The owner of a large vacant block wishes to chop it up into small parcels (lots) and sell each new lot. However, the owner has two problems. Firstly, he doesn’t have the substantial funds he needs to construct roads and install services for each lot. And secondly, he’s not sure whether anyone will want to buy the lots once he’s finished the works.
The owner can sell the lots first, and then divide them up later. He enters into contracts with buyers promising to do his best to subdivide the land and, if he succeeds, the sale will be completed. Each buyer pays a 10% deposit to guarantee their commitment. The owner then raises bank finance he needs to pay for the works, relying on both the contracts and the land as security for his loan.
These contracts, known as off-the-plan contracts, are common in all types of land development, from green-acre land releases, urban infill sites and high-rise apartment buildings.
Common features include
A detailed set of plans depicting the proposed lots and identifying which lot the buyer has selected.
That the deposit is held in a trust fund until the subdivision and settlement is complete.
If the land cannot be subdivided within the time specified in the contract, the contracts can be cancelled and the buyer will get their money back.
Bear in mind that an off-the-plan contract relates to real estate that does not actually exist at the time the contract is signed. There is a possibility that subdivision will not be approved, or that settlement will be delayed for many months for a variety of reasons.
Pro’s and con’s
In future blog posts we’ll examine the benefits and risks of buying off-the-plan in more detail.