8 Reasons why I don't buy Off-Plan Townhouses
Here are my 8 reasons why I don't buy off-plan townhouses or new townhouses anymore.
I have learned my lessons the hard way, please learn from my mistakes to avoid making them yourself.
Price of Off-Plan Properties
When buying off-plan townhouses it is easy to be overwhelmed by the offerings like no transfer fees (which means a saving of R 20 000) or even free appliances like washing machines and fridges ( About R 5000 - R 10 000) , that you don't notice the price you are actually paying.
Look at the fine print in the documentation supplied to find the size of the property and then divide the price by the size to get R/m.
A 5 minute look through the new developments in Midrand advertised on Property24 will show you prices ranging from around R 16 000/m to R32 000/m at Waterfall Estate .
Our associated Real Estate Company Targer Properties, regularly sells similar second hand properties in this area between R 9000/m - R 10 000/m.
Now when you are paying half price, the R 20 000 transfer fees and free fridge don't really stack up do they? And your brand new townhouse will be second hand as soon as your first tenant moves in.
Any experienced investor will tell you how badly high levies erode ones earnings. It is important when you invest to see what portion of your rental will be lost in levies.
Developers effectively run the body corporate from the moment the first townhouse is sold. They have maintenance teams available and a vested interest in making the levies as low as possible to make the properties attractive to buyers.
In my experience the levies go through the roof as soon as the developer is out of the picture and reality sets in.
The Body Corporate have to budget for a management team, ongoing maintenance, security and they need to save up a maintenance reserve fund equal to a full years worth of levy collections.
And who pays for these this? - The new owners that bought off-plan of course!
Return on Investment
Following on from the high price of new developments and artificially low levies mentioned above, the next thing to watch out for is the "Guaranteed % ROI" offered by some developers.
When selling off-plan townhouses, many developers will offer a guaranteed return on investment by guaranteeing the rental for the first year. ( They do this by subsidising the rental deal for the tenants they install - no deposit/rent free periods etc) They may even subsidise the shortfall in rental for the first year.
In all my years in property I have seen no clear accepted standard calculation of return on investment for buy to let rental properties.
For example do you include capital growth, maintenance, vacancies, estate agency leasing and management fees? What is clear is that unscrupulous developers can can make the numbers look as attractive as you want to.
By way of comparing two investment properties, the key is to remain consistent in your calculations to compare "apples with apples".
We have developed a Return on Investment factor that we use in our Litmus test, that measures a few things like rental/levies/rates/maintenance/estate agency management fees and leasing fees.
Since return on investment essentially means net income divided by net expenses, by inflating the rental income and underestimating the levies, the return on investment can look very attractive and yet be far from reality.
Size does matter! Be careful when you buy off-plan
I don’t recommend you buy off plan townhouses because it is impossible to tell the size of unit you are going to buy. The pretty drawings you are offered portray a different picture to reality. The plans of the townhouse will always show small purpose designed furnishings in place and make it look larger than it really is.
You need to be able to walk around inside a complete unit that has normal furniture in it to be able to make a good decision.
For example this 2 bedroom 1 Bathroom apartment below is is only 56m including the patio. That is not much bigger than a 38m double garage!
After you have paid a million rand for this property you are bound to be disappointed when you try to move in to a unit that is is not much bigger than a double garage !
Building Snags when buying off plan townhouses
It is impossible to develop a complex of 100 units and not have defects. We all know this!
Building defects are a reality that have to be dealt with and most developers will gladly fix all the defects you report. However as an investor you are limited to the defects you see on handover and the defects your tenant reports. Some defects you will only discover much later when it is too late and you have to foot the repair bill or sue the developer.
I once bought a good sized brand new unit in Northgate (not off plan), dealt with some minor snags and installed my first tenant. Fortunately before the developers left the site, my tenant used the built-in fireplace.
He discovered to his smoky surprise that the chimney was completely blocked by bricks and cement! Who knows how that happened, but FORTUNATELY I found the problem in time for the builders to climb onto the third story roof and unblock it.
Location is the most important factor in property investment.
It stands to reason then that developers will try to build in the best locations, but land prices and availability become a problem.
At the moment, finding land cheap enough to do a development of townhouses at a price of around R 16000/m will require developing in very poor locations where distances to work, traffic flow, and security become major factors.
Building in a superb location like Waterfall in Midrand near the mall of Africa results in townhouse prices of around R 30 000/m.
How do you as an investor justify paying that price when a few hundred meters to the North, you can find a second hand townhouse for R 10 000/m.
To buy new and off-plan townhouse developments, you will find yourself paying a fortune for townhouses in good locations or reasonable prices in terrible locations.
Immature Body Corporate
Think about it, new townhouse developments are bought up by first time home buyers and buy to let investors.
The investors often own multiple units and simply don't have the time or the energy to get too involved in the running of the complex. They also often live far away from the complex.
The Body Corporate consists of all the unit owners, who then elect a few trustees to run the complex. The trustees will therefore consist of a few first time home buyers with little or no experience in running anything, let alone a multi-million rand annual budget.
I have noticed that it can take up to ten years before a complex settles down with an experienced competent board of trustees .
After about 5 years, a complex will need to be painted and waterproofed because developers will often do the minimum possible to maximize profits. Many years ago I bought a real bargain in a Northgate complex called Los Alamos. At first glance the complex looked like Monte Casino's faked old age paint work. The paint was peeling and stained, water had entered the plaster and the complex looked terrible. I spotted some paint swatches on the wall near the gate and inquired. Apparently the 8 year old Body Corporate had taken some years to get around to budget for painting and were taking another year of meetings and paint sampling to decide on the new colour!
I spoke to the caretaker who confirmed to me that the funds had been raised and the colour chosen. My timing was perfect, I bought an absolute bargain in a complex that would transform from an ancient slum to a modern Spanish style complex.
Corrupt and/or Incompetent Managing agents
In the time that I have been investing in Townhouses I have personally encountered at least two situations where the developer made a very poor choice in managing agent where the managing agent turned out to be corrupt.
The original managing agent in both Bel Aire [Midrand ]and in Telford Court [Northgate] was eventually ousted in a cloud of forensic audits and criminal charges, leaving the Body Corporate crippled in debt and still trying to recover many years later.
It is no wonder the levies are extremely high as the body corporate recovers from the theft.
Many others like Polofields in Morningside were very poorly run and after a few years were placed in some kind of administration rescue deal.
Why I don't buy off-plan townhouses - Conclusion
These 8 reasons are more than enough to convince me that buying a townhouse or home off-plan is fraught with problems and not worth paying double the price for half the product!
And if you have read this far, then you would be interested in the next in this series aimed at education new investors. Click here .. Don’t be duped ! Buy To Let Property for Sale by Property Developers and Investment Clubs