No Transfer Duty - Trick Or Treat?

Saving money when buying directly from a developer is appealing to most, but is it really a saving or simply marketing speak? How much of a pull is it, or are there other reasons why buyers are drawn to developments?

Given that the purchase of a property is, for most, the single largest investment made, it’s tempting to be lured by any potential savings en route. That’s not to suggest that the lure isn’t 100 percent legal, but rather that the young, inexperienced or accepting consumers often haven’t done their homework as regards the facts and processes. Particularly for young buyers, it can be bewildering to discover that the price paid for the property, is not where costs end.

When buying directly from a developer, one of those come-hither drawcards is the ‘No Transfer Duty’. It’s instantly attractive, as confirmed by Myles Wakefield, CEO of Wakefields Real Estate in Kwazulu-Natal, a family-owned company operating in the industry for 75 years. He says the saving is debatable: “You’re not saving on transfer fees, but on transfer duty. Two different things, both usually payable on a property: transfer fees are the fees paid to the conveyancer, either bond registration fees, and/or the conveyancer’s fees for processing the transfer of the property; and transfer duty, which is the fee paid to the government.

“When you buy from a developer, invariably they’re VAT vendors, so there’s no transfer duty. But you still have to pay transfer fees.”

Seems pretty straightforward, but it’s not. As Wakefield says, “If the developer is VAT registered, if your property purchase is over R600 000 (transfer duty not applicable under that), you’ll save up to around 7 percent transfer duty. But of course, you will pay 14 percent VAT. That will be included in the price of the property you’re buying, so it goes unnoticed.”

 So, is there any saving at all? You do the maths. Simply put, when you purchase a property for a million rand, you pay transfer duty on top of that. When you purchase from a developer, you pay R1,14m, because the VAT is included.

Wakefield adds, “If you, the buyer, are a VAT vendor, you can obviously claim that back, but very few people, - maybe one percent - in residential developments are VAT vendors.”

What about the other costs? Wakefield says, “If you’re buying directly from a developer with no estate agent, there may not be a commission payable, but most developers have a designated sales arm – they will pay a commission to those agents who work for them. That fee, too, will be built into your price.”

No matter how you purchase a property, legal fees apply.

Wakefield believes there are many more issues at play than saving transfer duty when buying from developers: “In the early 2000s, buying directly off-plan worked in the buyer’s favour – the developer took three years to build the project, and by then, the market had moved and the property value had escalated. If you sold that property immediately, you were very likely to make a profit because the development had been transformed from a bleak piece of land into a finished product with landscaping, driveways, security and a guard house. Essentially, the finished product takes away much of the guesswork, and there’s a sector of the market who’ll pay a higher price for that level of certainty.” Sometimes, of course, the brave get burnt, so buying off plan can be very speculative. It’s vital to buy from a reputable developer, with a strong track record, a history of quality work, and an ability to survive and bounce back.

Today in South Africa, you pay a premium to live in a development or gated estate. “That’s why,” says Wakefield, “most people choose developments for reasons other than No Transfer Duty’. Invariably, you’re paying a higher price per square metre. Of course you’ll be in a newer property with modern finishes, but the prime driver is security/ lifestyle.

“Building costs are high at the moment, so that’s a contributor,” says Wakefield. “Take two identical pieces of land, one with a 40-year old house on it, and on the other, build an identical house. The input cost will be 25 to 30 percent higher in the new build. In rands and cents, on a R2m property, you’re getting it for R600 000 less. Which one would you buy?” 

That’s the challenge for developers. They can’t build the same size as these older properties, so they offer good value by giving you places to walk, bicycle paths, dams, indigenous plantings or eco settings, club houses, sporting facilities, and of course, a heightened level of security.

Wakefield says, “It’s not as black and white as No Transfer Duty being the drawcard. Developers are drawing buyers because of the secure lifestyle. If you’re prepared to pay more per square metre for a property in a new development, avoiding Transfer Duty isn’t why you signed on the dotted line.”