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Is buying property off-plan a good idea?

24 Aug 2017

There’s always a risk associated with buying something that you can’t see, and buying property off-plan means exactly that - you are buying your new home in a sectional title complex or cluster home scheme before it’s been built.

Kohler says the largest benefit of purchasing a property off-plan is you are purchasing a property at today’s value, and only start paying for it once the development is complete, therefore getting capital appreciation on the property while it is being built.

This means you will be depending on the developer and builder to complete your home properly, within your desired construction design requirements and timeously.

“There are many benefits of purchasing a house off-plan, firstly there is no transfer duty as you are purchasing the property directly from the developer,” says Jonathan Kohler, CEO Landsdowne Investment Properties.

“In some cases, buying property off-plan can offer a substantial saving, however, with the transfer duty amount raised in the last budget speech from R750 000 to R900 000, this has given first-time homeowners a greater opportunity to purchase properties,” he says. “Another benefit of purchasing a property off-plan is the deposit required, especially with the large developers like Summercon or Balwin, it is usually only R20 000, no matter how much the property costs.”

Kohler says with properties in the second-hand market, you are required to put down at least 10% of the purchase price in order to qualify for the bond. Developers are able to get this right because they have existing relationships with the banks, who pre-approve value in the development and in the property with as little as a R20 000 deposit.

He says the largest benefit of purchasing a property off-plan is you are purchasing a property at today’s value, and only start paying for it once the development is complete, therefore getting capital appreciation on the property while it is being built.

Kohler says with properties in the second-hand market, you are required to put down at least 10% of the purchase price in order to qualify for the bond. Developers are able to get this right because they have existing relationships with the banks, who pre-approve value in the development and in the property with as little as a R20 000 deposit.

Another benefit from a buy-to-let perspective, is that tenants like to rent properties that have never been lived in before and that are brand new, and owners can demand a slightly higher rental than other developments that are older for example, says Kohler.

“One needs to be very careful that the developer you are purchasing from has a good track record. It is advisable to have a look at the previous completed developments and make sure they were built well, built on time and look like the architectural drawings and renderings said they were going to look like,” says Kohler.

“It is also important to make sure that historically the occupation and the transfer dates are more or less the same. If this is not the case, you could be forced to take occupation on the agreed date and pay occupational rent to the developer until the apartment is transferred.”

Kohler says be careful about believing that the developer is reputable because there is a reputable estate agency selling the development. A good estate agency does not equal a good developer. Some developers require 80% to 90% of the development sold before the bank will release the first portion of the building finance.

“If you are purchasing a property on the precedent that you will get occupation when the developer says you will, and the development doesn’t sell well, it might never materialise,” he says.

Kohler says the following questions, are questions a purchaser should ask their developers when they’re planning to buy property off-plan:

  • How many years have you been in business?
  • How many developments have you completed?
  • Could I have a list of your completed developments?
  • In your previous developments, does transfer and occupation generally occur at the same time?
  • Are your renderings a true reflection of what the development is going to look like?
  • Who is the managing agent who prepared the budget and levies for this development?
  • Do your levies include provision for maintenance, or are there generally special levies imposed for major maintenance?

Kohler says a sign of a good property developer is that the finished product is almost exactly the same as the renderings. However, this is not always the case, minor changes can be expected in terms of colour and style due to availability of materials but developers cannot be misleading with their marketing material and produce a completely different product.

“Make sure you are buying something that you have compared in price to the second-hand market. Buying off-plan is expensive, you are paying for new building costs which is generally far more expensive than a development that is a couple of years old,” says Kohler.

“There isn’t always the perceived saving on transfer duty, especially with properties priced from R900 000 and below that are transfer duty free in the second-hand market.”

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