Buying off the plans has become an increasingly popular way to enter the property market, especially for first-home buyers and investors looking for new builds with modern features.

The approach means purchasing a property before it's been constructed, based solely on architectural plans and marketing materials. While it can offer advantages like locking the price in early, lower maintenance costs, and potential capital gains before move-in day, it also comes with unique risks and considerations. Understanding the process, key terms, and potential pitfalls is essential before signing on the dotted line and Bayleys General Manager Residential Projects Gavin Lloyd says if you do you can get a fantastic deal on your property.

“Firstly, you get a cheaper entry price to begin with because most developers look to incentivise buyers as they're generally required to reach a certain threshold of sales before their banks and funders will lend them the money.”

“Secondly, developments may take 12 or sometimes 24 months to build but because you’re buying today in a rising market you’re able to realise that capital gain across that period of time.”

Lloyd says you can also get a great return on equity.

“If you think about when you're purchasing a property off plan, you're only putting down a 10% deposit. But because it takes time to be delivered, you're also leveraging the value of that additional 90% across that period of time too.”

Which in a rising market like we’re beginning to experience now is a huge benefit for buyers.

“There's the potential for a substantial price uplift, and that's when in strong markets, we often get buyers coming in and purchasing or agreeing to put down a deposit early on, and then as the property is closer to settlement they’ll sometimes flip those properties and make a capital gain.”

That means if you buy a million-dollar property off the plans, but you’re only putting down $100,000 as a deposit, the full value of the property will keep growing, and you’re not having to make payments until construction is complete.

“Right now, we’re in the right part of the cycle and we're arguably just coming out of the bottom of the market, so we're getting a lot more interest in people buying off the plans.”

“You’re buying it at today’s price and getting it for tomorrow’s value which is going to be much higher.”

What are some of the other advantages?

There are a range of other benefits to buying off the plans, especially since you’re getting involved in the building process before it even begins.

“Firstly, there’s an opportunity to customise the finishings within the apartment to suit personal taste and style.”

Lloyd says the other advantage is the fact that you’re getting something entirely new.

“That means you’ll get all your code of compliance certificates and all of the latest interior trends, fixtures and fittings, as well as all of the warranties and guarantees that come with that.”

What checks should you make?

Lloyd says right now the two strongest markets for off-the-plan purchases are Auckland and Queenstown.

“But we also see Wellington, Hamilton and other major cities with their fair share of developments too.”

While there’s lots of positives associated with buying off the plans, he says there’s also a process you should follow to ensure any developer has your best interests.

“You really need to be confident and do your homework on the developer. Ask lots of questions around their track record in the past? Have they got funding? Who are their funders? Who are their builders?”

“You should also always get a lawyer to have a look at the sale and purchase agreement. You need to check this very thoroughly and make sure it's covering off all the things that you're expecting to be included in the purchase including specifications and finishes.”

Because the house hasn’t been built yet, generally those sale and purchase agreements have a lot more detail in them than what would be found in one for an existing home.

“You are taking a bit of a risk because it's not built yet. But if you do all your homework and thoroughly check all that there shouldn’t be any issues.”

What about securing finance?

Lloyd says there isn’t a great deal of difference in securing finance for an off-the-plan purchase compared with an existing home.

“The only difference is the time it takes before the development is completed. Most banks will only give you preapproval for 12 months, so if the project you’re buying into isn’t likely to be completed within that time, it may mean that you have to go back midterm and ask for another loan application and get it extended for another 12 months.”

“That may sound daunting, but another advantage is that after paying your deposit you don’t pay anything else until it’s completed which gives you more time to save and means you'll need to borrow less.”

What if the property doesn't live up to your expectations?

Lloyd says generally in the sale and purchase agreement for an off-plan property there should be protections in place to ensure that what the developer delivers aligns with what you’ve agreed on.

“There’s also a pre settlement inspection that you would conduct before you hand over your money, so you need to be satisfied.”

“Within most agreements there’s also some snagging and defects clauses. You need to make sure that those are included, and that then requires a developer to go back and fix anything within a certain period of time - usually 12 months.”

“That means that if something cracks or stops working within that period of time you can call the builders and the developers back in and they’ll fix that under the warranty period that you’ve agreed on.”

As for the property’s specifications and fixtures, Lloyd says the agreed design elements need to be accurate.

“It might be that a developer may not be able to procure a certain brand of whiteware as it’s out of stock, or the company may have closed down. But through your purchase and sale agreement, the developer is obliged to provide a like-for-like substitution. “

“For example, if they can't get you the Fisher and Paykel model, they'll supplement it with an equivalent Miele model.”

But if they don’t, Lloyd says recourse is available through common law.

What are the risks?

Lloyd says the biggest risk of buying off the plans is whether or not the developer can complete the project.

“There are many things that could prevent a developer from being able to complete a build. In those circumstances, the purchaser would be fully refunded their deposit.”

“It’s obviously still very disappointing though because most buyers have dreamed of getting a brand-new apartment or a new home, and if that doesn't come off, they're kind of back to the drawing board.”

Lloyd says things like the covid pandemic, or a global economic shock are just some of the things that could affect a development.

Another risk factor comes from the buyer’s side.

“This could stem from people who have a change of circumstances during their life, in that period between paying a deposit and a project's completion. That could be deaths, marriages and births or unemployment.”

“That means buyers need to be fairly confident that they’re going to be employed in a few years' time and that there will be no substantial change in their lives.”

Buying off the plans can be a smart way to secure a brand-new home or investment, often with less upfront cost and more customisation. Doing your homework, understanding your rights, and working with trusted professionals is crucial and with the right approach, buying off the plans can be a rewarding path to property ownership - one that’s worth the wait.