How to protect your money when you buy off-plan

Homebuyers who purchase off plan – or in advance of their home actually being built – need to know that they will usually have quite a few more money issues to deal with than those who buy pre-owned homes.

So says Shaun Rademeyer, chief executive of BetterBond, (previously BetterLife Home Loans), who notes that about 10% of the home loan applications being received currently are for off-plan purchases in new sectional title developments or to build new houses in estates where the prospective owners have already bought stands.

“And of course there are many advantages in buying off-plan homes, including the fact that you can often customise them to suit your own needs and preferences. Even in apartment and townhouse developments, buyers can usually choose their interior fittings and finishes according to their personal tastes and budgets.

“In plot-and-plan schemes they can often also choose the size and floorplan of their homes, while owner-builders in estates usually only have to follow the basic architectural guidelines while designing their dream homes.”

However, he says, there are many potential pitfalls when it comes to paying for a home that doesn’t exist yet, and buyers need the correct information to be able to avoid them.

“It is very important, for example, to know that you should never pay a deposit for an off plan home, or even sign any agreement to buy such a home, until you have thoroughly checked the credentials of the developer and the builder.

“You should also be absolutely certain that any deposit you do pay will be held in trust by an attorney or a registered estate agent – and be repaid to you with interest if the development does not go ahead within a specified time. There have been far too many cases in recent years of bogus estate agents, builders’ agents and construction companies printing glossy brochures and taking deposits for proposed developments and then simply vanishing.

“There have also been many cases of underfunded and half-built projects being delayed by months and even years, while the developer hangs on to buyers’ deposits – and any further amounts that they may have paid – because there was no cut-off date in the original purchase contracts.”

When a new development is launched, Rademeyer says, prospective buyers would also be well advised to see whether the developer has partnered with a bank or a reputable bond originator to help them obtain the home loans they will need.

“This is a good sign that the development is legitimate and that the developer has already secured the necessary finance to finish it,” says Rademeyer.

“In addition, you will immediately be able to get a professional assessment of what you can afford and whether you are likely to obtain the home loan you want, or whether you first need to work on your credit record or pay off some debt.”

And on this subject, he says, if you are planning to buy into sectional title or estate developments – which is where most off-plan purchases occur – you must remember to budget for the monthly levy as well as your home loan repayment and other regular expenses.

“You should also make sure exactly what the levy covers – and by how much it is likely to increase once the development is finished. There could be quite a steep jump once the last unit is sold and the developer is no longer involved and no longer subsidising certain costs.”

Rademeyer says if you buy a sectional title unit off plan you should also take into account that it is the developer who will have a direct contract with the actual builder, and that you will probably have very little control over the quality or speed of construction.

“This makes it especially important in such instances to buy from a developer with a track record of maintaining very high standards and delivering on time, because ultimately it is your money at risk.”

On the other hand, if you are buying a freehold home off-plan you are likely to have your own contract with the builder, who will be paid in instalments, or draws from their building loan as certain stages of the building work are completed.

“And since you will have to sign each draw form authorising the bank to pay, you will have a large measure of control over the way the work is done.

“In fact, we recommend that you visit your home building site as frequently as possible and monitor the workmanship closely, so that any problems can be rectified immediately – and certainly before the builder collects the last draw and you have to start repaying your loan.”

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