Buying off plan: pros, cons and purchase tips for new developments.
Category Developments
Buying "off plan" - or buying a property before it's been built, based on the developer's architectural plans - is an increasingly popular option for South African homeowners and property investors. Under the right circumstances, off-plan purchases can deliver exceptional returns on investment, but they also hold some risks for unwary buyers.
David Jacobs, Gauteng Regional Sales Manager for Rawson Properties, explains.
Benefits of off-plan purchases
"The most obvious benefit of an off-plan purchase is that you're buying a brand-new property," he begins. "That means modern building styles and standards, complete with energy efficient features and fittings, as well as mod-cons like high-tech security, high speed fibre internet, and backup and/or solar-supplemented power." New builds also mean less chance of major maintenance requirements in the near term, with developer guarantees covering most major defects up to five years from transfer.
"There are also financial incentives to buying off plan," says Jacobs. "For example, instead of paying transfer duty, you pay VAT which is generally included in the purchase price. That means you can finance it through your bond, reducing the upfront costs of your purchase." Off-plan investors also stand to benefit from "free" capital appreciation during the construction window between paying the deposit and taking transfer." Units in top developments have been known to appreciate 25% or more before the investors have even made their first bond repayment," says Jacobs.
Risks of off-plan purchases
While off-plan purchases have incredible potential, Jacobs cautions buyers that they also carry some risk. "The biggest thing to realise is that all developers are not equal," he says. "It takes a lot of experience and an excellent network of contractors to create the kind of developments that deliver lasting value to investors. Inexperienced - or worse, unethical - developers may walk the walk and talk the talk, but without a solid track record, there's no guarantee that they can deliver on their promises." Jacobs says there's also some risk involved in visualising off-plan spaces.
"It can be really difficult to get a good idea of things like size, flow, natural light and ambiance from a plan and elevations, or even an artist's impression," he says. "These things can make a big difference to the long-term value of your unit." Another potential risk is construction delays.
"It's not uncommon for developments to encounter delays that force occupancy dates to be pushed back," says Jacobs. "This can leave investors scrambling to put a roof over their heads if they have fixed exit dates on their current homes."
Avoiding the most common pitfalls of off-plan purchases
Thankfully, most of the risks of off-plan purchases can be avoided by doing a bit of homework. "I'd definitely recommend researching the developer and their previous projects to make sure their build quality is sound in the long term, and that their older developments are still thriving," says Jacobs. "It's also a good idea to chat to local real estate agents about sales or rentals of units in those previous developments to gauge how well they've performed on the market, historically."
The developer is not the only party responsible for a development's success or failure, however. Jacobs also strongly recommends looking into the construction company tasked with doing the actual build work. "Some developers have their own construction teams, while other contract independent construction companies," he says. "Either way, you'll want to make sure they're registered with the NHBRC, and have a solid reputation for quality work and excellent after-sales service and snagging."
Jacobs says it's also wise to investigate the development itself, confirming that the necessary planning permissions are in place, and that the site and surrounding neighbourhood has been accurately represented. "Just because you can't view the property doesn't mean you can't view the site and its surroundings," he says. "Location is just as important for a new development as it is for an existing home."
Last of all, Jacobs reminds buyers to check every detail pertaining to their unit and the development as a whole, from parking availability to guest access, to landscaping, body corporate rules and future managing agents.
"Also read the fine print on your contract to understand what may change as construction progresses, and what (if any) additional costs you may be liable for," he says.
What to do on taking occupation
Making the most of an off-plan purchase doesn't just involve preparation and patience during construction. Jacobs says you'll also need to do a bit of work after taking occupation. "It's very important to create a thorough snag list of your unit, covering everything from structural elements to decorative finishes, fixtures and fittings," he says. "If you're not confident in your own ability to spot defects, get a professional home inspector in to do a full check."
Jacobs also reminds investors to get all the guarantees and warrantees for any appliances, fixtures and fittings, and check with body corporate that a full snagging process is being followed for any communal spaces. "Ultimately, it's up to you to hold your developer to the quality standards they promised," he says. "Don't be shy to voice your concerns. A reputable developer will not hesitate to address legitimate flaws."
If choosing to buy an off-plan property investment Celia Tabb from the Midlands Local Real Estate office suggests that buyers ask the following questions:
- How long will the development take to complete?
- If I were to sell straight after the completion of my unit - will I be competitive in the market against a development unit that attracts No Transfer Duty?
- If I live in a unit in a still ongoing development what security options and insurance can the Developer give until such time as the Development is fully complete?
- Has the Body Corporate been formed with legislated Rules or is it still to be formed?
- Have the rates been finalised yet?"
- As this is still a new development what guarantees will be given regarding a snag list if there are any problems and what will be the procedure to ensure it will get rectified?
Author: Property24
