Read your Home Owners Association (HOA) constitution carefully before buying into a sectional title estate.
Absa’s senior economist, Jacques du Toit, says buying a stand inside a security estate might have been a dream come true a few years ago, but if your financial position has since changed, building penalty levies could be causing a headache.
To eliminate speculators and get genuine homeowners to buy into developments, Home Owners Associations (HOAs) have building clauses which stipulate that building must commence within two or three years to avoid inconvenience to other residents. “It also helps those who have already built to maximise their investments.”
However, the current economic climate has seen a change in many people’s financial circumstances, pushing them into a situation where they can no longer afford to start or finish building. At this stage, there are possibly no other buyers for vacant land if the property market has taken a dip, and the owner of the stand is stuck without options.
“Two types of penalty levies apply in this situation: Failure to commence construction within a set time or failure to complete construction within a set timeframe,” said Absa property economist Jacques du Toit.
Penalty levies can be up to eight times the monthly levy, or even more, depending on individual HOA constitutions.
The timeframes date back to the original transfer of the plot. However, some estates are adding the two penalty levies together after three years if no building has begun, where they should only be applying the penalty levy for failure to commence building – and then still adding the standard monthly levy on.
“If you’re in the market for a stand, you need to read the constitution carefully before signing. There are estates which have elected to amend their constitutions to help the market recover quicker, but having these levies due every month is counterproductive to the value of the property. A potential future owner of the stand might be scared off by having to pay the monthly penalties,” Du Toit said.
“Levies have an impact on any sale and can influence the market in this type of property. However, it is a limiting impact rather than a negative impact on the marketability of the property.”
“There are differences between estates when it comes to levies, rules and regulations. Buyers need to be aware of things like security levies and escalation costs – if the levies will increase by a fixed percent each year or will follow the inflation rate. Also be aware about any extra costs involved when buying such a property.”
In the first quarter of 2010, it was R229,100, or 18,3% cheaper to buy an existing house than to have a new one built, according to Absa’s Quarterly Housing Review.
The recently released data for the second quarter of 2010 shows the cost of building a new house in the middle segment (houses of 80-400sqm and priced at less than R3,1m) of the market was up by a nominal 5,5% y/y in the first quarter of 2010, slightly down from 5,7% in the fourth quarter of last year.
“This continued relatively low growth in residential building costs is an indication of the tough conditions still prevailing in the residential building and construction sector,” du Toit said.
Rob Lawrence, national manager of the bond originators, Rawson Finance, says most of those deciding to build for themselves do rely on bank finance and banks are still prepared to advance up to 80% bonds for this type of enterprise. “But the requirement is that the loan applicant qualifies and goes about his request in the approved way.”
This, he said, involves, either buying a plot, designing and building a house or buying into a so-called “plot and plan” system where the house is pre-designed as part of the development.
In the next steps, said Lawrence, it is absolutely essential not only that the plans should be complete but that they should also have received Council approval. The banks themselves will check on this and will want to approve the plans.
The next preliminary step, said Lawrence, is to get a written, signed quote from one or more builders – with a programme attached. This, too, the bank will insist on seeing before they will advance a loan.
The builder must not only have a good track record, he must also be a National Home Builders Registration Council (NHBRC) member and the building must on completion have an NHBRC Certificate. “If the building is not registered with the NHBRC, the banks cannot by law advance any moneys and for five years no bank can bond the property if there is a resale,” says Lawrence.
During the course of the building operation the builder will “draw down” on the loan as the work progresses, usually four times before the building is completed. “The bank’s valuers will visit the site when each draw is requested and inspect the work done. If they are satisfied with progress and standards, they will authorise the ‘draw’. This gives the bank’s client some protection against poor workmanship and is therefore to his advantage.”
“The bank’s valuers will always work on the ‘safe retention principal’ to ensure that there is enough left in the kitty to complete the building. For this reason it is important to have a builder who has resources and/or a strong cash flow to bide him over the times when his input expenses are higher than the bank’s reimbursements – which often happens.”
Finally, said Lawrence, the DIY client should try to visit the site every day. “Builders perform better when they know that they are under constant surveillance, and the client should see to it that he has at least 10% more cash available than the quote has specified.
“It is almost impossible to build a home exactly to budget. There will be unforeseen problems, changes and extras for which the builder is entitled to claim. So the client must have some reserves to draw on.” – Source: Eugene Brink, Property24.com
No related posts.
Related posts brought to you by Yet Another Related Posts Plugin.
