Buying to Build? What you should know before buying Vacant Land

Seeing as we are one of only two agencies that are mandated to sell the newly launched Phase 7 in Cove Rock Country Estate, and having vast experience in the selling of vacant land in general, we thought we’d touch on a few points about the ins and outs of buying vacant land.

Purchasing vacant land is far different from buying a home, where the structure is in place (assumingly that complies with the local regulations), you know the location and general amenities and are sure that there is water in the taps, and juice in the lights.  These things become uncertain when you’re buying vacant land, so it’s best to check them out before you commit to a purchase you might regret.

Cash or Bond?

Cash is always king as it gives you better bargaining power, and generally when you invest it in property, you don’t often fail.  However, we don’t all have large chunks of change lying around, and some that do would prefer to keep it and use the bank's money to finance their dream home.

The difference with financing a home or vacant land is the amount of finance a bank would be willing to offer.  While banks are known to finance bonds for 100% of the selling price, and in some cases even 104% (the 4% being the additional transfer/bond fees), they generally will only finance 60% of the selling price of vacant land.  However, Investec have been known to finance up to 80%.

This is generally because the banks have more value and thus security in a building, which is easier to sell than vacant land.

So be prepared to have a 40% deposit for the land if your choice is to build.

Location

A plot’s location will have an impact on a number of factors which will need to be considered when buying.  The major issue is whether you are buying for residential purposes or business purposes.

The local municipality has zoning by-laws, which regulate what is and isn’t allowed in certain areas. 

For example, in certain residential areas in East London, only certain types of residences are allowed, which excludes boarding houses.  In fact, the type of zoning in the area will determine whether an escort agency is allowed next door.  And in other areas, both residential and ‘soft office’ is permitted (which allows certain professional offices – doctors, lawyers or accountants).

So, knowing that you may potentially be dealing with evening unrest due to a noisy school boarding house, or a barrage of “Pretty Women” frequenting next door, is important when your purpose may be to build your dream home for a young family.

Another thing that must be considered is resale value.  It is somewhat pointless to purchase a cheap piece of land in a certain area, only for your dream home to decrease in value due to emerging industry or rezoning into business or industrial zoning.

Availability of Services

This follows from location to a certain degree.

If you’re looking at a plot in an established suburb, this won’t be applicable to you, as all suburbs in East London have the infrastructure to build and establish a ‘working’ home immediately.  This means that there are already sewage, water and electrical installations available to ‘connect’ to the mothership when your house is a “go”.

However, when you’re considering land in outlying areas, you need to do your homework to determine whether there are those services available to have a running household from the beginning.

In some cases, you may be required to install a septic tank for sewage, or rather connect to Eskom instead of the local municipality.

Restrictions

As with already-built homes, plots can come with their own ‘baggage’ in the form of title deed restrictions, and/or building restrictions imposed by a homeowner’s association.

Title deed restrictions set out and regulate the way and extent to which a property may be used or developed by its owner

In addition to describing the rights, privileges, and obligations in respect of owning a property, the purpose of title deed restrictions is to protect the local amenity and character of the area for the benefit of surrounding property owners and the general public.  They have however become largely redundant because the local municipality by-laws now police these issues, which wasn’t always the case.

In this instance, you can apply to have the restrictions amended, suspended or even removed entirely from the title deed, however, the cost can set you back up to R55 000.00, as this is often done by way of High Court application.

Another hurdle you might encounter is general building restrictions if you purchase land in a specific estate, which will be governed by a homeowner’s association.

In some cases, you would be restricted to a certain ‘spec’ or style of house, which means that there are variations allowable (in terms of a number of bedrooms, bathrooms, double or single story), but that the look, feel and character of the home will need to suit the rest of the development. 

A good local example of this is Cove Rock Country Estate, Balugha Lifestyle Estate (East Coast Resorts), the Village and Umlele (Kidd’s Beach), and Clovelly Cluster (Sunnyridge).  If you’re interested in viewing these developments, give us a call – we have contacts.

Boundaries

You may be forgiven for assuming that what you see (land perimeter or house perimeter) is what you own, but the truth is, not all surveyors or builders are made equal.

In some rare cases, what you buy may exceed or fall short of what you’re expecting…

We were involved with a legal case a number of years ago, where a survey of a Gonubie home was carried out incorrectly.  The homes were built over 40 years ago, and the boundary walls were placed in accordance with that incorrect survey. 

Our client was approached by their neighbour, who claimed that our client’s property encroached on theirs (meaning the boundary walls were placed in the neighbour's property, over land which wasn’t theirs).

Through some investigation, we found that because the boundary walls were placed in that position over 30 years ago, and no person had been made aware of the mistake for that long, the land had accrued or prescribed to our client, which meant that the neighbour could no longer claim this portion of land as his.  This happens in terms of legislation, which is similar to monetary debt prescribing, and is called Acquisitive Prescription of Land.

Hidden Costs and Savings

We all know that there are hidden costs in almost every aspect of our daily lives.  After all, nothing in life is free…

This is the same for buying vacant land to build…

Hidden costs that you may not have considered are the following:

1. Architectural and Municipal fees – when buying a built home, there are no additional fees to a professional for the design of the home, as those were paid a long time ago. Added to this is the price of getting the plans approved at the local municipality.  Other than that, you may need to consider the cost of a garden design professional, unless you have green fingers and are able to sort your dirt out on your own.
2. Finishes – be aware of the cost of getting what you want. You might have a new home in a new development that meets your budget, but those standard homes come with standard finishes.  If you don’t want standard finishes in your new home, be sure to discuss this with your chosen builder before he quotes you on the full build, as his normal quote will usually include basic or standard finishes which you haven’t considered.
3. Turnaround time – what often happens is that a build is scheduled for 4-6 months, but certain issues crop up which delay the finish date. Buyers may enter into short-term leases, assuming that they will be in their dream home within a certain period, and find themselves in a predicament without accommodation due to these delays.  As a result, they may be faced with harsh penalties for either extending their lease or additional costs of moving into a guesthouse until the build is complete.
4. Storage fees – building a new home takes time, and often buyers will rent smaller homes or flats in order to save money until their home is built. The question is what do they do with their belongings in a smaller home during this time?  The answer is storage facilities, which allow you to store as little as a room, to a full home at a cost. This can cost anywhere from R500 to R800 per month.

Savings

Yes, there are in fact savings you can cash in on, which may surprise you.

One that many people overlook or don’t even consider is the saving on SARS Transfer Duty.  Transfer Duty is a tax imposed by SARS on properties over a certain value. 

Currently, properties sold for under R1 200 000 are not levied with Transfer Duty, which is deemed the ‘free’ threshold.  Thereafter a certain percentage of the amount above R1 200 000 is levied on a climbing scale.

So, what is the saving you ask? 

If your budget for your new home is R1 800 000, and you purchase a turnkey property (already built), the cost of transfer duty will be R29 625.00.

However, if you buy a plot for R300 000, and obtain a building bond for R1 500 000 (combined reaching your budget of R1 800 000), the only portion taxable is the purchase of the land (i.e. R300 000 for the cost of the plot), which means you save R29 625.00 in tax.  In other words, SARS only taxes the immovable land bought (with or without a house on it), and they are not able to tax a builder’s costs of building the house itself. 

Another overlooked saving is the immediate and medium-term maintenance costs.

When buying a turnkey property, unless from a developer, it is not new and as a result is bound to have some maintenance issues, especially if it is an older home.  Some properties will need a new paint job, require the bathrooms or kitchen to be upgraded, carpets replaced or eaves and facia boards replaced.  And in some unfortunate circumstances, there may be lurking problems that the former owner didn’t even know about, which means you are saddled with them whether you like it or not, due to voetstoots clauses.

Just be sure your builder has a valid NHBRC certificate, and make sure you get references to ensure you’re choosing the right person to create your castle!