Commissioner's Blog: Secure deposits when buying off the plan
With Acting Commissioner for Consumer Protection David Hillyard
A number of residential building companies have collapsed in WA in recent months prompting Consumer Protection to reissue advice to off-the-plan property buyers. One of the biggest risks for anyone purchasing a home and land package or a yet-to-be-built house, unit or apartment within a development, is the prospect of it not going ahead.
Off-the-plan buyers might expect a refund of any deposit paid if a project doesn’t proceed, however, this depends on the type of property and specifics of the contract. In the event of insolvency a consumer’s cash can be tied up, unless steps have been taken to protect it. Ultimately a buyer could join a list of unsecured creditors.
To avoid this it is absolutely essential off-the-plan buyers ensure any money paid up front is held in a designated trust account by an independent party, such as a real estate agent, until the property is ready to settle (remember this timeline can blow out from months to years depending on the status of planning applications, how many other buyers have signed up and subsequent bank loan approvals). Contracts have usually been drawn up in the developer’s best interests, so buyers need to take measures to protect themselves if things go wrong.
For strata title or survey strata property sales, deposits MUST be held in the trust account of a solicitor, real estate agent or settlement agent but only until a strata/survey strata plan has been registered with Landgate. A clause would need to be added to the contract to prevent its release until settlement.
As of April 2017 a change in sale of land laws means if you buy a lot or sub division before the developer is the registered owner, your contract will have to say so and your deposit must be held in an Australian trust account. There will be a deadline for the land ownership to be obtained by the developer, or your deposit money will be refunded. Read more at www.landgate.wa.gov.au.
Consumer Protection’s guide at www.commerce.wa.gov.au/buyingofftheplan covers other scenarios, including what happens to a deposit if an off-the-plan buyer can’t go through with the deal due to changing circumstances. Interest rate rises, falling property values and loss of employment can all affect a buyer’s ability to get finance at settlement time. A buyer defaulting could mean a loss of deposit and even the prospect of paying damages to the developer.
How will I know if a builder is in financial difficulty?
WA contractors carrying out residential building work valued over $20,000 need to be registered with the Building Commission and inform the Building Commissioner if they are unable to meet their financial obligations. Keep up-to-date with announcements at www.commerce.wa.gov.au/buildingcommission. News media is also a good source of information.
If a registered home building contractor becomes insolvent, consumers who have unfinished, faulty or unsatisfactory work on residential building contracts above $20k should be covered by home indemnity insurance, although there are some exemptions. The insurer and the administrator or liquidator would need to be contacted in the first instance.
Home indemnity insurance coverage
Under the Home Building Contracts Act it is compulsory for a builder to take out home indemnity insurance in the name of the owner before accepting payment or starting work worth more than $20,000. (This requirement does not apply to multi-storey off-the-plan purchases).
Western Australians should independently verify if their home construction contract is covered by this insurance and if so, get a copy of the certificate from the builder. For peace of mind, consumers can then contact the insurance company directly to check the policy is valid and current. Generally it will provide up to $100,000 to cover the extra cost of getting a new builder to complete work if the original builder becomes insolvent, dies or disappears.
The Building Commission website has a Home Indemnity Insurance page or consumers can phone 1300 489 099.
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