Guide to buying off the plan
Guide to buying off the plan
This guide is designed to help you understand some of the differences between buying a new build over an existing property.
We’ve structured this section as a Frequently Asked Questions so you can find what you’re looking for quickly. The FAQ is broken up into some general questions, then is divided into two sections: Developments and House and Land.
- Why buy a new build property over existing?
- What risks are involved in buying new?
- What can I do to reduce the risk of buying new?
- What is an Affordable House?
- What is a Special Housing Area (SHA)?
- What financial assistance can I get?
- What is Kiwibuild?
- What is the KiwiSaver First-Home Withdrawal?
- What is the Kiwisaver HomeStart Grant?
- What is the Welcome Home Loan?
- How much can I afford?
Why buy a new build property over existing?
There are many compelling benefits to buying off the plan.
The high deposits required - 20% for owner-occupiers, 40% for investors - by current LVR (Loan-to-Value Ratio) restrictions on existing houses do not apply to new homes. New builds only require a 10% deposit if you are a New Zealand Resident (20% for foreign buyers) regardless of whether you are an owner-occupier or investor. This means it’s both easier to get on the property ladder, and to increase your property portfolio by buying off the plan.
New apartments and houses are generally built to a higher standard due to improvements in the Building Code moisture, thermal and acoustic ratings - and include the latest in energy-efficient lighting, heating and appliances. They are also covered by warranties (generally 10 years) from the developer/builder so there should be few maintenance costs in the initial few years, nor any renovation work to be done.
There are good gains to be made buying off the plans. You will pay only the 10% deposit upon signing the contract, but do not settle the remaining 90% until the project is completed. During this time, it is possible that house prices will have surged and that you are now paying below-market-value for the property. The capital gains on a new build tend to out-perform an existing property in the first few years after you take possession as the risk you’ve taken in buying off the plans is capitalised.
What risks are involved in buying new?
Whilst there are many benefits to buying off the plan, there are also risks. There is a chance that the property market could decline during the build period so that when you take possession of your property, you are paying above current market value.
Many buyers are concerned about their deposit being lost through financial mismanagement by the developer but this cannot happen. All deposits are held in interest-bearing solicitors’ accounts (meaning the developer cannot spend your deposit). The risk in buying off plan is that you are legally bound to complete that purchase once the developer delivers the project – so your deposit, and your mortgage approval are tied up should you decide you want to exit the contract.
Some developments – especially larger developments – can take a long time to sell down (or reach their funding threshold) and start construction. This increases the time you have to wait to take possession. Similarly, it is not uncommon for construction to take longer than expected. The silver lining is that the longer you wait to settle, the more the market value of that property vs your contract price may have improved.
It can be difficult to fund the deposit to buy off the plans if you already own a house because all your equity is tied up in a property you are still living in.
Although there are excellent resources (floor plans, 3D imagery, material samples, specifications etc) provided by developers and their agents to communicate what the development will be like when finished, there is always an element of risk that you will not get exactly what you thought you would.
What can I do to reduce the risk of buying new?
It is a good idea to do your due diligence on any developer and their past projects. You can see in the flesh the quality of the development, and possibly even compare it to the marketing material from which it was sold. You can investigate how long projects took to build, and if there were any contractual problems or other issues that point towards mismanagement.
It is highly recommended that you get a solicitor to review the contract and associated sale & purchase documentation. It is especially important that you understand what rights you have to exit a contract if you feel like the development is stalling or suffering from other issues.
Before buying, make sure that you have thoroughly researched what other developments are for sale to make sure that you are buying into the one that best suits your needs.
Approach every property like you are an investor. It’s easy to get swept away by flashy marketing so make sure that you take a clinical look at the basics – does it get sun, does it have a view, is it a good area, what is the cost per square metre, is it a good layout, does it have good specifications?
What is an Affordable House?
This term is used to classify properties below the price cap for that area (Auckland $650K, Other Cities $550K, Regions $450K). Affordability is based on the average wage in that area.
This classification is important because there are certain financial assistance packages that relate specifically to Affordable Houses. You can read more about these below.
What is a Special Housing Area (SHA)?
SHAs were set up by the councils and government to speed up construction of housing through fast-track consenting and other benefits. In order to qualify as a SHA, developments would need to contain a certain percentage of affordable housing.
SHA developments will likely start construction more quickly than a standard development – so you would take possession sooner than in a non-SHA new build. You may also be able to secure one of the affordable houses if you fit the criteria.
What financial assistance can I get?
There are a few financial assistance schemes including Kiwibuild, the KiwiSaver First-Home Withdrawal, the KiwiSaver HomeStart Grant and the Welcome Home Loan. These are covered in more detail directly below.
What is Kiwibuild?
Kiwibuild is a government initiative to deliver 100,000 modest starter homes over the next decade through collaboration with Iwi, Councils and Private Sector. These affordable homes will be allocated by ballot to New Zealand first home buyers that fit specific income caps. You can read more here: https://www.squirrel.co.nz/home-loans/kiwibuild
Kiwibuild homes are likely to be good value because the government is contributing to a portion of the construction cost to keep the price under the affordable home cap. Kiwibuild developments are also less likely to have funding problems and thus will get underway more quickly and be more financially stable throughout construction.
What is the KiwiSaver First-Home Withdrawal?
You can withdraw your KiwiSaver to contribute towards your deposit if: A) you are a first home buyer and B) you have contributed for at least 3 years. You can read more here: https://www.kiwisaver.govt.nz/new/benefits/home-withdrawl/
What is the Kiwisaver HomeStart Grant?
If you A) have a salary of $85K or less – or a combined salary below $130K – and are B) purchasing a new build property below the Affordable House price caps, and this is C) your first home, you are eligible for the HomeStart Grant: $2000 for each year you have contributed (assuming you have been with Kiwisaver for a minimum of 3 years) up to a maximum of $10K. As a couple, your combined maximum is $20K. Where the property is being sold off the plans, the HomeStart grant may be paid out prior to settlement to assist with the deposit or progress payments but this sum must be held in trust until settlement. You must then live in the property for 6 months. You can read more here: https://www.kiwisaver.govt.nz/new/benefits/home-sub/
What is the Welcome Home Loan?
A Welcome Home Loan is a low deposit (10%) mortgage for purchasers of an Affordable House with a salary of $85K or less (or combined salary of $130K or less). As buying any new build property entitles you to just a 10% deposit, the Welcome Home Loan is relevant to existing homes. You can read more here: https://www.welcomehomeloan.co.nz
How much can I afford?
What you can afford comes down to a number of factors: How big is your deposit? Are you a New Zealand Resident? What is your salary (or joint salary) and what are your financial commitments before and after this loan? What other assets and liabilities do you have? Are you eligible for financial assistance?
We recommend that you speak with the mortgage advice experts at Squirrel. They’ve helped thousands of Kiwis into their first homes and can help you too. If you want to do some quick calculations beforehand, why not try their mortage calculators
- What is the normal process for buying an apartment off the plans?
- Where can I find a price list for a Development?
- Is it common to negotiate on the price for an off-plan apartment?
- Do I get to customise my unit?
- How do you know if you're getting a good buy?
- How do I spot a bargain?
What is the normal process for buying an apartment off the plans?
When you spot a development that suits your purchasing criteria, the first thing to do is get in touch with the agent. There will often be a Display Suite to visit where you can view the floor plans, 3D imagery, material boards and other marketing collateral. If you find an apartment you like, you will usually pay a nominal amount – anything from $1000 - $5000 – to secure the unit with the balance of the 10% deposit due once your solicitor has had a chance to review the contract. This money is held in a trust account until settlement.
Generally construction will not begin on the project until the developer has reached their ‘pre-sales target’, which is the number of sales required by the bank to unlock their construction finance. Assuming the sales target is reached, construction can take anything from 1-3 years depending on the size of the build. Good developers will regularly communicate with buyers to update them on the build progress and expected completion date.
Upon completion (CCCs issued and building ready for occupation), you will need to settle by paying the balance of the contract and take possession, much the same way as you would with an existing property.
Where can I find a price list for a Development?
It is uncommon for price lists and floor plans to be made available online, so you will likely have to contact the agent for this information.
Is it common to negotiate on the price for an off-plan apartment?
There is no definitive answer to this question but the prices are generally considered fixed. If a development is selling slowly or is close to a sales target, there may be room for negotiation.
Do I get to customise my unit?
In some developments, you may be able to choose between two or three interior colour schemes, but there is little else that you will be able to influence within the fitout unless it is a very high-end apartment. It is very unusual to be able to change the floor plan as there would be impacts on consents, structure, services and build cost.
How do you know if you're getting a good buy?
Generally, units within a development are priced on a square metre value that is consistent across the project, but then individually tweaked to incorporate position in relation to sun, views, privacy and height up the building. Within a building, the best buys tend to be the units with the floor plans that have the least amount of hallway or circulation space as this area is charged at the same sqm rate as more useable space.
A purchaser that has done their research will start to get a feel for which developments have a competitive square metre rate for their location and the amenity included in the building.
How do I spot a bargain?
Many larger developments will have some under-priced units to hook early sales and start momentum. It is a good idea to keep a close watch on Offplan for new developments being released to market. Certain SHA developments also have a proportion of ‘affordable’ units which are often priced lower than market value.
House and Land
- What is a Turn Key contract?
- What is a Land & Build contract?
- Can I modify the design?
- Do Turn Key contracts include landscaping?
- What does Titles due mean?
What is a Turn Key contract?
The phrase ‘turn-key’ (or ‘Turn Key Loan’) is used to describe a fixed price contract where the purchaser pays a deposit (usually 10%), and then has no loan or interest repayments until completion. The Builder or Developer delivers a fully completed home (with CCC issued) ready for occupation - at which point the balance is due upon settlement. Turn Key contracts don’t generally allow for much customisation beyond minor variations such as colours and interior finishes.
Turn-key contracts are popular because the purchaser is not required to make loan payments during the construction process while they are still renting in or paying a mortgage on another property. Banks generally prefer turn-key contracts – which makes getting finance easier – because they don’t have to manage the construction payments. The downside is that the builder must cover the finance costs of the land and construction until settlement, so this expense is usually built into the purchase price.
What is a Land & Build contract?
The phrase ‘Land and Build’ is used to describe a contract where a purchaser buys the land at the very beginning of the build, and then enters into a construction contract with the builder to build the house on their land. They make progress payments to the builder at specific milestones until the home is completed.
The upsides of Land and Build contracts (also known as a ‘Construction Loan’ or a ‘Progress Payments Loan’) are a lower construction cost as the builder is not financing the cost of the land during the build, and the purchaser has full ownership of the land and house on it from the start. The obvious downside is that the purchaser is required to make mortgage payments on the land and construction while they are paying to live elsewhere.
Can I modify the design?
It is uncommon in a Turn Key (fixed price) contract to be able to influence anything other than colours, whereas Land & Build contracts allow for a high-level of customisation due to there being more flexibility in the contract.
Do Turn Key contracts include landscaping?
Different houses will come with different levels of finish in terms of landscaping so this is an important thing to know when purchasing. At a very minimum, all Turn Key homes would come with the necessary retaining and fences to form the section, a driveway to access the garage and a footpath to access the front door – but planting, patios and other landscaping elements may not be included.
What does Titles due mean?
Construction cannot begin on a House and Land package until the Title for the newly subdivided land has been issued. Expected Completion dates are therefore usually provided as a set number of months from title issue.