Turn-key or plot-and-plan?
Category Weekly Advice
Although many home buyers would like to move into a brand new home, one in which they are the first occupants, and are often ready to pay
slightly higher for this privilege, they are, says Rowan Alexander, Director of Alexander Swart Property, often fearful of the extra,
“undisclosed” costs that, they have heard from others, can be encountered with this type of purchase.
“Most newly- built homes in South Africa,” says Alexander, “are offered to the purchaser via one of two different processes: turn-key or
plot-and-plan. In our experience, buyers are often ignorant of how these systems work and fear that there may be “hidden” costs of which
they have not been told upfront by the agent or the developer. This applies particularly to plot-and-plan projects.”
Explaining the difference between the two systems, Alexander said that with turn-key the developer or builder finances both the land and
the construction costs: when the buyer then takes transfer, the house is- or should be- 100% complete and the buyer makes a single one-off
payment on which there are no extras.
The plot-and-plan system, says Alexander, is more complicated. Here, the builder’s operation, after he has funded the first month from his
own resources, is financed by the buyer or, in most cases, the bank which has granted him a bond. Payments are made when certain
stipulated sections of the work are completed. Prior to this, however, the buyer will have had to pay the interim interest on the land now
bought in his name on which the home is to be built and certain other charges---and it is here, says Alexander, that misunderstandings
often occur.
As soon as the land is transferred into the buyer’s name, he becomes responsible for its rates and taxes, for any water used on the site
and for any levies (if he is moving into a multi-complex project with a Home Owners’ Association) as well as the interim interest on the
money advanced to the builder for work done according to the schedule.
“Taking a typical twenty year R3million bond on a new home as an example, the first installment on the bond will only be payable when the
house is completed-- but before that stage is reached, the purchaser will have had to pay the interim interest on, say, R1million paid for
the plot and on the sums paid to the builder for completing certain stipulated sections eg the foundations, the walls or the roof.”
In general, says Alexander, the plot-and -plan system works well- but if a builder eases off or disappears for some time after completing
and being paid for certain work, the interim interest on the money already paid out to him will continue to be charged whether or not
further progress is made. And the sums involved here, says Alexander, can be large.
“As estate agents we frequently have to warn clients that interim interest can be two or two and a half times the amount they will later be
paying on their monthly bond instalments and they must make provision for this. On a R3million home, to quote the same example, payment
could be R60 000 to R90 000 over the duration of the construction period. If the purchaser fails to pay such sums, then they will be
deducted from the final payments made to the builder who will probably retaliate be refusing to hand over the house. Interim interest
payments can, therefore, be a contentious issue especially as the buyer may at this stage in his life be under great financial pressure as
he is still also paying bond installments on his existing home (prior to its being transferred to a new buyer) or renting temporary
accommodation before moving into his new home.”
In addition to interim interest costs, says Alexander, the plot-and-plan purchaser may also find that he is responsible for a range of
other costs not included in his building contract price and quite possibly not explained to him by the estate agent or person responsible
for the sale. These could include:
· architectural fees
· plan drawing and printing costs
· the cost of getting local authority approval for the plans
· electrical connection fees
· sewerage and water connection fees
· National Home Building Registration Council (NHBRC) registration fees
· plan submission fees and
· water used during construction of the home
When buying on the more straightforward turn-key system, problems can and do arise with regard to the transfer duty and costs.
“Many purchasers buying turn-key,” adds Alexander, “think that they have zero transfer fees because they have been told that the builder or
developer will not charge transfer duty (tax). However, the purchaser is responsible for the transfer COSTS even though he is not liable
for the duty tax. It has to be added, however, that this duty tax is often the largest sum involved in a transfer. Buyers should be careful
not to confuse transfer duty with transfer costs; additional fees such as deeds office fees, attorneys fees, etc also form part of the
total transfer costs."
What advice can Alexander give to the nervous home buyer wanting to buy a home by plot-and-plan or with a turn-key deal but not confident
of finding his way through the ins and outs of the contract?
“The best advice I can give,” says Alexander, “is to work with a reputable developer or builder, one with a track record of successes. Many
have track records in which there have been some serious failures. If, however, you deal with a reputable operator it should save you from
those awkward extra costs which may not be mentioned at the outset by a second rate outfit. As always in life, a good reliable firm will
ensure that you get a quality project and avoid confrontation.”
Whatever firm the purchaser deals with or system he agrees to, says Alexander, he must see to it that the contract contains strict
penalties for the builder or developer falling behind schedule. It should also include full building plans of the home and a list of all
the finishes, fittings and the specifications. In addition, it should contain instructions indicating where all water and plumbing points
can be found.
The contract should also contain a clause about arbitration on any disputes which may arise: it should be agreed that these will be
referred to an independent arbitrator acceptable to both buyer and seller. Preferably this should not, says Alexander be the architect
because in one way or the other he is often an interested party.
“For the purchaser authorising and then watching a new home being built for him and his family can be a very pleasant experience,” says
Alexander. “However, if the snags mentioned here are encountered, it can become an emotionally draining nightmare. Make the right choice at
the outset so as to avoid frustration and financial losses.”
Author: Independent Author
