Finance and Off The Plan Purchases

A potential trap (and it is something which all buyers should be aware of) when purchasing a unit off-the-plan is that most contracts will be worded along the lines that, “finance to be approved within 21 days of Contract Date” or words to that effect.

The trouble with this is that, when buying off-the-plan, the actual unit may not be constructed or finalised for 12 to 18 months or even longer. And a lot of things can happen between the date of signing the contract and completion of the unit. What people do not understand is that when a bank approves your application for finance, it is always subject to certain conditions (yes, the devil is in the fine print).

Some of those conditions may include, that the finance approval is limited to 90 days from date of approval and if not taken up within that time, then a fresh application may need to be made.  Another condition is that it is subject to a final valuation of the unit when it is completed.  Another may be that it is subject to the buyer’s circumstances not changing from the date of approval until the loan is advanced.

The Scenario

The following is not unusual and indeed we have seen it happen on many occasions.  A client enters into a contract to purchase a unit in a high rise, “off-the-plan” (OTP).  The contract is subject to finance approval within 21 days.  The buyer makes application and is approved for finance.  The contract then becomes unconditional.  The buyer has paid a hefty deposit. 

Fast forward 12 – 18 months’ time, the unit is completed and the seller calls upon the buyer to settle the contract.  The buyer contacts his bank.  The bank asks for updated financial statements, income tax returns and wants to undertake a valuation of the unit.

In the intervening period between finance approval and settlement, the market has taken a downward turn.  The buyer had entered into the contract for the sale price of $500,000.00 but the bank now values the unit at $450,000.00 and is only prepared to lend on 80% of its valuation.  All of a sudden, there is a huge gap between the purchase price and what the bank is prepared to lend and the buyer has to come up with a shortfall. In this scenario, $100,000.00.

The buyer is then left having to beg, borrow or steal to bridge the gap between what the bank is prepared to lend and the selling price.  If he cannot raise the funds and cannot settle on the due date, the buyer is then in breach of the contract allowing the vendor to take certain action against him including, terminating the contract and forfeiting his deposit.

That is why it is so important when buyers are looking to purchase a unit off-the-plan that they ensure that either their finance is watertight or the contract is worded such that the contract is subject to finance been obtained within say 21 days after the unit has been completed.

If you are thinking of purchasing a unit off-the-plan, please always ensure that the contract is read over by an experienced property lawyer before you put pen to paper.

Before you sign a purchase contract, we suggest you contact one of our property lawyers to discuss any potential duty concessions that may apply to you. We can be contacted on 07 3808 7777 or business@mclaughlinlawyers.com.au.