What does it mean buying off-plan?
Buying 'off plan' means buying a property before it has been built, and basing your purchasing decision on the developer’s ‘vision’ as reflected in the artist’s impression and the architectural plans. You will be required, in most cases, to pay a deposit, sign all the contracts, and pay the balance of the purchase price once the construction has been completed.
The pros and cons of buying off-plan
Low deposits, long transfers and capital appreciation are all terms you will hear when buying off the plan developments. And lately, gated estates are seen to have the highest ROI (return on investment). But what does it all mean, and is buying off-plan a viable option considering the recent downturn in the property market?
There are many benefits of buying off the plan for investors, but there are also some potential pitfalls, which can be avoided if you do your homework thoroughly.
Benefits of buying off the plan apartments
There are many benefits to buying off-plan, particularly for investors building a property portfolio:
Buying off-plan is often more affordable than buying an existing unit. The deposits can be as low as R2 000 per unit, and an investor with good negotiating skills could negotiate a lesser or even no deposit.
Bond repayments are delayed until the construction is complete, 18 to 24 months down the line, providing investors with ample time to adjust their cash flows and get their budgets in order.
You buy the property at today’s property prices, but by the time you take a transfer and begin to repay the bond, the property could have increased in value by as much as 20% to 35%. In essence, investors are enjoying capital appreciation without having to pay any cash upfront, except perhaps the deposit.
There is no transfer duty payable when you buy directly from the developer. Unfortunately, this does not mean you avoid paying tax, because VAT will be included at 14%. However, paying VAT instead of transfer duty has a major benefit. Since the VAT is included in the purchase price, the bond on the purchase price will cover the VAT. This means investors will not have to take a higher bond to cover the VAT amount or pay the VAT out of their pockets, as would be the case if transfer duty was levied. Some developers cover the bond registration costs. This means that investors do not need cost-inclusive mortgages or extra cash to cover these costs.
As a marketing strategy, some developers offer a cash-back incentive to buyers. This can be used to finance the shortfall between the rental income and the bond repayments – again, investors do not have to take bigger bonds or cover initial shortfalls out of their pockets.
The units in these new developments are often constructed in line with the latest design trends, which means the investor will have a modern and appealing unit to offer the rental market. In addition, the investor has some options in terms of choosing the fittings, tiles and more, to ensure market appeal.
The units are often constructed using the latest building materials and construction technology, which means increased longevity of the investment.
Major repairs and extensive maintenance are delayed for at least three to four years since the building and its fixtures and fittings are brand new. You are not buying existing maintenance problems, as could be the case if you buy an older property.
Marketing Manager of eLan, Melanie Clarkson, has invested at Blythedale Coastal Resort, a development on KwaZulu-Natal's North Coast and says buying land off plan is better than a traditional property purchase, especially if one is looking for quick capital appreciation. “It’s a low-risk investment provided you have done your homework; you know the future demand for the area and you have confidence in the developer,” she said.
From a property investment perspective, these benefits certainly make financial sense. The challenge, of course, is to maximise all these benefits while avoiding the potential pitfalls.
Pitfalls to watch out for when buying off-plan:
Investors risk losing their deposits if the development does not proceed for a variety of reasons, such as the local authorities not granting the necessary approvals, or Eskom not being able to provide power, or even bad financial management by the developer.
The construction of the unit may take longer to complete than was initially undertaken by the developer. This could be a major obstacle for homeowners, who may have to find another place to live while the construction is being completed. However, it may also pose a problem to an investor if the income from the unit is critical to their cash flow.
There is a risk that the market price could drop between signing the contract and taking transfer of the property up to two years later. As unlikely as this seems, the current market conditions have shown that this is in fact a risk investors must consider.
Most people are unable to visualise the completed unit from the artists’ impressions and architectural plans. Do you know the actual size of 40 square metres? Can you read and understand the architectural drawings and plans? This is one of the biggest pitfalls of buying off plan, and many investors have been extremely disappointed with the final unit.
The final units may look quite different to those portrayed in the original plans, for a number of reasons. These include the unavailability of materials, or engineering or architectural changes that have to be made during construction.
While most developments are modern and aesthetically pleasing, some developers build units that are entirely out of touch with current market demands. They are impractical, unappealing and even downright ugly. These units will be difficult to rent out, and far more difficult to sell when completed than they were off plan.
There may be development problems such as roads which have not been installed after registration of transfer. This may result in bond repayments becoming due before the unit can be occupied.
There are usually penalties applicable if an investor wants to withdraw from the contract for whatever reason. So, what can smart investors do to ensure they get the maximum benefits of buying off plan, without running into any of the pitfalls? The answer, of course, is thorough, extensive homework that covers all the bases.
How to avoid the cons in buying off-plan:
Doing the following could drastically reduce your risk of making an expensive mistake when buying a property off plan:
Check the developer’s background before you make an offer. Do a search on the Internet, and speak to estate agents and other property professionals. Give preference to a well-known and established developer who has a good track record and a good reputation, and who has a vested interest in maintaining that reputation.
Make sure the developer is registered with the NHBRC (National Home Builders' Registration Council). It provides some measure of protection and will open another avenue of recourse to you if you have problems with the developer, since NHBRC membership includes insurance against major structural defects and waterproofing.
Investigate other projects the developer has completed, particularly developments that are three to four years old, as these will provide a good indication of the quality of workmanship. This will also give you an idea of the style of the company’s units. Speak to the body corporates or individual tenants in these developments.
Find out if the development company has its own construction company and maintenance division that will be responsible for rectifying problems after construction is completed. If the construction is subcontracted, check out the construction company too.
Find out whether services such as roads are scheduled to be installed before or after registration, and whether the relevant town planning and other approvals have been obtained.
If you are not familiar with architectural plans and drawings, ask a building contractor or an architect to look at the plans for you. Do not implicitly believe the artist’s impression! The beautiful view depicted may not apply to the unit you are buying, and the location of your unit within the complex may result in a cold, dark unit or one with a view of the refuse area.
Talk to the local town planner or visit the local municipality to find out what other developments are taking place in the area, such as new road, railway or other public infrastructural developments. Also find out whether other possible factors will impact on your investment, such as building height restrictions applicable to the neighbourhood.
Read every word in the contract before you sign so that you know exactly what the fine print allows the developer to alter during the construction period and what costs you will be liable for. For example, estate agent’s commission may be included in the purchase price.
Double-check issues such as parking arrangements and how close the units will be to each other. Ask for details about security, landscaping and body corporate rules.
When you take transfer of the unit, you will be required to draw up a written ‘snag list’ within a certain period of time. Make sure you thoroughly check the unit, including that the walls are straight; that all the plugs, light switches and water connections work; that the tiling is neat and no tiles are broken; and that all the surfaces are free of scratches, marks or cracks. Better yet, get a professional home inspector to do a full inspection before taking occupation. You can refuse to take occupation until the ‘snag list’ has been properly attended to.
Ensure you obtain the guarantees and warranties for the stove, geyser, roof, glazing, etc.
Confirm with the body corporate that the common property has been snagged and the repairs completed, and that they are in possession of all the relevant warranties, guarantees and drawings.
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If you’re looking to invest in off the plan apartments, you’ll find all the information you need on the Private Property website.
