Property developments in SA are growing, and buying off-plan from these developments is increasingly popular.
WORDS: LUTFIYYA KARA SENIOR ASSOCIATE AT CLIFFE DEKKER HOFMEYR – PHOTOS: FREEPIK
Buying off-plan helps developers to finance their project, because having pre-approved sales allows them to obtain the necessary funding for construction. This form of purchasing can also save the purchaser money, as transfer duties are not applicable.
‘Buying off-plan’ means purchasing a unit within a sectional title, or erf within a home cluster scheme prior to it being erected. The responsibility then lies with the developer and builder to complete the building to your satisfaction and on time. When buying off-plan, the developer will provide you with draft plans of what the property will look like. As the draft plans are not final the builder and developers might need to deviate from the draft plans, but they should always seek the purchaser’s approval should the deviations impact them.
As with any purchase, there are some risks when deciding to buy off-plan, but these decrease as construction nears completion. Therefore, the purchase price of units will usually be lower at the beginning of construction, then increase towards the end of construction.
RISKS OF BUYING OFF-PLAN
The rule of thumb is, do some background work before committing to buying off-plan. Ensure that the developer is reputable. Speak to various estate agents, and ask whether you can obtain confirmation from them about other developments completed by the developer. Do online research to ensure that other developments done by them were successful. Once you have established that the developer is reputable, even if there are some defects within the building, you can rely on them to fix any issues. A dependable developer will ask the purchaser to inspect the building’s finishes and fixtures within the first few specified days of occupation, and to provide the developer with a list of defects so that they may be fixed.
Some items to look out for are:
- All taps and showers are in working order
- Cupboards open well and are installed correctly
- Tiles are laid straight
- Plugs and electrical wiring are in working order
- The stove is in working order
- There are no scratches, cracks or marks on the walls
- The walls are straight
- The roof and patios are sealed
The national Housing Consumers Protection Measures Act (Act No. 95 of 1998) was enacted in 1998. Under this legislation the National Home Builders Registration Council (NHBRC) was established. Its mandate is to protect the interests of purchasers by ensuring that builders comply with the prescribed building industry standards. It thus protects purchasers from unscrupulous builders who deliver sub-standard houses, bad workmanship, and use poor-quality materials. The NHBRC holds all builders who register with them accountable, and holds them to a wide range of requirements before they can commence building. One of these requirements is that a Certificate of Enrolment needs to be obtained before the foundations of the development are laid. To fulfil this requirement, each builder must provide the approved building plans of the development, as well as a specification schedule of the actual construction to be done and the building materials the contractor intends to use. The approved plans, together with the developer’s building contract, must be supplied to purchasers before the construction commences.
The NHBRC further inspects all enrolled homes at key stages of construction to ensure against poor workmanship, and to allow them to issue non-compliance to the builder should that be the case. The NHBRC also provides purchasers with warranty cover for any minor defects that are identified within the first three months of occupation, roof leaks identified within the first year of occupation and cover against major structural defects within the first five years of occupation. Should the builder be unable or unwilling to rectify the defects, the NHBRC can rectify them, following the completion of a complaint procedure by the purchaser.
RECOURSE FOR DEFECTS
The reality, though, is that most defects and signs of deterioration only make themselves apparent a couple of years after the buildings have been constructed. What happens then? The Sectional Titles Act (Act No. 95 of 1986) (STA) provides that a body corporate may institute legal action against a developer by way of a special resolution with the support of at least 75% of owners in the scheme. The body corporate then needs proof that the workmanship was poor, and that sub-standard materials were used in the construction process.
This route is a costly one, because litigation is not cheap. The glaring truth is also that the STA places responsibility to maintain and repair any exterior damage to the buildings within the scheme on the body corporate, by means of levies from owners. The owners of the units are left to repair any internal damage to their specific unit. Another pitfall is having the developer promise to complete the construction within a specified time, only to have that time pass without the purchaser being able to take occupation of their unit, and construction still far from completed.
Here again, a purchaser’s recourse would be to approach the NHBRC for relief and appropriate action to be sanctioned against the builder. The specification schedule mentioned earlier should also be constantly monitored and updated to ascertain timeously whether there will be any delays, and for these to be communicated to all parties involved.
BENEFITS OF BUYING OFF-PLAN
However, there are also many positives to buying off-plan, aside from saving on the transfer duty payments. When buying off-plan, only a small amount of cash needs to be paid upfront (usually between 10 and 15% of the purchase price) to reserve the unit. The payment of the balance of the purchase price (if paying cash) will only be due on completion. It is also possible to finance the purchase through a bank loan.
Although no transfer duty is paid to the South African Revenue Service (SARS) with these types of sales, this does not mean that SARS does not ‘get a slice’ – but it is the developer who pays value-added tax on the transaction as they are considered to be selling ‘goods’ as part of the stock in their business. Units bought off-plan usually appreciate in value by the time transfer is effected, which is an attractive feature for investors and first-time buyers. Often, purchasers are given the freedom (with a few restrictions) to choose their own internal fittings and finishes for their units, but such options are developer-specific, and purchasers would need to enquire with the developer whether such options are available.
Although buying off-plan is not for the faint-hearted, once you have ascertained that you are working with a reliable team of builders and developers, it can bring you excellent results.