that deposits are held in trust accounts and refundable should liquidation or bankruptcy occur.

Buyers need support

Unless buying property is something you do every day, you need experts who are 100% on your side and committed to helping you get what you want. Exclusive Buyers Agency does just that. We work exclusively for the buyer.

For a free due diligence checklist for buying off-the-plan contact me now.

Lorraine Burns

Buyers Agent - Licensed (REAA 2008)