What is the valuation gap in an off-the-plan purchase?

Buying an off-the-plan apartment on the Gold Coast can be a great way to secure a property at today’s prices for tomorrow’s market. However, one of the most significant financial risks buyers face is the valuation gap—a scenario that can leave you scrambling for tens of thousands of dollars just weeks before settlement.

Understanding the Valuation Gap

When you sign an off-the-plan contract, you agree to a fixed purchase price for a property that won’t be built for another one to three years. You typically pay a 10% deposit upfront, with the remaining 90% due at settlement when construction is complete.

Most buyers intend to finance that 90% balance with a bank loan. However, banks do not definitively approve a loan amount based on the contract price you signed three years ago. Instead, the bank will conduct a formal valuation of the finished property just prior to settlement, assessing its worth in the current market conditions.

A valuation gap occurs when the bank’s valuation comes in lower than your agreed contract price.

Why Does the Gap Happen?

Valuation gaps typically occur for two reasons:

1. Market Downturns: If the broader property market cools between the time you sign the contract and settlement day, the apartment is simply worth less than when you bought it.
2. Developer Premiums: Developers often build a premium into off-the-plan prices to cover their marketing costs and future risk. Bank valuers strip this premium out, focusing purely on comparable recent sales.

The Consequences of a Valuation Gap

If the bank values the property at $700,000, but your contract price is $800,000, the bank will only lend you money based on the $700,000 valuation.

This creates a $100,000 shortfall. Because off-the-plan contracts are unconditionally binding (they do not have “subject to finance” clauses at settlement), you are legally obligated to fund that $100,000 gap personally in order to settle the property.

If you cannot find the cash to cover the shortfall, you will default on the contract. If you default:

• The developer will terminate the contract.
• You will lose your entire 10% deposit.
• The developer can sue you for breach of contract and claim further damages if they have to resell the apartment at a lower price.

How to Protect Yourself

To mitigate the risk of a valuation gap:

• Have a Cash Buffer: Do not stretch your borrowing capacity to its absolute limit. Ensure you have savings, equity in other properties, or family support to draw upon if a valuation comes in low.
• Research the Local Market: Be wary of off-the-plan developments priced significantly higher than existing comparable stock in the same suburb.
• Seek Legal Advice Early: Always have a property lawyer review an off-the-plan contract before you sign it so you understand your total financial exposure.

Related Topics

• Can a developer cancel my off-the-plan contract in Queensland?
• What is a sunset clause in an off-the-plan contract in QLD?
• What is a Form 2 Seller Disclosure in Queensland?

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1. Property Law Act 2023 (Qld)