Wednesday, April 27, 2011

Dangers of buying off-the-plan

"When they returned to the Dolphin Bay Real Estate office, Mr Conolly told Mr and Mrs Brecht about the development which was to be Number One Park. He told them that it was a “crème de la crème real estate investment opportunity”. Number One Park consisted of apartments with four penthouses at the top, two of which had been sold, he said, to a company associated with the former celebrity tennis player, John Newcombe. Those were units 9 and 10. The third penthouse, unit 8, had been sold and the fourth penthouse, unit 7, was being held by the developer because he wished to keep it for himself. However Mr Conolly told them that perhaps the developer could be interested in selling the last penthouse at Number One Park.

Mr Conolly told Mr and Mrs Brecht that unit 7 would be suitable for them because it was going to have uninterrupted views that could never be built out and although there was a development to be built in front called “Splash”, the residents of the penthouses would be able to see over the roof of Splash because the balconies of the penthouses, in particular of unit 7, would be higher than the roof of Splash. Mr Conolly said there would be uninterrupted views from unit 7, Number One Park and those uninterrupted views would be views of the ocean. He said to them that if you were standing on the balcony “you may not see waves breaking onto the sand, but you will see waves breaking.” He said that those surf views were panoramic, which Mrs Brecht understood to mean 180 degree views. In common parlance, the word “surf” is synonymous with the words “breaking waves” or “white water”, so that a view of breaking waves has the same meaning as a view of surf or white water views.

The apartments in Number One Park were yet to be built so they were to be bought off the plan. It was not therefore possible for intending purchasers to stand on the balcony to see if the representation made as to the views was correct. In such circumstances the vendor, real estate agent and intending purchasers all realise that purchasers must rely in the usual course on representations made by the real estate agent retained by the vendor to market the property for sale. ...

In order for Barnscape to settle, the company borrowed $600,000 and used $600,000 of its own funds. Mrs Brecht said that if they had not used the $600,000 to purchase unit 7 at Number One Park, they would have otherwise invested the funds. They were unable to take up an opportunity to purchase a beach front block of land for $540,000 later in 2005 on Kangaroo Island (Lot 256 on De Coudie Drive) because the funds had been spent on Number One Park. The rest of their funds were invested elsewhere, and so were not available to purchase Lot 256. An RP Data Property Search showed that Lot 256 sold on 17 May 2005 for $540,000 and then on 27 March 2006 for $755,000.

If Barnscape had not purchased a unit in Number One Park, then there were properties which they could have bought on the Sunshine Coast between Coolum and Noosa with uninterrupted surf views. Of the alternative properties particularised, however, only unit 4, Splash appears to have become available during the relevant period and have the type of ocean view sought by the Brechts. Unit 4 Splash sold on 7 October 2003 for $1,950,000 and Unit 2 (rather than Unit 1), 16 Henderson Street sold on 18 October 2003 for $1,725,000. Those units were larger in size than either Unit 7 or Unit 8 Number One Park; Splash is closer to the ocean and has fewer units. Those factors made the units more expensive to purchase than unit 7 or unit 8, even if units 7 and 8 had shared the expansive views enjoyed by the units in Splash and 16 Henderson Street. Barnscape had access to an additional $1,000,000 at the time of settlement if more monies had been required to purchase a more expensive property. So those are opportunities that Barnscape missed as a result of the purchase of unit 7.

As the unit at Number One Park had been bought as an investment property, it was let as a holiday rental property. It was also used from time to time by Mr and Mrs Brecht personally. The rental was designed to provide some income while steps were put in place to work out what the cause of the problem with the view was and then to sell the property. The net rental received by Barnscape was as follows:

01/07/04 – 30/06/05

Dolphin Bay Real Estate


Laguna Noosa Holidays


01/07/05 – 30/06/06

Dolphin Bay Real Estate


Zinc Realty


01/07/06 – 30/06/07

Dolphin Bay Real Estate


Zinc Realty


In addition, Barnscape had other expenses, including interest paid on the $600,000 loan. However, had they bought an alternative property at Sunshine Beach, they would have received rental income and most likely paid interest on borrowings. They would probably have received more income but paid more interest so it is very difficult to say they made a net loss on rental income and interest payments.

Unfortunately units 9 and 10 were for sale when the Barnscape contract settled and the Brechts took the view that the Barnscape unit would not attract a good price if it was put on the market at the same time as two other penthouse units. On 12 May 2006, Barnscape appointed Zinc Real Estate to sell unit 7 for $1,375,000. Once it was offered for sale it took 12 months to sell. Barnscape signed a contract to sell unit 7 on 29 May 2007 for $1,035,000.

See Avis v. Mark Bain Constructions and

Developer ordered to pay compensation after off-the-plan unit's views are blocked

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