4 ways to get out of your new build contract under construction

Picture this, you sign a contract to buy a new build investment property. The property is under construction, and it’s almost time to pay the money and make it yours.

But what happens if – during construction – you have another baby and can’t get the bank to lend you money anymore.

Or, what if you get made redundant and can’t afford the top-up. Or, what if something unexpected in your life happens?

You could find yourself unable to settle the property having to sell a property … before it’s even built.

So what are your options if you’ve got a new build under construction and decide that it’s not the right fit for your portfolio anymore?

In this article, you’ll learn 4 options for how you can sell your property while it’s still under construction.

And if you have a question, write your questions or thoughts in the comments section below.

Option #1 – Nominate The Contract

The first option on this list is arguably the most desirable option. This is where you nominate the contract to another person.

This is where you organise another person to effectively take over the contract for you. They’ll pay the money to the developer and end up purchasing the property instead of you.

To set this up a lawyer will put together a ‘deed of nomination’ which states (in simple terms): “Who was the original purchaser and who is the new purchaser”.

Pros and Cons of Nominating a Contract

While this option is the top of our list, there are pros and cons to this (and every) option.

The major pro is that if you use a deed of nomination your property is still considered a New Build in the bank’s eyes. That means it keeps LVR exemption, and if you sell to an investor will also only have to front 20% deposit.

This makes it easier for you to find someone to nominate the contract to.

Whereas if you sell the property to an investor, the property loses this status. That means they’ll have to front a 35% deposit.

But here’s the con. For your property to keep its “new” status, you have to nominate the contract at the original purchase price.

That does mean that if your property has increased in value during construction, you will likely lose any capital gains you may have made.

But the moment you sell at a higher price – your new build property becomes an existing property, which requires a 35% deposit for investors.

So, unintentionally, you may be cutting investors out of the buying pool, limiting your scope for potential buyers.

It all depends on how urgent selling the property is.

One other con is that, as the original purchaser, is that if the person you nominate the contract to falls through, you will still be on the hook and need to settle.

How Do I Find Someone To Nominate a Contract To?

Generally, an investor will nominate a contract to a person they already know. This could be a family member, a friend, or a colleague. This means you won’t have to pay a real estate agent fee.

If you can’t find a person to nominate the contract to, you will generally have to use one of the other three options.

Option #2 Settle And Sell

Even if you know you want to sell part-way through the build, another option is to settle the property before selling it on.

This would work for an investor who can get the money from the bank to pay for the property, but who no longer thinks the property is the right fit, long term.

In this situation, your off-the-plans resell becomes the same as a normal sale. Just like if you were selling your own house.

You’ll engage a real estate agent and take the property to market.

If you follow this option, you should stage the property with attractive furniture, so it stands out from other competition. And make sure you use quality photographs and videos to market the property.

Pros and Cons of Settling and Selling

The benefit of this option is that if your property has increased in value, you might be able to make some money.

That’s if you can sell the property for more than you’ll buy it for (minus real estate agent and other fees).

Though, bear in mind, you’ll likely make less money than if you held the property for the long term.

The other benefit is that you don’t have to find someone you know to nominate the contract to. In this case, a real estate agent will find the buyer, rather than you doing it yourself.

The challenge/con with this option is, as we’ve stated above, a New Build becomes an existing property on the day of settlement, which means it will require a 35% deposit if an investor wants to buy it off you.

This is true even if construction finished yesterday and no one has lived in it.

Yes, this option makes your property less attractive to investors. So, they probably won’t be your target market. Rather, you will be looking to find a first, or second-home buyer, or a downsizer to buy your property.

How Do I Find Someone To Sell the Property To?

First of all, settle the property, then engage a real estate agent to sell the property to.

Option #3 – Contemporaneous Settlement

Option #3 is to get a real estate agent to set up a contemporaneous settlement.

This is where you find someone to buy the property off you (like in option #2), except you don’t have to get the money from the bank to buy the property first.

That’s because the settlements all happen on the same day. So effectively:

• The new buyer pays you the money to buy the house

• You then use that money to pay the developer for the property

This all happen ‘contemporaneously’, which basically means ‘at the same time’.

Said another way, you aren’t putting any of the money in, but someone is settling the property for you on the same day.

Pros and Cons of a Contemporaneous Settlement

The first pro is that you don’t have to get a loan from the bank to pay for the property. Instead, you’ll use someone else’s money.

This can make it an option for people whose financial situation has changed, and who can no longer get finance for the property (just like a nomination).

Like in option #2, if you do a contemporaneous settlement, there is sometimes the ability to sell the property for more than you’ll pay the developer.

This means an investor will sometimes make money if the market has moved upwards since signing the contract.

The other pro is that (unlike a nomination) you don’t have to find someone to sell the property to. Instead, you’ll engage a real estate agent to sell it on your behalf.

However, selling an off-the-plans property isn’t “really” something you would normally do through a real estate agent.

This is because, generally, agents sell existing properties by hosting open homes. And you can’t host an open home for an off-the-plans property (it’s not built yet).

Like in the settle and sell, another con is that the bank will view the property as ‘existing’. That means an investor will need a 35% deposit to buy from you.

That will mean you’ll primarily target first home buyers and other owner occupiers.

And you also need to be able to find a buyer who can pay you the money on the same day that you’re meant to pay the developer.

And you are still on the hook for the original contract if your new buyer doesn’t settle. So there is some risk here too.

How Do I Find Someone To Sell the Property To?

Micky Limmer, from Opes Property, says out of 1500 agents in Christchurch there are probably a handful of agents that would be able to handle this sort of contemporaneous sale, and do it well.

So, you’ll need to find a real estate agent who has experience in off-the-plans sales. That way they’ll have a database of owner occupiers and investors they can tap into, to find a buyer.

Option #4 – Get The Developer to On–sell it

The final option is to ask the developer to on-sell the property for you. You might think “why would they give up a sale and spend time trying to find a new buyer?”

Well, a developer would typically say “yes” if the market has moved substantially from when you first signed the contract.

That way, the developer may be able to sell the property for a higher price compared to if they went through with the initial contract you signed. In which case, they’re making extra money.

Pros and Cons of the Developer On-selling the Property

Again, the first pro of this option is that you don’t have to find someone you know to buy the property off you. The developer will do this instead.

The major con is that:

a) Developers will generally only agree to this if the market has moved substantially. This is to ensure they can sell the property at a higher price. So, the developer won’t always say yes.

b) If the developer can re-sell the property at the higher price, sure you’ll be let out of the contract, but you’ll miss out on the equity gains you would have otherwise made.

How Do I Ask The Developer To On-Sell The Property For Me?

Get in contact with the developer through your lawyer to see whether they would be interested in on-selling the property for you.

Do This Before You Decide What To Do

If we back track for a moment, the first step – before you explore any of the 4 options above, is to check your sales and purchase agreement.

Once you do, you may find out that you don’t have the right to pursue one (or many) of these options, because some contracts have clauses to prevent you from selling the property.

For example, there may be a clause that says: “you cannot sell the property to a third party until 3 months after the properties settle”.

Why would a developer put this in the contract?

Sometimes a property developer will keep some of the units in a development and then sell them for a higher price once the properties are built.

When this happens, the developer doesn’t want to be selling at the same time as you (or any other owner in the development), because otherwise they might not get the most premium price.

Similarly, sometimes there might be a clause that says you can nominate the contract, but only with the developer’s consent.

So, if you do find yourself needing to get out of a contract, contact your lawyer to make sure there isn’t anything in the fineprint preventing you from on-selling or nominating your contract.

Which Option Is Best For Me?

Generally, the best option for an investor is not to use any of the options listed above.

Ideally, you want to hold on to your property for as long as possible to reap the benefits of long term capital gains. That’s the reason you probably put your new build property under contract anyway.

However, if you do find yourself needing to sell, these are the main four options to consider.