Reality can bite hard when buying your home off plan
The concept is a great one but protect yourself from the pitfalls
THE idea of buying property off plan is sensational, since the potential to have input into the internal layout and finishing of your dream home is exciting. Being able to custom design your own property without having to pay for an architect is definitely an advantage. That’s the good part. The bad part is that there are many downsides to procuring property based on an architect’s plans.
One of the most obvious is that purchasers cannot inspect what they are buying. People seldom buy a car without having inspected it or taken it for a test drive; yet many buy property off plan without having seen more than a picture or architect’s plan.
An artist’s impression of what a development is meant to look like is not necessarily what a purchaser agrees to in the draft building plans and specifications. As buying property is one of the most expensive purchases individuals make during their lifetime, investing capital into something that has never been seen is highly risky.
A less obvious, but extremely important downside is the falsely perceived cost savings. The “package deal” that many purchasers believe they are receiving is not really saving the purchaser any money. It is not uncommon to see slapped on development billboards “no transfer duty”, “no transfer costs” and “no bond costs”. What most purchasers don’t know is that these costs are assimilated into the purchase price. Where the seller of a property is a VAT vendor and the property is part of a VAT-able enterprise, no transfer duty will ever be payable by a purchaser. Instead, VAT is payable by the seller. In the case of a development where the developer is a company and a VAT vendor, the seller will always be liable for VAT. This cost is built into the property’s purchase price, along with all other costs, such as bond and transfer costs.
The problem with the advertised “package deal” is that the property’s value is less than what a potential purchaser may believe. Be well aware that the real value of the property is the net cost — the total cost of the property less the transfer and bond costs and the VAT associated with those costs.
A further potential problem is the financial standing of the developer. It is vital that prior to signing any sale agreement, a potential purchaser investigates the developer. It is not unheard of for a developer to run out of funds part way through a development. This, in turn, can create various problems for a purchaser whose land has not been developed to completion. If, for example, the developer runs out of funds, the development will halt, resulting in long delays. The longer the delay, the more chance there is for the overall costs to escalate. These, in turn, can be transferred to the purchaser unless a watertight agreement, tailored to identify these problems, is drafted.
The process is further delayed if the purchaser is purchasing a unit in a sectional title development. Normally, transfer of a sectional title unit will only take place when the final phase of that particular building has been completed.
When buying off plan it is imperative that a purchaser is familiar with the process.
Should a purchaser require a bank to assist with the finance, it is important to realise that the repayment of (or at least part of) the mortgage bond and the rates and taxes (which are higher on vacant land than on developed land) will be payable upon the undeveloped land being transferred to the purchaser. This means that a purchaser will have bond repayments before the construction of the house has even commenced.
Accordingly, there is nothing to protect the purchaser if there are delays in the development. If the development has not been built to specification of the approved plans, no occupation certificate will be given by the local authority. Until such time that the house has been repaired or, in extreme cases, plans are amended and re-approved by the local authority and attended to by the developer, the purchaser should not occupy the property.
Ultimately, most of these problems arise either because the purchaser is unfamiliar with the process of buying off plan or because insufficient research was conducted into the developer and development. Once the purchaser has attended to the above, it is vital that various protections are in place in the sale agreement to protect the buyer in the event of long delays or a breach by the seller and/or developer.
Although there are numerous problems (only some of which are mentioned above) associated with buying off plan, there are many great developers and successful developments. If a purchaser has done his homework and the right protections are in place, they are likely to avoid most of the difficulties and take pleasure in having a custom-designed home.