As with any strategy where you commit to a large future purchase in a moving market and also take a risk on the developer performing to contract, buying off the plan can be risky. Especially because of the way these contracts shift the risk away from the developer. With a Self Managed Super Fund purchase with a mortgage this can be even more of an issue if the proposed lender’s final valuation comes in lower than the contracted price which is more common recently. You may then be forced to come up with the shortfall in your SMSF which may be more difficult if you have exhausted your contsribution limits.
Here are the basic essentials to getting this type of strategy right:
- The “property purchase” should be subject to one contract which must be for the completed house and land. Do not purchase land and then look for an SMSF loan to construct a property on it. You will be too late to use the land as security.
- It is often better to have the SMSF pay the deposit and only have the lending arranged as part of the settlement. In my opinion the Holding Trust should still be in place with the Custodian/Holding Trustee on the title of the contract from the outset.
- Ensure that the bank/ lender’s only security is only over that land and completed house/unit;
- The only payments made in respect to the purchase are for the deposit and settlement with no “progress payments”. You may breach the “single acquirable asset” rule which is a big no-no!.
- Be prepared to move quickly at the time of settlement. LRBA loans do not go through lender’s quickly and you should have as much of the documentation prepared in advance and ready to go as is possible. Drum this into your Mortgage Broker and Solicitor.
- Do not borrow to the limit of your SMSF. Make sure you have some liquidity to manage low valuations or the demand for a lower LVR from the lender. Alternatively have the capacity and ability to add funds to your SMSF without breaching a contribution cap.
Now there are some who feel that more than 2 payments are possible and that the law is silent on the matter but my philosophy is to KEEP IT SIMPLE! Why makes things difficult for yourself especially when there are developers out there redesigning their contracts to meet the basic 2 payment strategy.
For those looking for more detail I would recommend reading the issues addressed by the ATO their Taxpayer Alert TA 2012/7 and in the minutes of discussion at the NTLG Super Technical sub-group (December 2012) (if you can find a copy as the ATO took down the page) with specific reference to example 10 within SMSFR 2012/1.
My final tip is to use a SMSF Specialist Advisor who has dealt with SMSF property borrowing and look for references from client’s they successfully guided through the process. Use a conveyancer or solicitor with experience in the intricacies of these strategies. Use a Mortgage broker that knows how to place these specialised loans and is thinking ahead at all times. Oh and READ YOUR TRUST DEED!