Alarm bells are ringing in some quarters on behalf of property buyers who have signed contracts for apartments being built three to four years down the track.
According to the Domain article, Off-the-plan buyers: One in three are in trouble, recent tightening of lending criteria means purchasers who signed contracts years ago have to find extra money for their deposits to meet new lending rules.
The fear is many of these buyers will walk away from their contracts, forfeiting what deposits had already been paid and thereby flooding the market with an influx of inventory that will put downward pressure on prices.
As conveyancers, there is little we can do to help people in these situations, as the neutral brokers in property transactions there are some common sense guidelines to follow and questions to ask drawn from our experience as the largest conveyancing firm in South Australia.
The future is always unclear
One of the major issues with signing contracts off-the-plan is that some apartment buildings are selling apartments up to three to four years before the likely completion date.
This means parties are entering into contracts with no clear view of when settlement will take place, and that always makes conveyancers nervous!
These early contract are good for developers because they have some certainty for their lender when borrowing funds for the construction, and when all goes well they can also be good for the buyer as it’s quite possible the apartment will increase greatly in value before it’s even been paid for in full.
But when things go wrong, the stakes can be very high.
It’s not just the market, it can be the regulations
All speculation in real estate involves risk and applying some prudence can help limit your exposure to levels you are able to tolerate.
Unfortunately, some changes can take purchasers by surprise such as the regulatory changes as quoted in the story which resulted in buyers having their ability to borrow funds reduced dramatically, leaving them radically exposed.
Purchasers in this story who already had their original finance in place faced the battle of finding extra funds by other means which for many will be very expensive or impossible, or their other option was to say goodbye to their deposits. Neither option is palatable.
Furthermore, it can get even worse for buyers because if they default on their contract and the contract is terminated by the vendor, they risk being sued for an amount far greater than their deposit.
The vendor can sue the purchaser for any loss suffered by the vendor, which can include additional agent fees, reduction on final selling price, interest, etc.
These losses can often exceed a deposit, enabling the vendor to sue for these excess losses
Wisdom from years of conveyancing clients’ property settlements.
There is not a lot a purchaser can do to guard against these events when buying an apartment that’s yet to be built, apart from a couple of important measures we’d view as fundamental:
- Carry out extra research like speaking to the banker or loan broker to make sure your loan is solid for a reasonable period of time
- Make sure there is a reasonable sunset clause end date included in your contract so you have a way out if the developer takes longer than planned to complete the development
And, of course, if you are an Eckermann Steinert Conveyancers client, feel free to chat with your conveyancer as we’re always here as your advisers.