Quick answer
An off-the-plan valuation shortfall happens when a property bought years earlier values below the contract price at completion, so the bank lends less than expected. Buyers can top up from savings, negotiate with the developer, seek a second valuation or use a short-term property-secured loan over other property to cover the gap and settle on time, then refinance later.
Key points
- Off-the-plan contracts are often signed years before completion
- Banks lend on current valuation, not the contract price
- Failing to settle can cost your deposit and more
- Equity in other property can bridge the gap
- Start planning as soon as completion is announced
When completion arrives with a surprise
Buying off the plan means signing a contract today for a property that will be finished in the future, sometimes two or three years away. Investors and business owners buy off the plan for many reasons, including locking in a price, buying new commercial or industrial units, or securing premises in a growing area.
The risk is that the world changes before completion. When the developer issues a notice to complete, the buyer’s lender orders a valuation. If the market has softened, or if comparable resales are lower than the new-project prices, the valuation may come in below the contract price. The bank then lends a percentage of the lower figure, leaving the buyer to find the difference.
How big the gap can be
Consider a buyer who signed for a commercial unit at a set price with a ten per cent deposit, planning to borrow the remaining ninety per cent at an eighty per cent lending ratio plus savings. If the unit values ten per cent below contract, the bank’s eighty per cent applies to a lower figure, and the buyer must find the full valuation shortfall plus the original planned contribution. The gap can easily run to six figures on a mid-sized purchase.
Why settling matters
Off-the-plan contracts set a deadline after the notice to complete. If the buyer cannot settle, the developer can usually issue a notice to complete, then terminate, keep the deposit and pursue the buyer for any loss on resale, plus costs. Walking away is rarely cheap.
Options to close the gap
Use savings or other funds. The simplest answer, if available.
Seek a second valuation. Another lender may value differently. This takes time, so start immediately.
Negotiate with the developer. Some developers will agree to a short extension, a price adjustment, a rebate or vendor finance for part of the price, especially if several buyers face the same problem.
Change the loan structure. A different lender may lend a higher percentage or accept additional security.
Use equity in another property. A short-term bridging or second mortgage loan secured over another property you own can cover the shortfall so you settle on time. The private loan is then repaid from a refinance once values recover or a full bank valuation supports it, from the sale of another asset or from business cash flow.
How a private lender looks at it
A private lender will consider the property being purchased, any other property offered as security, the total debt across all properties and the exit. If the bank is funding most of the purchase with a first mortgage, the private lender may take a second mortgage behind it, a first mortgage over a different property or both. Second mortgages behind a new bank loan need the bank’s consent, which some banks will not give; security over a separate property often avoids this issue.
Timing is critical
Valuation shortfalls are usually discovered within weeks of the settlement deadline. Every day matters. As soon as completion is announced, contact your lender, order or chase the valuation, and if the figure is low, begin exploring options immediately. Our guide to what to do when settlement is days away covers the most urgent steps, and the settlement checklist helps keep track.
Commercial and industrial units
Off-the-plan commercial units, warehouses and strata industrial units are popular with business owners who want to own their premises. They are particularly prone to valuation gaps, because comparable sales are fewer and banks may lend lower percentages on commercial property. Business owners should check how the bank intends to value the property and what percentage it will lend well before completion.
Illustrative example
A logistics business signs for a new strata warehouse unit off the plan. Two years later, the bank’s valuation comes in below the contract price, and the bank also reduces its lending ratio for the asset class. The directors own their home with good equity. A private lender advances a twelve-month first mortgage over the home to cover the shortfall, with interest capitalised. The warehouse settles on time with the bank loan, and after a year the directors refinance both loans when a new valuation reflects completed sales in the estate.
This example is illustrative only.
Preventing the problem next time
When buying off the plan, ask how comparable resales in similar projects have valued. Keep a buffer in your plans for a lower valuation. Consider whether you could settle if the bank lent ten or fifteen per cent less than expected. Track the market during construction rather than waiting for completion.
Talking to other buyers
If several buyers in the same project face low valuations, you may not be alone in negotiating with the developer. Buyers sometimes share information about valuations and approach the developer together, which can encourage practical solutions such as extensions or price adjustments. Take legal advice before acting jointly, and keep your own settlement plan moving in the meantime rather than relying on a negotiated outcome.
Getting started
If your off-the-plan purchase has valued short and the deadline is approaching, check your eligibility with no credit check. Tell us the contract price, the valuation, the settlement date and the other property you own.
Start your enquiry as early as you can.
Frequently asked questions
Why do off-the-plan properties value below contract price?
Market conditions can change between signing and completion. Valuers also look at comparable resales, which may be lower than new-project prices that included marketing and incentives.
Can I ask for another valuation?
Yes. A different lender or valuer may reach a different figure, but there is no guarantee. Ask early so there is time before the settlement deadline.
What happens if I cannot settle?
The developer may terminate the contract, keep your deposit and sue for losses if it resells for less. Get legal advice promptly.
Can a secured loan cover the whole shortfall?
It may, if you have enough equity in another property and a clear plan to repay. The lender will look at the combined position and your exit.
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