Why it is important to complete due diligence when buying an off-the-plan apartment

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Due diligence is really important when buying off-the-plan. Source: Istock

It is easy to get caught up in the excitement of purchasing an off-the- plan apartment, particularly when you are presented with the beautiful, stylish, modern design that will be yours on its completion.

It’s the same whether you are a first-time buyer right through to the downsizer. But you cannot let your excitement get in the way of doing proper due diligence, or it can really cost you, Stacks Champion Parramatta solicitor, Zohra Ali warned this week.

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Ali suggested that off-the-plan (OTP) buyers can never be too careful. The risks involved in off-the- plan purchasing emerged recently after the collapse of the Sydney-based Ralan Group, the longtime apartment developer.

Off-the-plan buyers should seek legal advice before buying.

It has left hundreds of apartment buyers at risk of losing their deposits for their intended Arncliffe acquisitions. Like other off-the-plan purchasers they put forward a deposit — generally being 10 per cent — before their property had been built. But these Arncliffe buyers went further and released their deposit for the developer, who’d promised a high rate of return during the intervening period.

The apartment buyers who released their deposits will be considered as unsecured creditors, ranking behind secured lenders the ATO, Westpac, NAB, St George, Wingate Group and Balmain NB Commercial Mortgages.

Not all off-the-plan contracts present the same level of risk and, as with all investments, there are important things to research.

Ali said off-the-plan buyers should seek independent legal advice as well as financial advice prior to signing off.

You need to assess the risks involved. Picture: istock.

“Ultimately an off-the-plan buyer is purchasing something that does not exist yet,” Ali noted.

She pointed out there were many players involved from the time of signing the contract to having it ready for settlement, including the developer, council, valuers, builders and certifiers.

“With so many players involved, it only follows that the risk of something going wrong increases exponentially to when purchasing an already built home,” she said.

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Buying an already built home is a fairly simple process — but does often involve the cautionary pest and building inspection reports during the cooling-off period.

Your lawyer can help you assess the risk level of entering into an off- the-plan transaction by undertaking some due diligence on the proposed developer and also the builder, whose bankruptcy could see construction halted indefinitely. Ali said she would never countenance a client releasing the deposit in an OTP situation.

“There is no reason why a deposit should be released to a developer and, if anything, the request should serve as a red flag as to the developer’s financial situation.

“What happened to Ralan is a perfect example of what can occur if your deposit is not sitting safely in a trust account.”

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She described the situation that the Ralan buyers have found themselves in as “terrible”.

“It will definitely take a large, financial toll on the affected families,” she said. Ali added even if you do all the due diligence, and ensure that you go with a reputable developer, somethings can still go wrong.

After all, developers cannot predict what state the property market and lending standards are going to be in the future.

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