Do you want to sell an off-the-plan property before its settlement date? Here’s what you need to know.
Buying property off the plan offers a long list of potential benefits to investors, but it also comes with its fair share of risks. One strategy adopted by some investors is to purchase an off-the-plan property and then sell it on before settlement even occurs.
This option is entirely legal and can have specific advantages, but it’s important that you know the correct process for doing so before you decide on this investment approach.
Why sell an off-the-plan property before settlement?
Colin Lee, Editor of Hot Homes, says selling before settlement has the potential to generate high returns for investors. “This can happen when the property value of the project has increased during the construction period and the purchaser is wishing to sell for a profit,” he explains.
“As the purchaser has only paid, typically, a 10% deposit, any profit on re-sale can result in an extremely high return on his investment – e.g. Purchase Price $500,000, Deposit Paid $50,000, Re-Sold for $550,000. Return on investment 100%.”
In other cases, you may find that you need to sell before settlement to improve your financial situation. For example, if you get into financial difficulty and think you will struggle to make ongoing repayments on the loan you take out to purchase the property, you may decide to sell the property before settlement occurs.
How to sell an off-the-plan property before settlement
Although the title to an off-the-plan property doesn’t actually pass to the buyer until settlement, once you’ve signed an unconditional contract the property can be re-sold. However, you’ll need to take a close look at the sales contract before you sign it (as you would need to do anyway) because some developers place a restriction on re-sales prior to settlement.
“The contract will have special conditions and any restrictions on re-sale will be contained in the special conditions,” Lee explains. “Every off-the-plan purchaser should ensure the contract is checked by a suitably qualified lawyer prior to signing.”
The good news is that there is generally no penalty for re-selling an off-the-plan property. “Not many developers have their own sales arms, so most re-sales are handled through real estate agents or specialist off-the-plan agents” Lee says.
“If a real estate agent is used to sell the property, commissions will generally be payable.”
Other factors to consider when selling an off-the-plan property before settlement
Lee also points out that when looking to re-sell an off-the-plan property, the seller needs to do their financial calculations very carefully and take into account the following:
- Tax. Take advice from your accountant before you agree to re-sell,” he says. “Under the current capital gains tax regime, you will be required to pay tax on the capital gain you make when you re-sell the property, at your marginal rate.”
- Agent’s commission. “If an agent brokered the resale deal for you then you will be liable to pay agent’s commission on the resale as well at the date for completion.”
- Stamp duty buying in. Although it doesn’t seem that you actually own the property for any period of time, the law considers that you will actually take ownership of the property. As a result, it’s important to remember that you will be required to pay stamp duty.
- Additional legal fees. “It is not a simple exercise for any lawyer to re-produce an off-the-plan contract,” Lee says. “Additional costs are inevitable.”
- Net effect. “The net effect of these deductions needs to be considered,” Lee advises.
- You remain bound. “Even though you have a buyer, if that buyer does not complete his contract with you, you are still bound to settle with the developer,” Lee says.
If you’ve decided that you need to get out of an off-the-plan property contract, either to get your finances back in order or to take advantage of a capital gain, make sure you consider your options and obtain expert advice before going through with the sale.
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