Don't be pound foolish

First-time buyers and new investors need to be careful not to buy an overpriced property, just to save on transfer duty.

That's the warning sounded this week by Lew Geffen, chairman of Sotheby's International Realty in SA, who notes that a large percentage of the newly-built homes currently for sale are not being sold by the original developers but by owners who bought 'off plan', hoping to make a quick profit on a quick resale.

"Consequently, these properties are classified as pre-owned and qualify for the huge transfer duty reductions that came into effect this month — which translate into savings for buyers of up to R35 000 for properties under R1-million.

"The trouble is, many are overpriced by more than the potential transfer duty saving, for a number of reasons. The first among these is the fact that there have been long delays on many development projects over the past few years and that off-plan buyers in these schemes have incurred heavy holding costs instead of making their anticipated profits."

Geffen says the reasons for such delays — approval hold-ups, building material shortages, insolvencies among developers and even the weather — are generally well known, "but what is less well understood is that most sale agreements for new homes have an escalation clause that provides for the price to be increased between the time the unit is sold and the time that it is handed over, ostensibly to cover building cost increases during that time.

"We know of cases, for example, where units bought off-plan in 2002 were only delivered in 2005 — almost four years later — at 40 percent more than the prices originally quoted because the sale contract provided for a annual 10 percent escalation, no matter how long the delay in delivering the built units."

"And while prices across the board have risen to such an extent since 2002 that the owners who can now finally on-sell such units should not have a problem making up this sort of difference, they often make the mistake of also trying to add on the profit they originally hoped for.

Growth rate is slowing

In addition, says Geffen, there are many investors who bought at the height of the boom in areas that became oversupplied and, having had trouble letting their units for anything close to their bond costs, are now looking to recoup their losses as well as make a capital gain on the property.

"In either instance, the property will be overpriced, and buyers should not be blinded to that fact even by the prospect of a large transfer duty saving. With the rate of home price growth having slowed now, they need to be especially careful that they don't find themselves in a negative equity situation, having paid more for their home than they could get for it if they had to resell in a hurry."

Geffen emphasises that he is not advising buyers to "steer clear" of all development resales — or even of new developments that are subject to VAT and where there are thus no transfer duty savings to be made.

"That's simply not an option, since there is not enough existing stock to meet the steadily increasing number of homebuyers in SA.

"However, we do think first-time buyers and investors should consult with estate agents in their area before committing to home purchases, to independently ascertain that they will be paying market-related prices."

Article From: http://iafrica.com