Buying homes in new developments – how safe is your money?
News > news - 04 May 2007
Buying a property 'off plan' can be a risky business – the decision to buy is often made on the strength of glossy brochures and good marketing and it can take months, if not years, for the actual property to materialise at which point in time the financial situation of the buyer may well have changed.

Developers usually gear their developments. This means that a bank will fund the development by means of a development loan registered against the land and the developer will take draw-downs from this loan as construction proceeds. The banks require developers to have a minimum number of sales before they will grant the development bond.

Most buyers will pay a small deposit of say 10% of the purchase price when the sale agreement is concluded and the balance will be funded by means of a mortgage loan and which loan will only be paid out to the developer on registration of transfer of the completed unit.

Developers will often price their units to secure quick sales. This creates an opportunity for first time buyers to re-sell a unit at a profit. However, factors such as agent's commission and transfer duty which is payable by the purchaser on the second sale must be considered, and market conditions may change between the point of sale and completion of the unit.

Most developments take place in terms of the Sectional Title Act and all funds paid towards the purchase price must be retained by the conveyancers in their trust account pending completion.

If the developer does go insolvent and the agreement of sale is cancelled, all money paid towards the purchase price will be refunded to the buyer.

Buyers should however exercise more care when buying into a 'plot and plan' development. Usually the buyer will take transfer of the land before construction commences and the developer will receive payment for the land value against registration of transfer. The property will then be constructed in terms of a building contract and progress payments will be made to the developer (builder) when certain milestones are reached. If the developer or builder goes insolvent, the buyer will own a half-completed home and may have to find another builder to complete construction, at great expense.

Consumers do however enjoy a warranty against structural defects and poor workmanship in terms of the provisions laid down in the Housing Protection Measures Act for a period up to five years after date of completion. It is advisable to check your builder or developer's enrolment number with the NHBRC before you conclude an agreement.
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