Have you ever dreamt of owning a brand new home, complete with modern finishes and the latest amenities?
In South Africa, buying property “off-plan” is a popular way to achieve this dream.
This approach involves purchasing a property that is still under development, based on architectural plans and visualizations. While it offers exciting possibilities, it also comes with unique considerations.
This article will help you with the knowledge you need to understand off-plan property purchases, focusing specifically on both cluster homes and sectional title developments.
Benefits of Buying Off-Plan
There are several attractive reasons why property buyers turn to off-plan property purchases. Lets look at some of these reasons.
Financial Advantages
- Cost Savings: One of the biggest perks is the exemption from transfer duty on new builds. This tax can add a significant chunk to the overall cost, especially for properties exceeding R1 million. In many cases, the developer will include VAT within the advertised price, further streamlining the upfront costs. In short, as a buyer of an off-plan property you do not pay any transfer duty or legal costs (apart from bond costs if you are financing your purchase with a bank).
- Potential for Appreciation: Getting in early on a development allows you to secure the property’s current market value. As construction progresses and the area/development attracts interest, the property’s value is likely to increase by the time you take ownership. Remember you are buying the property today, while construction may take 12 to 24 months before you actually take transfer of the property. In that time you are waiting for your new property, there is a strong possibility that the property values in the area would have increased from the time you bought. This translates to potential profit if you decide to sell later. In some cases, if you have a relationship with a developer, you might even be able to buy your off-plan property at a discount to the current market price, which could result in even more profit when you sell.
- Phased Payments: For sectional title developments, a major benefit is the phased payment structure. You typically only start making bond repayments once your specific unit or the entire development is complete. This frees up your finances during the construction period, allowing you time to save for bond repayments or address other financial commitments.
Risks to Consider
While off-plan purchases offer exciting possibilities, it’s important to be aware of the potential challenges involved.
Here are some key risks to consider before signing on the dotted line:
- Developer Due Diligence: Unlike buying an existing property, you’re placing your trust in the developer’s ability to deliver on their promises. Thorough research is vital. Investigate the developer’s track record, focusing on past projects’ quality and adherence to timelines. Look for evidence of financial stability to minimize the risk of the development stalling due to unforeseen circumstances. Where possible, visit the previous developments of the developer to see the quality of their work first hand.
- Unforeseen Delays: Construction projects don’t always run perfectly according to schedule. Be prepared for the possibility of delays due to factors like bad weather, material sourcing issues, or unexpected complications. Carefully review the sale agreement’s clauses regarding delayed completion. These might stipulate grace periods or potential compensation for extended delays impacting your move-in date.
- The Unknown Finished Product: One inherent challenge of off-plan purchases is the limited ability to visualize the final product. Your decisions will be based on architectural plans, 3D renderings, and marketing materials. While these offer valuable insights, there’s always a chance the finished product might deviate slightly in terms of layout, finishes, or overall feel.
Cluster vs. Sectional Title: Making the Choice
When it comes to off-plan properties, you’ll encounter two main dwelling types: cluster homes and sectional title homes.
Understanding the key differences between these two options will help you choose the one that best aligns with your lifestyle and priorities.
Cluster Homes
- Freestanding living: Cluster homes offer a sense of independence and privacy often associated with traditional freehold properties. These homes are detached units, each with its own private yard and garden.
- Greater control: You have more control over the exterior aesthetics of your home, potentially allowing for some personalization within the developer’s guidelines.
- Maintenance considerations: Ownership comes with the responsibility for maintaining the entire property, including the exterior walls, roof, and garden. This can translate to higher ongoing costs compared to sectional title units.
Sectional Title Homes
- Shared amenities: Sectional title developments typically offer shared amenities like swimming pools, gyms, or landscaped gardens. These amenities can enhance your lifestyle but come with monthly levies that contribute to their upkeep.
- Potentially lower maintenance: The responsibility for maintaining the building exterior, roof, and common areas falls under the Body Corporate. This can result in lower individual maintenance costs compared to cluster homes.
- Shared walls and noise: Since sectional title units share walls or floors with neighboring units, there’s a potential for noise concerns. Consider your tolerance for noise and inquire about the development’s soundproofing measures.
- Refundable Deposit: if you are paying a deposit, be sure to check that it is refundable. Some contracts may stipulate that it is a non-refundable deposit.
- Snag Lists and Inspections: Once construction is complete and you take ownership of your property, a thorough inspection is essential. This is your opportunity to identify any defects or unfinished elements, commonly referred to as “snags.” Don’t hesitate to compile a detailed snag list that the developer must address before final handover. Consider hiring a professional snagging inspector with a keen eye for detail to ensure no issues go unnoticed.
- Exit Strategies: While you might plan to live in your off-plan property for years to come, it’s wise to consider potential exit strategies. Research the resale market for similar properties within the development to understand the property’s potential value growth. If you’re buying for investment purposes, investigate potential rental yields to assess the property’s income-generating capabilities.
In Closing: What You Need To Know Before Buying An Off-Plan Property
Buying off-plan property in presents an exciting opportunity to own a brand new, modern home within a developing or established upmarket neighborhood. The potential financial advantages, from transfer duty savings to phased payments, are certainly enticing.
However, as with any investment, careful planning and thorough research are paramount. By understanding the inherent risks, such as developer due diligence and the unknown finished product, you can make an informed decision.
Consider whether a cluster home’s independence or a sectional title unit’s shared amenities better suit your lifestyle.
Most importantly, don’t underestimate the importance of a detailed sale agreement (and a second sale agreement where applicable), a keen eye during inspections, and having a clear exit strategy in mind.
By following these guidelines and consulting with a qualified property professional, you can navigate the world of off-plan property purchases with confidence and unlock the potential for a rewarding investment.
Aslam is from Johannesburg, South Africa and graduated with a BComm degree from the University of South Africa and followed that up with a BComm Hons degree in Finance and Investments.
He has spent over 18 years in the financial services sector, with 12.5 years in the commercial property finance arena with 3 of the major banks in the country.
His specialty being deal structuring and finance solutions for commercial property investors and developers across the commercial property sector, including large scale retail developments, high density residential investments , industrial and office property.
Aslam was also a fast food franchise investor for 7 years, is experienced in digital marketing and online lead generation and has owned and managed multiple residential properties.
