Read your Home Owners Association constitution carefully before buying into a sectional title estate.
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' 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 maximize 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. Penalty levies can be up to eight times the monthly levy, or even more, depending on individual Home Owners Association 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, as 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. 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 80m²-400m² and priced at less than R3,1-million) 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. *Jacques du Toit is Absa's senior economist