Deposits on new developments

Purchasing a property off plan is often considered a good investment. But before putting down a deposit, it’s important to understand what this means…

January 26, 2017

What you should know before buying development property

Buying property from a developer offers buyers the opportunity to be the first occupant of a property, which eliminates many of the concerns about maintenance and structural integrity that can accompany the sale of an existing property. In addition, there is often the advantage of being able to select some of the finishes, providing new owners with a level of control over the style of the new property.

Sealing the deal with a deposit

To ensure the security of a new development, and as a show of commitment and goodwill on the part of the purchaser, most developers will require a deposit to be paid. This deposit is paid into the trust account of the estate agency or conveyancer involved in the development, who will invest the funds on behalf of the purchaser. This is done in line with the Fidelity Fund, which acts as an insurance against misappropriation of the funds.

After conclusion of the sale, the initial intention is for a transfer of property to take place upon completion of the construction. However, in some cases, the property sale may not be concluded. Depending on the wording of the agreement, the reasons for this cancellation and who is deemed to be at fault, the purchaser may or may not be eligible to receive the deposit back.

Termination of the purchase

Should the transaction not proceed due to the default of the developer, the deposit paid by the purchaser, including interest, will be fully refundable. This includes situations in which the project does not proceed due to insolvency of the developer, as the deposit is not held by the developer but rather in a trust. In addition, should the purchaser not be able to obtain the relevant finance to purchase the property, he or she cannot be forced to proceed with the transaction and the deposit paid in good faith will be returned in full.

However, in cases where the sale of the property does not proceed as a result of breach of contract by the purchaser, the seller or developer may retain the deposit and utilise it as compensation for costs associated with any waste or damage suffered as a result of the purchaser’s cancellation.

While an informed decision should be made when investing in an off-plan property, the payment of a deposit should not be a deterrent, but instead should simply be handled responsibly.

Written by Wessel de Kock

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