Don't get caught when buying an off-the-plan investment
Over-supply, inflated prices and one-sided contracts are just some of the challenges facing off-the-plan investors.
What is a deposit bond and should I use it if I'm buying an off-the-plan property? Michael Saliba, principal franchisee, Smartline Personal Mortgage Advisers
A deposit bond is a product that can be used in place of a cash deposit that is given at the time of exchanging the purchase contract.
The bond is something of a formal IOU that the purchaser can apply for through an agent such as Deposit Power by paying a premium that is costed on factors such as the term of the bond, the dollar value and the security being used (i.e., cash or property).
Something to consider is that purchase contracts will usually specify if a deposit bond can be used in place of cash or a bank guarantee, so this must be checked before applying.
What is the cooling-off period and what happens if I change my mind after the cooling-off period? Anthea Digiaris, associate, Slater & Gordon
The cooling-off period varies in each state. In Victoria, for example, you may be entitled to a three-day cooling-off period which starts from the time the purchaser signs the contract, not the time the vendor signs.
There may also be some instances when the three-day cooling-off period doesn't apply so you should seek legal advice. If you change your mind in that cooling-off period, you must either give the vendor or the vendor's agent written notice that you are ending the contract or leave the notice at the address of the vendor or the vendor's agent.
If you end the contract this way you'll be entitled to a refund of all the money you paid except for $100 or 0.2% of the purchase price (whichever is more).
Once the cooling-off rights have expired, you can't terminate the contract if you change your mind. You'll need to proceed unless there are any other conditions in the contract that may give you an out.
What happens to my deposit if the developer goes bust? Michael Yardney, CEO, Metropole Property Strategists
Your deposit should have been held in a solicitor's trust account to protect your interests and will be returned to you if the developer goes belly up.
However, in the meantime you may have missed out on interest or capital gains earned through other investments.
What happens if the property market falls between the exchange of contracts and building being completed? Patrick Bright, buyer's agent, EPS Property Search
In short, you could be in negative equity and a world of financial pain. The bank will only lend based on its valuation at the time of settlement, not on purchase price at the time of exchange.
If you can't stump up the shortfall and settle, then you lose your 10% deposit.
You're also still exposed to being sued for more money for non-performance of contract. For example, if the developer re-sells the property for less than what you agreed to pay, and after offsetting the 10% deposit it has already kept it is still short on the original agreed purchase price, it can sue you for the difference.
Further, even if you can stump up the extra cash and settle but too many other buyers in the development can't, then the developer could go bust and you would lose your deposit or be asked for more money from another developer which may take over and try to complete the project.
Either way it's a lose-lose situation for all involved.
For more information on the challenges facing off-the-plan investors, pick up the August issue of Money