Buyers these days have a number of options open to them when purchasing certain developments. It used to be the case that, in most cases, a buyer could purchase a plot, or a plot-and-plan. A few years ago, with the reduced funding appetite from the banks, developers introduced a Turnkey sale which the banks were very receptive to.
However, there are some fundamental differences between a Turnkey and a Plot-and-Plan sale, which need to be understood.
The conventional plot-and-plan sale meant that a buyer would purchase a plot, have plans drawn up and a building quote, and submit to the bank for finance. Once finance is approved the buyer takes transfer of the plot, and enters into a building contract with a builder.
As the building progresses the builder is paid out in stages, or draws, either by the buyer or the bank, until the property is completed.
The benefits of such a purchase are that the buyer can build the house he wants according to his budget, with the finishes he desires.
The negative is that the buyer has to carry to cost of servicing his bond while the property is under construction, which could be anything between 4 and 12 months. In addition to this, the buyer has to deal directly with the builder, handle the payments, deal with issues, and carry the risk of delivery – in other words, it’s up to the buyer to manage the whole process.
A few years ago the banks took a conservative approach to plot-and-plan finance applications, mainly because of the delivery risk, and in many cases only offered finance up to 80% of the total building and land cost.
In order to appeal to buyers who required a higher loan-to-value bond, and who wanted to avoid the stress of building, some developers, on the advice of Harcourts Platinum, introduced a Turnkey product.
The Turnkey product consists of a range of pre-designed homes with plans already approved by the municipality. The buyer selects the property he wants and signs a contract to purchase a completed home where he has a choice of finishes from the range provided, but where no changes to the plans can be entertained.
The benefits of a Turnkey product are that the developer funds the entire building process, deals with all building issues, and delivers a completed product to the purchaser. The buyer only pays for the property once it’s completed, thus removing any delivery risk for the purchaser.
This has proved an extremely popular option to many buyers in developments marketed by Harcourts Platinum. The main difference is that buyers cannot change the pre-approved plans, and need to restrict their finishes to the range the developer offers. However, the benefits of not having to fund the construction or deal with building issues means that a buyer gets a brand new home, with the finishes he wants, without any of the stress associated with building.
Banks are generally happy to finance a turnkey home to the same extent they would finance a second hand home – so buyers benefit from higher loan-to-value rates, although banks have warmed up to plot-and-plan bonds again. Both products have their advantages – be sure you understand exactly what you are purchasing.
Principal of Harcourts Platinum, and Director of Harcourts South Africa
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