Bought off-the-plan and now can't afford it? Here are your options
COVID-19 is striking fear into the hearts of many, including off-the-plan property buyers who signed up before the pandemic hit.
Will Uncles from Forty40 Finance warns of two key threats buyers should be aware of.
"Valuation risk and personal finance risk are causing the biggest headaches at the moment," he says.
It typically takes 18 months to two years for off-the-plan purchases to settle.
"If you rewind that, we're talking 2017-2018, which was a strong market," says Uncles.
Valuations on the assets are coming in far lower than when buyers signed the contract, due to the virus. At the same time, buyers could have experienced a fall in income or the loss of income altogether.
"When you buy off the plan, you commit to the property, but you don't get any finance until the property is ready," says Uncles.
"Just because you can finance it today, doesn't mean you can finance it in two years."
Leah Kent from Cue Property Settlements says the overall impact of COVID-19 on the off-the-plan market is varied.
"At this point in time, the affects of COVID-19 have not impacted off-the-plan market volumes as it is still very much a new issue that this industry is digesting," says Kent.
"In terms of immediate off-the-plan sales, COVID-19 has had an effect on conversion rates representative of general uncertainty in the market amongst purchasers."
Off-the-plan is often touted as a money saving way to enter the market due to the saving on stamp duty.
But Uncles says the settlement risk and long contract timeframe inherent in off-the-plan purchases doesn't match the reward.
"The reward of $10,000 for free does not outweigh the risk of lower future valuation upon completion and not knowing what your financial position will be down the road," he says.
Kent believes property remains a solid investment class, but stresses the need for off-the-plan buyers to do their homework.
"With volatility in the share market, record low interest rates and what will likely be significant government incentives offered in the future (eg. first home buyer incentives), property will continue to be a good investment," she says.
"Of course, this is guided by fundamental principles of selecting the right product in the right location and importantly for off-the-plan purchases, selecting a developer with track record on delivery and quality."
For those whose financial situations have deteriorated after they entered an off-the-plan contract, the options are limited.
Worst-case scenario, would-be buyers who can no longer be approved for a mortgage may have to forfeit their deposit.
Buyers may be able to negotiate an extension to the settlement date, or negotiate vendor finance.
This means the vendor and buyer negotiate a loan agreement for the buyer to pay as much of the price as they can afford, and the minimum the developer will accept, which is repaid over an agreed term. That loan agreement may or may not be secured by a second mortgage.
However, according to law firm Maddocks, "even if there is appetite to provide vendor finance, be mindful of the potential regulation surrounding these arrangements".
"Such arrangements may constitute credit contracts under the National Credit Code and the National Consumer Credit Protection Act. If they are found to be credit contracts, a developer would need to obtain an Australian Credit Licence before implementing the arrangement."