Dangers of sectional title ownership

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

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responses to this article

Buy Used Why buy an expensive small plot on a windy field?...buy into older established developments by JJ on July 28 2010, 15:00 Find this comment inappropriate? Report it

@JJ here, here... I totally agree by ds on July 28 2010, 20:56 Find this comment inappropriate? Report it

Title - Sectional Title? A homeowners association if formed with freehold ownership in an estate. Sectional title has a body corporate. - And penalties can be legally challenged if they are deemed excessive. by aj on July 29 2010, 09:07 Find this comment inappropriate? Report it

@JJ and ds Spoken like a true schahat kalum buyer ( or whatever their name was ).... you know , you could actually , like , hmmm , I dont know , buy a stand in an established suburb , and build a house that you want - plenty of great stands still available in Joburg . .more - Morningside , Houghton , Bryanston ( to name a few very established suburb ) . .less by Smiley on July 29 2010, 09:14 Find this comment inappropriate? Report it

Surely the title is incorrect and misleading This article is about estates with home owners associations not sectional title. by Agent Orange on July 29 2010, 09:22 Find this comment inappropriate? Report it

The first line of this article and the content that follows are inconsistent: The first line reads: "Read your Home Owners Association (HOA) constitution carefully before buying into a sectional title estate." Although it is possible to have a Sectional Title Scheme within an HOA, this line seems to indicate that . .more they are one and the same thing. This is incorrect. I imagine the line meant to read: "Read your Home Owners Association (HOA) constitution carefully before buying a property in an HOA." I also suggest that you change the title of the article to: "Beware of HOA building penalties." . .less by Rob Paddock on August 04 2010, 08:27 Find this comment inappropriate? Report it

HOA Building penalties Is it not time that HOAs fell under some sort of guidelines similar to the Sectioanl Titles Act? I know that HOAs are popular but I will guarantee that most buyers never read or if the do don't understand the real impact of the HOA regulations. Everyone . .more is so different that even the estate agents cannot be blamed for know knowing all the details. I have even seen them where once you have accepted an offer you must them offer the unit back to the developer and if they decline to buy it, you still have to pay 5% of the selling price to the developer for the privilage of selling your own home! While I understand the intention of the penalities in order to encourage people to build within a reasonable time there will always be reasons why people don't. Surely the correct solution would be to rather have a clause to say that if at the end of the period you have not bought the developer has the right to buy the site back at the same price that you paid. That way it would tend to stop speculation and would take into account situations like the one we currently have, without penalising those genuine buyers that are caught in a dead market. . .less by Mike Spencer Bloemfontein on August 04 2010, 10:00 Find this comment inappropriate? Report it

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