The current slump in the property market opens the way for innovative property solutions for buyers and sellers, says Meyer de Waal, a property attorney in Cape Town.
Some property owners have had to consider offers that are lower than the prices they paid some three to five years ago.
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Says Jono, I bought my house three years ago for R2 200 000 and spend another R600 000 on an electrical generator, and upgrading the kitchen and garden. When I sold my house in early 2019, I had to accept an offer of R400 000 below the price that I paid in 2016.
What Jono also lost was the transfer costs he paid when he acquired the property in 2016. He also would have paid the estate agent a commission of 5% when he sold in 2019, adding to his losses.
The 2019 general election was used as an excuse as to why the property market was underperforming, but now, with elections behind our back, we still do not see quick turnaround or improvement says de Waal.
One problem that still exists for home buyers is the struggle to raise a home loan with a financial institution. The impact of debt exposure and credit behaviour combined with the lack of property affordability are the main reasons for this.
UPFRONT CASH REQUIRED
Few property buyers have sufficient cash available to get their foot on the property ladder to cover a deposit and legal fees required.
Often a financial institution may require a deposit from the buyer to top up the difference between the approve home loan amount and purchase price.
If a bank approves a 90% home loan for a purchase price of R800 000, then the buyer must have R119 000 in cash available to finance the property transaction.
This R119 000 is broken down as follows: a 10% cash deposit of R80 000 required, as well as R20 000 for the fees payable to the transfer attorney and R19 000 payable to the attorney that registers the mortgage bond. Few home buyers have such cash available and thus aim for a 100% home loan says de Waal
FEW 100% BONDS APPROVED
Some buyers with no deposit may try to apply for a 100% bond that also covers all transfer and bond registration fees. However, as only 38% of 100% home loan applications are approved nowadays, buyers still require a substantial cash deposit to purchase a property, and are often unable to raise all the upfront amount required, says de Waal.
NOT SOLD – RENT OUT
Peter recently decided to sell his house purchased five years ago for R3,8 million. When he received offers of R3,5 million and below, he decided to rent out his property and move to his new home he build to be closer to his children and grandchildren. I was not prepared to accept such low offers and decided to wait for the market to recover, says Peter. With the rental market also in a slump, the best rental income he could secure was R28 000 per month.
Innovative property sales structures such as Rent2buy and or instalment sales can provide solutions for many sellers and buyers.
Based on a realistic valuation of his property of R3,8 million, if Peter could secure a Rent2buy buyer, then he would aim to secure a Rent2buy lease income of R38 000 per month for a two year period. This is R10 000 more than his current rental. The agreement can be structured that R28 000 of the payment of R38 000 rental per month will be regarded as “ordinary rent” and the extra R10 000 as a down payment on the purchase price. This would be a win-win for both the seller and the purchaser, says de Waal.
We started to investigate the rent to buy or rent to own concept way back in 2007. In fact, I bought my first TV set in 1985, when Teljoy offered a TV rental with a maintenance programme. What attracted me in those days was their quick response to maintenance problems as the television signal would be scrambled often and I did not have the know-how to fix it each time the screen went snowy. Four years later, Teljoy informed me that I became the owner, through their rent to own scheme says De Waal.
With Rent2buy for property, a structured process to meet all the requirements of a legal and binding sale agreement is required. The seller and purchaser agree on a purchase price that will be paid in the future.
BETTER PRICES ACHIEVED
We find that sellers are able to achieve better prices for their properties as they open the door many times for a home buyer who could not raise finance through a home loan with a financial institution.
TYPES OF BUYERS
The Rent2buy buyers that have been assisted over the past 12 years range from; buyers with sufficient cashflow to pay the monthly instalment, but may be self-employed, buyers with a slight credit scorecard problem, those with bigger credit scorecard problems, investor buyers whom a bank would regards as overcommitted, but still with sufficient cash-flow from alternative and non-conventional sources, buyers who just completed their debt review process or were rehabilitated but still with a zero or low credit score rating, as well as foreign buyers. Sometimes the buyer has sufficient cash to put down as a deposit, but not enough to cover the legal fees for the transfer and bond registration expenses.
Our Rent2buy transactions range from a R22 million farm sale, to a R150 000 house sold in Khayelitsha says de Waal.
The Rent2buy concept helped me secure my dream holiday home at Cape Infanta. I rented the house for the past seven years for weekend breakaways and family holidays. When I heard that the owner wanted to sell the house, I was lucky to be offered the opportunity to buy direct from the owner. As I was only to receive a dividend payment from our company in nine months and wanted to pay a substantial amount in cash, I was able to structure a Rent2buy agreement with the seller. We agreed on the purchase price I have to pay in nine months. Through the Rent2buy concept we signed a sale agreement as well as a lease and option agreement. I paid a deposit over to the seller to secure the transaction and show my good intent to the seller. For the next nine months I paid rent and had the use of the house for weekends and the December holiday period. I am due to take transfer in a month or two and cannot count my lucky stars with my Rent2buy transaction to secure the property some time ago, but only pay now in 2019 says Bennie.
Another innovative sales structure is also available under an instalment sales concept – also referred to as an ISA type of sale. An ISA agreement is governed by the Alienation of Land Act of 1968. The Act provides the guidelines for this type of sales structure. It also provides strong security for the purchaser as the ISA agreement is registered against the title deed.
We often use an ISA type of agreement when the purchaser pays a substantial upfront deposit to the seller. There are, however, certain issues to consider, such as the legal formalities prescribed by the Act, the application of the National Credit Act to such types of agreements as well as the impact of penalties if transfer duty is not paid within six months from conclusion of the ISA sales agreement says De Waal.
One example is Sindle, who found a buyer that does have R550 000 cash available to put down as a deposit to secure his property on the market for R2,4 million. With an ISA type of agreement, the deposit is released to the seller once the ISA contract is registered against the title deed in the deeds office. The buyer is not able to raise a home loan, but will be able to pay off the property within 4 years. The R550 000 is sufficient cashflow to Pat to use the funds to get his new business venture started.
2018 was a game changer for the Rent2buy concept. A fund manager approached us to provide funding for an approved property buyer says de Waal.
With Rent2buy Finance, we can now assist home buyers in the price range between R400 000 to R1,8 million in the Gauteng, Bloemfontein and Cape Town Metropole areas.
With finance now available, the sellers do not have to wait for one to five years before they are paid their purchase price. With the funding available, once a Rent2buy Finance buyer is approved and a property found and purchased, the property is purchased for cash from the seller and the transfer in the Deeds Office is registered without delay, usually within 60 to 80 days after signature.
Author – Meyer De Waal
Source – MDW Attorneys