The term “off-the-plan” originated from Hong Kong and refers to properties that has been put on the market for sale whilst still in its construction stage. Generally speaking, the act of selling these “off-the-plan” properties are termed ‘pre-sale’ whilst the act of buying referred to as “pre-order”. The process of reselling these properties is known as ‘nomination’. The risk associated with these unfinished properties is much higher than the risk you would face when dealing with completed properties. However, the benefits of prioritised purchase, equivalent to having the rights of first refusal and lower investment cost compared to established properties attract many consumers.
01 Why do people resell “off-the-plan” properties
There are many reasons why buyers choose to resell “off-the plan” developments and may be attributed to:
- Insufficient funds due to stock or business downfall
- Change of mind
- The buyer’s desire to make quick profits
- The buyer owns too many properties, and is unable to settle them all
02 The benefits of nomination properties
There are 3 main advantages of purchasing nomination properties in comparison to directly sourcing them from the developer or purchasing as second-hand property:
Generally, the construction period for an apartment can take up to 2-3 years, and between 15-24 months for townhouses. Whereas, most of the nomination properties are available for purchase up to 6 months prior to settlement date, thus are better suited for clients who are in urgent need of the property and unable to await the construction period.
- Price affordability
The timing also has an impact on the pricing of the property. The housing price in Melbourne continues to increase, thus the earlier you purchase, the cheaper the costs. For example, a 2-bedroom apartment that costed approximately $550,000 in 2013 increased to a starting price of $700,000 in 2015. Thus, even if the first buyer resold for a profit of $100,000, the overall cost of this apartment would still be lower for the second buyer than attempting to purchase property firsthand.
- Stamp Duty
Some people may question whether second-hand property would be a better choice if timing is a factor of consideration, due to its immediate availability. However, second-hand properties pose many restrictions for overseas buyers, such as requirement for owner-occupation, limitation to one property purchase and stamp duty costs. Currently, the cost of stamp duty in Victoria is approximately 5.5%; from 1st July this year, new regulations will enforce an additional 7% stamp duty cost for overseas buyers. Therefore, the overall stamp duty costs to purchase second-hand property for overseas clients totals to 12.5%, which is a considerable amount. On the contrary, due to its incomplete nature, stamp duty costs for “off-the-plan” properties are calculated in accordance with incurred cost at the time when first buyer’s contract is signed. Hence, a large proportion of the 5.5% stamp duty fees can be waived.
03 Process for nomination properties
- Get in touch with the developer
It is necessary to contact the developer prior to the purchase, as their consent must be given for the process to proceed.
- Find a suitable buyer
An ideal buyer can be found through a real estate agency or professional leasing company. It is important to source an agent who has the expertise in dealing with “off-the-plan” property as the process is different to reselling settled properties. If you are an overseas buyer, it is possible to resell to a permanent resident (PR) or another overseas buyer. As the property is being resold prior to settlement, it is regarded as a new property rather than a second-hand purchase. Sourcing an ideal buyer is a crucial step as failure of property settlement leaves you as a liability.
- Price negotiation
A price needs to be negotiated between the first and second buyer. If there is sufficient supply in the market for the type of property the first buyer is hoping to sell, then a price increase is not likely. It is therefore wise for the first buyer to resell at its original price or less, depending on geographical location and other conditions of the property. On the other hand, if demand surpasses the supply of the property, or the property is inclusive of great facilities and excellent location, then the first buyer may wish to increase the price and make a profit when reselling.
Terms conditons cannot change as you are taking over the previous contract,
- Hire an attorney
The attorney hired for the initial purchase of the property should also be responsible for the nomination process. With regards to legal costs, usually 50% of the fee is paid when the contract is signed, and the second half paid upon completion of property. Thus, if the “off-the-plan” property is resold, the first buyer is no longer required to pay the remaining half of the attorney fees as the contract between the first buyer and the attorney has ended. The second buyer will need to hire an Australian real estate attorney, which generally costs between $2000-$3000. The attorney is responsible for drafting agreement documents and transfer of the property between the first and second buyer. The remaining fee for the first attorney can be settled according to the negotiation between the two parties, and the fee for the second attorney is to be paid by the second buyer.
- Re-sign the contract
The attorney of the second buyer will need to establish a transfer agreement document based on the contract signed by the first buyer upon initial purchase of the property. In the new agreement, the first buyer is now regarded as the seller. It is important to note that any terms and conditions stated in the original contract, including the price cannot be changed. Hence, any negotiated price between the buyer and seller will occur at their own discretion. Once the contract is signed by both parties, the original contract between the first buyer and developer is no longer legally valid.
- Transfer and making the final payment
The first buyer is responsible for agency fees. The second buyer must then make the following payments:
- 10% down payment/ deposit to the first buyer
- Attorney fees, stamp duty and other associated fees paid to the attorney’s trust account
- Remaining costs of the property paid to the developer (this amount is calculated by subtracting the $10% down payment from the total cost of the property as stated in the first contract)
Once the above fees are paid, the attorney will process the second buyer’s property ownership certificate and the developer will settle the property. Once this point is reached, the entire nomination process is considered complete.