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Turnkey vs. Progress Payments

Buying off-the-plan can be daunting for investors who are used to the traditional real estate model of buying existing homes.


However, with the current tax laws introduced by the Labour government, existing properties have become approximately 40% more expensive to own, compared to newbuild properties.


Resultingly, there has been a massive shift for investors buying off-the-plan in order to get tax benefits as well as lower deposit requirements.


When buying off-the-plans it is important to know that there are two different contract types:

  1. Progress payment

  2. Turnkey

Progress payments are used a lot less in off-the-plan purchasers and are mainly used when purchasing house & land packages. With progress payments, the investor pays an initial 10% deposit in which some of that money relates to the land and the remainder relates to the building work.


The purchaser then pays the residual land price 5-working days after the certificate of title has been provided which means they now own the land.


As the build progresses, the purchaser pays in portioned amounts when significant points of the build have been reached.



To clarify, here's an example of how progress payment would work in a real-life scenario if a prospective purchaser signed a progress payment contract:

  • Purchase price $550,000 (with a land value of $175,000)

  • Initial $55,000 deposit paid on the unconditional date. $17,500 of that relates to the “land deposit” and the remaining $37,500 relates to the building work

  • The residual land price of $157,500 is paid 5-working days after the land title is issued

  • 15% of the balance remaining after the settling of the land is paid on the foundation of the dwelling being poured

  • 35% of the balance remaining is paid upon commencement of the roof being placed on the dwelling

  • 30% of the balance remaining is paid upon commencement of the GIB being fixed to the dwelling

  • The final balance is to be paid within 5-working days of the CCC being issued


Purchasers that engage in progress payment contracts have to carry the interest cost throughout the build which adds a layer of expense.


However, on the flip side, if the contract is turnkey, then the developer has to carry an even greater interest cost throughout the build and the cost is included in the sale price. Therefore, in general, progress payment properties are cheaper than turnkey properties.


Turnkey payments are much more common and are a lot simpler. Most (if not all) townhouses or apartments you purchase off the plan will have a turnkey contract so it is important to understand how these work.


Once you go unconditional, a 10% deposit is lodged to the vendor's solicitors trust account and then you don’t need to make any more payments until settlement.


At settlement, you put down an additional 10% deposit as well as the substantive 80% mortgage.

 
Turnkey purchase schedule
 

Turnkey properties are generally easier to get lending for and with the lending market being so tough at the moment, it is essential to have the strongest case you can to get finance approved.


Another plus to turnkey properties is the relative ease for purchasers throughout the whole process. An off-the-plan build period can last up to 18 months so having the security that you have locked in the current market price and don’t need to pay any additional lump sums until the settlement is preferred.

 

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