It’s great to move straight into a newly-built home with brand new furnishings and fittings. But it’s also important to understand the benefits and risks involved with the different types of developments, particularly if you are looking to finance the property with a mortgage bond. How do you determine which one is the best for you? Read on to find out.

There are two main options to consider when purchasing a newly built home:

• Turnkey – where the developer/builder owns the plot of land and what’s being built upon it right up until transfer takes place; and
• Plot-and-plan – where the end-user purchases the vacant plot and then enters into a building contract with the developer/builder.

How does Turnkey work?

A turnkey option is effectively offered on sectional title developments but can be offered by some developers on full title complexes too, although it is less common.

Turnkey properties consist of a range of pre-designed homes with plans that have already been approved by the municipality. Having plans approved is one of the most technical and sometime time-consuming parts of building a new home. The purchaser chooses the variations within the developer’s scope (layout and finishes within a certain specification/range) and signs a contract to buy a completed home. The purchaser’s selected options are put into the turnkey contract and generally, no further changes can be made. Therefore, a single agreement will be signed:

1. Offer to purchase / Sale Agreement of the turnkey property to be constructed.

Note that further scope changes can be requested by the purchaser down the line, but will be subject to a new contract addendum and likely a higher contract price. If the bank approved a loan for the original development, they will also have to assess the application again for the new contract scope and cost.

Benefits to the purchaser of a turnkey property include:

• The developer funds the entire project from start to finish;
• Banks will consider 100% mortgage loans for the development;
• The developer deals with all building issues that may arise (e.g., the purchaser does not take on any risk relating to the delivery of the project); and
• The purchaser (or purchaser’s bank) only pays for the property once the developer delivers a completed product.

Essentially, the biggest benefit of turnkey properties is that the purchaser does not have to deal with any of the stresses involved with liaising with the builder and overseeing the build of a brand-new home.

Bank Financing of Turnkey Developments

With a turnkey project, the mortgage bond will only register and pay out to the developer once the home is complete and transfer of ownership has taken place. In essence, it’s no different to an existing home and all the major banks would look at 100% bond financing for turnkey developments.

How does Plot & Plan work?

A plot and plan development can only be offered on full title developments where a whole piece of vacant land or erf can be registered in the purchaser’s name.

The end-user will purchase a plot of land that may or may not be owned by the builder. It is first transferred into the purchaser’s name and the purchaser pays the transfer fees on the land portion only. Secondly, the purchaser enters into a building contract with the builder to construct the property on that land.

Therefore, two agreements will be signed:

1. Offer to purchase / Sale Agreement of the vacant land, where the Owner/Seller is usually another party (different to the Builder); and
2. Building Contract between the Purchaser and the Builder.

Typically, the builder is paid out in stages by drawing either directly from the bank or from the purchaser until the property is completed. These drawing amounts are usually called ‘progress payments’, with specific amounts and timing being stipulated in the building contract.

There are some benefits for plot and plan developments, which include:

• The transfer and bond registration fees (payable to the attorneys) are much lower, because the purchaser will only pay fees on the land price (not the total build, as would be with Turnkey developments);
• The transfer duty (payable to SARS) on the vacant land is lower (and only applicable if the land value is above R1 million);
• The purchaser can have total control over the plans and exact specifications for the home, which is agreed with the builder before-hand – this can include modern energy and water-saving additions.

However, there can also be some hidden costs with plot and plan, such as:

• Having plans draw up by an architect or draftsman – this is usually done on an hourly rate, and the total cost will depend on the number of scope changes and revisions;
• Fee for submitting the building plans to the local council for approval;
• Registration fee with the National Home Building Registration Council (NHBRC) which is a mandatory requirement for new builds;
• Oversight and management fees of the architect throughout the build – to ensure the builder constructs to plan;
• Utilities connection costs (water, electricity and plumbing); and
• Rates, taxes and potentially HOA levies, which will be the responsibility of the purchaser as soon as they own the vacant plot – this may be payable during the building process if registration of the erf occurs before building has been completed.

Purchasers should ask the estate agent or builder exactly which of these costs are included in the building contract and which are not.

Bank Financing Issues with Plot & Plan

Banks are very reluctant to give 100% financing on plot-and-plan developments. This is because they can be messy and somewhat complicated. In very rare cases, with an established developer and excellent end-user customer, there may be exceptions. In general, it should be assumed that a deposit of at least 10% or more will be required.

If the bank gives a purchaser a loan on a plot-and-plan, the builder will be able to request progress payments from the bank. In effect, the bank will be financing the project throughout its duration, and thus taking on most of the financial risk – the bank is tied in with the builder (relying on them to complete the project effectively) as well as the purchaser (relying on them to make no changes to their credit profile) during the time it takes to build the property. As well as taking on this financial risk, the bank has minimal control over the instructions given between the purchaser and the builder (and potential scope changes) during this time.

Another point that purchasers must be aware of, is that they will start repayments on the money borrowed from the bank as it is drawn. Although it is not the full bond repayment, part payments will be required on the drawings handed from the bank to the builder. This means, the purchaser may be making bond repayments on a property while waiting 6 – 12 months before they can actually move in.

In terms of purchasing vacant land only using a mortgage bond, banks typically only approve a loan amount of 60% max.

Essential Additions to the Contract

It should be noted that in addition to the Turnkey or Plot & Plan Sale Agreement and/or Building Contract, a number of other documents should be included to give the aforementioned contracts important context. These key documents include:

• Site development plan (if the development is part of an overall sectional title, HOA or estate);
• Legal description (erf number and township), as well as residential address (street address) of the property;
• Development drawings for your specific property - floor plans and elevations;
• Schedule of finishes (specifications for all the materials, fixtures, fittings, and equipment to be installed); and
• Building/construction timeline, with an agreed completion date.

Summary – Turnkey vs Plot & Plan Developments

As mentioned in the paragraphs above, the key points for purchasers to consider with the type of development they are entering into are summarised below.

It is important for the purchaser to ask the estate agent and developer as many questions as possible to ensure they understand the contract they are entering into. When it comes to buying from a developer, there’s no such thing as a stupid question!

We assist purchasers looking to finance their newly built home with a mortgage bond – we can apply to up to 7 banks at a time to ensure you get the best possible interest rate. We also assist developers with a once-off approval of their development with all the banks, including a streamlined application process with qualified end-users.

Contact us now to get started!