The High Life: 12 things you need to know about buying off plan
In today's property market, it's not unheard-of to buy a home or apartment before it's built.
Buying off the plans, as it's called, allows the buyer to secure a property at a set price - even though that property is only a two-dimensional drawing.
It's a tempting proposition, but it's not without potential problems. You'll want to do as much - if not more - due diligence before you make a commitment. But where to start?
In this excerpt from her recent book Buyer Beware: A New Zealand Home Buyer's Guide author Maria Slade lists the 12 most important things you ned to know before buying an as-yet-unbuilt property.
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Have a look into the track record of the people doing the development. There will be a particular company associated with the project, so look this firm up on the Companies Office website, https://www.business.govt.nz/ and see who the directors and shareholders are.
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In the age of the internet, it is the simplest thing in the world to Google those names, and doing a Google news search is also useful. Developing is a fickle game, and you will be amazed how many of these guys have a less-than perfect history.
Do a second Companies Office search on the names (you can do a directors and shareholders search), and see whether there are firms they have been involved with that have failed — that is, gone into liquidation or receivership. The entries for those companies will include the liquidators' and receivers' reports, which will give some information about the development and what went wrong.
You can also do a banned directors search, and search the Insolvency and Trustee Service register to check whether any of those involved are, or have ever been, bankrupt: http://www.insolvency.govt.nz/cms. Searching the Justice Department's Judicial Decisions Online site to see if the names come up in any court disputes is another good trick: https://forms.justice.govt.nz/jdo/Introduction.jsp.
2. WHAT'S THE PLAN?
Check whether the development has the necessary resource consents, and any building consents. Again, you will probably be surprised that the project is at a very early stage and doesn't even have resource consent yet.
The contract will almost certainly say that the development will only proceed once a certain number of units have been sold off the plans. This is because financiers only lend on a project once the developer has achieved an agreed level of pre-sales.
3. DON'T LET THE SUN GO DOWN
Make sure your contract has a 'sunset clause' which allows you to cancel and get your deposit back if the developer hasn't made sufficient progress within a certain timeframe.
Some developers deliberately avoid putting these in because they don't want to lose the sale if there are delays. There is a section in the Resource Management Act giving purchasers the right to get out if the developer hasn't made reasonable progress a year after the date of the agreement, or two years after resource consent was granted (whichever is the later).
But enforcing this would require fighting with the developer over what is 'reasonable' progress, and all the advice is that it is far better to have a well-drafted sunset clause in your own contract from the outset.
4. SAFETY DEPOSIT
Ensure that the deposit you pay for your future apartment is held in a third party's trust account (such as a lawyer's), and that you will earn interest on that money.
5. ENTIRELY IN AGREEMENT
Look out for what is known as 'entire agreement' clauses.
These typically state that the contract contains everything agreed between you and the developer. It is designed so that you can't later say, 'oh, but the sales rep told me this', or 'the glossy brochure showed that'.
6. WHAT YOU SEE MAY NOT BE WHAT YOU GET
Further to the above, most contracts give the developer the right to make changes to the planned complex without seeking your consent.
In many cases the developer can alter the size of your unit by up to 5 per cent. They may also be able to change the layout, use different materials and finishings, and move the car park.
Those fancy drawings you see of marble benchtops and tree-lined vistas are just that — drawings. They are not plans, and the reality may be quite different. Property lawyers say that if the apartment is changed significantly, there should be some provision in the contract for your purchase price to be reduced.
7. COOLING OFF
Under the Resource Management Act buyers of property in a planned development are entitled to a 14-day 'cooling-off ' period. This means you can change your mind and cancel the contract in writing at any time up to two weeks after you sign.
8. WHO IS SUPPLYING YOUR BROADBAND?
Be aware that some developers set up related companies and require owners to buy all of their power and other utilities through this provider, or use a developer-related letting agency if they are renting their apartment out. There have also been examples of clauses allowing developers to enter into long-term agreements with related body corporate management companies.
The developer is clearly clipping the ticket via these add-on services, but will argue that they have negotiated the best price for owners. However, it significantly curtails your consumer choice.
9. BEING COMPLIANT
Make sure your final payments for the apartment are tied to the building getting its code compliance certificate (CCC) and allow for the maintenance period. This ensures the developer remains motivated to see the job through.
The CCC is the statement issued under the Building Act confirming that the work carried out complies with the original building consent. The maintenance period is the time after settlement during which the buyer can notify the developer of any problems with the unit and get them fixed at the developer's cost. The experts say this should be at least 90 days.
10. THE ONGOING COST
What the developer says the annual body corporate levy will be is unlikely to be the full picture, because it probably won't allow for long-term maintenance. Every body corporate must have a Long Term Maintenance Plan (LTMP), setting out the work which will need to be done on the building going forward and how much it will cost.
Complexes are also supposed to put amounts aside each year in a Long Term Maintenance Fund, so that they have the money available when the big jobs fall due. It is not in the developer's interests to highlight the ongoing costs of ownership, because it makes the apartments look more expensive. The developer doesn't have to prepare a LTMP — this is left to the new building's body corporate once it is formed.
11. TURNING OVER THE DISCLOSURE
When a project is finished, the developer is supposed to provide something called a Turnover Disclosure Statement, detailing any recommended maintenance for the building, and details of the warranties and guarantees of the products used. But they don't have to give it to the purchasers — only to the body corporate, which hasn't been formed yet — and as mentioned above they also don't have to prepare a LTMP.
Property law experts say that this statement is incredibly technical and pretty much impossible for the ordinary person to understand. They are calling for developers to be required to produce a simplified version and give it to each buyer, and to write a fully costed LTMP.
12. GIVING YOU WHAT YOU REALLY NEED TO KNOW
The experts are also calling for a revamp of the pre-contract disclosure statement given to prospective buyers of units off the plans. But giving a buyer a statement for a unit that doesn't exist yet is a waste of time, because it won't contain any of the essential information.
There are existing efforts to reform the laws surrounding apartments. An industry working group has put a series of recommendations to the government, and, although it admits it is a Rolls-Royce list, this is what it would like to see in pre-contract disclosure statements given to people interested in buying units off the plans:
• estimated body corporate levies
• a profile of the developer, their history and other developments they have built
• whether any of the developer's previous developments have had leaky-building issues
• the ratio of owner-occupiers to investors in the complex
• whether any units have been sold to government agencies for rental accommodation
• a list of resource consents and building consents obtained
• a list of all intended service contracts.
Buyer Beware: A New Zealand Home Buyer's Guide retails for $30 and is available online via penguin.co.nz or at Paper Plus, Whitcoulls and The Warehouse.