It is possible to purchase an off the plan property with an SMSF. Setting up a transaction like this requires careful planning to ensure the compliance with SMSF regulations.
What is the process for buying off the plan property in an SMSF?
The specifics that go into purchasing an off the plan property using an SMSF will include making sure that the proper procedures are in place.
Make sure the property is eligible.
For the property to be eligible for purchase in an SMSF, it has to pass the sole purpose test. The buyers must prove that the only purpose of the purchase is as an investment and not a residential property for any beneficiary of the trust or relative.
The transaction must also encompass both the land and the building contract in the same loan. Specific steps have to be taken to carefully set up an off the plan purchase to qualify it as a single acquired asset as stipulated by the rules of investing with an SMSF.
Establish a bare trust
A bare trust is required to be sure that the trust complies with SMSF compliance law. It must be done properly to ensure that the the acquisition does not result in double duty. A lawyer should review the documents to be sure that all state and commonwealth laws are followed. They should also go over the lender’s requirements in case they have any special restrictions.
Sign the contract
Setting up the bare trust and signing the contract in the correct entity are both vital to get the purchase approved. In setting these things up, the order matters.
It will vary by state whether the bare trust needs to be signed and dated before the contract of sale or after.
Can an off the plan property be sold before settlement?
If the off the plan contract of sale permits on-selling, the property can be resold. Check with your legal and tax representatives before attempting to do this and if this is your plan discuss it with an expert before closing on the property. Some contracts won’t allow buyers to sell the property again until settlement occurs.
Reasons for selling a property before settlement include changes to liquidity in the SMSF, making it impossible to make payments on the loan. A rising real estate market could also create an opportunity to quickly flip the property for a profit without having to wait for the construction to finish.
What are the risks associated with buying off the plan property in an SMSF?
There are some common pitfalls and risks involved in buying an off the plan property with an SMSF. If the bare land is purchased first, and then the owner attempts to get a loan funded by their SMSF to bankroll the construction, it won’t go through and the land won’t be available to secure the loan. It’s only possible to complete an off the plan purchase when the entire transaction is written up as a single contract.
The investor is responsible for the entire amount of the loan, regardless of whether there are shortfalls in the SMSF that leave the owner without the funds to make payments. If the final valuation of the property comes in lower than the contracted price, then the investor could be stuck paying the difference from their SMSF. This makes it critical to not borrow to the limit of the SMSF. There needs to be sufficient liquidity to cover any surprise demands in capital.
What are the conveyancing costs for buying off the plan property?
Buyers and sellers need to be sure that they pay all the fees needed to cover the legal side of a property purchase. These costs can generally be split into two categories: legal fees and disbursements.
The legal fees are what the conveyancer or solicitor charges for doing the work. Legal fees will be between $500 and $1500 depending on the circumstances of the transaction.
Disbursements are the costs associated with third parties that charge for services like special searches. There could be disbursements costs for things like:
- Title searches
- Rates and owners corporation certificates
- Transfer fees
- Bank fees
Disbursements are usually between $200 and $500 depending on whether the property has an owners corporation.