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Guide to Property Investing

Property Investment for Beginners in South Africa

Investing in Property remains the safest long-term investment anyone can make. Here are some tips for anyone new to Property Investing.

auction bid sale judgment mallet

Property Auctions in South Africa​

Buying or selling a Property on Auction can be a daunting prospect, but we hope to guide you through the process, step by step. Properties on Auction can be Bought or Sold in several ways, the following is a guide to the types of property auctions, and the opportunities they represent:

Property Investment for Beginners in South Africa

By Werner Prinsloo

Investing in Property remains the safest long-term investment anyone can make.

Here are some tips for anyone new to Property Investing.

 

Investing in Rental Properties

Most people new to Property Investing will consider the Buy to Let option. This is the safest Property Investment that can be made but offers only modest returns.

The basic idea is to purchase a property for under market value in an area where relatively high rentals are paid. The property is then rented out, usually through an Estate agent. The agent will typically take a 10% commission on the monthly rental and should do a credit check on a prospective tenant. Most agencies will also collect the rent and do a pre and post rental inspection.

It is important to have a legal rental contract in place and to ask for at least 1 months deposit to cover any non-payment of rent, or to pay for any damage done to the property by the tenant.

Typically, the owner of the property will pay the monthly rates and levies, but the tenant will pay the municipal account. This must be clearly stated in the rental contract.

The average yield from rental Properties in South Africa is around 12 % per year. This is not including any unexpected costs, like doing renovations when a tenant vacates the property or paying special levies when maintenance is done by the body corporate.

In addition to the rental income, the property value should also increase year to year although in the current economic climate, we have seen little to no growth in property values.

It is advisable for anyone considering the Buy to Let investment strategy to learn more about becoming a professional Landlord. Several online courses and books are available to teach the fundamentals of becoming a successful Landlord.

 

Risks of Investing in Rental Properties

Although the return to the Investor can be decent there are potential risks involved.

The tenant can damage the property during their tenancy, this can erase any profits made by the Investor. We have helped several Landlords to sell their Properties when this happens. In these cases, the cost of renovating was so high that the owners were more than willing to sell the Property to our Cash Investors for below market value.

The property can also be vacant for many months before a suitable tenant is found. As the rental market is quite healthy at present this period should only be for a couple of months, but this will reduce the profit of the Landlord.

We have also seen many cases where the development has not been properly maintained by the body corporate, leading to falling property values. In some cases, the body corporate might institute a temporary special levy to do maintenance at extra cost to the property owner.

Investing in rental Properties only makes sense if the property is purchased for well below market value, and a reliable long-term tenant can be found.

 

Investing in Bank Repossessed Properties

This option offers a higher return than the Buy to Let option but can also have higher risks involved.

When Property owners are unable to pay their monthly bond, the property can be repossessed by the bank and sold at a Sherriff auction or can be bought by the bank itself and resold to the public.

In most cases, it is not possible to view the property prior to the Sherriff auction. The buyer will also be responsible for any outstanding rates, levies or municipal accounts.

Sherriff auctions can be risky to a new Property Investor unless a thorough due diligence is done prior to the auction to eliminate as much risk as possible.

In our experience Properties can sell for 30 to 50 % below market value at Sherrif auctions.

Bank Repossessed Properties will be advertised on the banks’ website, and typically are sold for around 10 % below market value.

 

Investing in Properties from Distressed Sellers

This investment strategy offers the highest returns with the lowest risk and is the focus of our company.

One of the major risks involved with Sherriff auctions is that the property cannot be viewed before placing a bid, exposing the buyer to potentially huge refurbishment costs. It might also be necessary to evict the previous owner of the property if he/she refuses to vacate the property.

By buying the property directly from a willing Seller, this risk is eliminated, as the Investor can meet the Seller and inspected the property before any contracts are signed.

Property owners contact our company directly asking for assistance to sell their property for cash, they understand that they cannot be paid full market value, as our clients are Property Investors looking to make a profit.

Although each deal is different and can be complex, the basic process of a deal is as follows:

  1. The property will be valued by our experienced Agents.
  2. An offer will be made to the owner based on their needs. The offer will depend on the property value, cash deposit needs by the Seller and the payment terms.
  3. The Investor will then receive a Report on the property with all relevant information needed to make an investment decision.
  4. The terms of the deal are then negotiated with the Seller.
  5. Contracts are prepared and signed when a Due Diligence process is completed.

Most of our clients make a return on investment of between 50 to 100% per year

 

Sources of funding for Property investment

Getting funding for Property Investments is the greatest obstacle to any new Investor. The following are some sources of funding that some of our clients have used successfully in the past:

 

Loans against Property

If you own a property that is unbonded, it can be used as collateral for a bank loan. We work with experienced bond originators that can help you get the best interest rates on a bond. This tends to be the lowest cost option to get a loan if cash is not available.

The term of the loan can be up to 20 years, making monthly bond payments relatively low. It takes two to three weeks to arrange a bond on a property.

If the property is not completely bond free but does have equity available, meaning that the property value is greater than the outstanding bond, the bank can agree to increase the current bond.

 

Seller Finance

This entails structuring the purchase of the property in such a way that the Seller is in effect giving the purchaser a loan to buy the property from him/her.

This can be done in a few ways; the Seller might be willing to accept an initial cash deposit from the Investor, the Investor will agree to pay the outstanding balance after transfer to the Seller. When the transfer takes place, a bond is registered for the benefit of the Seller, to protect them in case the Investor was not to pay the outstanding balance as agreed.

The Investor can then resell the property to a 3-rd. party at market value. The Investor will then use the proceeds of the sale to pay the outstanding balance to the Seller and the bond will be canceled.

We have structured several deals in this way, some cash will be needed by the Investor, but this is usually a relatively low portion of the property value. In our experience, most distressed Sellers need anywhere from R 100 0000 to R 300 000 as a cash deposit.

 

Risks of Property Investment

The following are  common risks in Property Investing:

 

Not doing a Due Diligence

The greatest risks in Property Investing can be reduced by doing a thorough Due Diligence, before signing any contracts or making any payments. Our company does this as a standard part of our service to Investors.

 

Accurate Property Valuation

Doing an accurate valuation of the property is the first step in any deal, if the valuation is too high, it will take longer to resell the property and the return on investment to the Investor will be lower.

Property valuation is not an exact science but it is critical to do correctly. Experience is a big part of doing an accurate valuation, but accurate sales data is also important. We use comparative market analyses, which in simple terms means comparing the value of the property with similar-sized properties in the immediate area.

This information is easily available from the title deeds office. This is especially useful when purchasing a sectional title unit. As units of the same floor size tend to sell for the same amount in a development.

We usually also get a second valuation from a local Estate Agent, that would have more knowledge of the property values in the area. Although we have found that these valuations tend to be higher than the actual market value, as the Estate Agents want to convince the Sellers to give them a mandate to sell the property.

 

Occupied Properties

The other risk we have found is that some sellers might not vacate the property when the transfer to the Investor takes place. We advise all our clients to only purchase a property that is unoccupied or where the tenant has signed a legal rental contract.

The legal cost of eviction can be high and will lengthen the time it will take to resell the property.

 

Refurbishment Costs

Unexpected refurbishment costs can reduce the profit when reselling the property. We make sure to get a least two quotes for any refurbishment that has to be done before any deal is concluded.

In most cases, only superficial work has to be done, to make the property more marketable. We do source properties that need extensive work, but most of our clients prefer to Invest in properties that need little to no work.

 

Conclusion

Investing in residential properties remains a safe and profitable undertaking, but experience and knowledge of the legal matters and risks involved are important. Feel free to contact Realty Investors at any time for a free consultation on any matter related to Property Investing.

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Property Auctions in South Africa

By Werner Prinsloo

Buying or selling a Property on Auction can be a daunting prospect, but we hope to guide you through the process, step by step. Properties on Auction can be Bought or Sold in several ways, the following is a guide to the types of property auctions, and the opportunities they represent:


Sales in execution

Also known as Sheriff auctions, these auctions are held when the owner of a property has fallen into financial trouble and has become unable to pay their bond to the bondholder.

The bondholder will be a commercial bank in most cases.

The Creditor/Bondholder will seek a judgment order from the court. Once the creditor has obtained an order, the debtor’s moveable or immovable property will be attached by the Sheriff and sold at auction to the highest bidder, to settle the debt owed to it.

Typically, the property will be sold for an amount equal to the outstanding bond, owed to the bondholder (bank).

In most cases, a representative of the bank will be present at the auction to accept or decline the offer made at Auction.

These auctions offer the best deals for Buyers, but also have higher risks, including the Buyer not being able to view the property before Auction and the Buyer possibly having to evict the occupants of the property.


Pre-Auction Due diligence

Obtaining access to the property to do a valuation or to estimate the refurbishment costs that might be needed, will not be possible in most cases.

If the occupants are the current owners, they would naturally be unhappy about their property being sold at auction.

Some owners are willing to sell the property before auction, as they could settle their debt and avoid having the Auction in the first place.

a Prospective Buyer could contact the owner of the property, before the Auction and make an offer to him/her. This could benefit both parties, as the owner will avoid the Auction and the Buyer could purchase the Property for below market value.

This approach has the bonus of giving the Buyer access to the property to allow him/her to ascertain if any refurbishment is needed.

Services like Lightstone or Windeed can be used to find the contact details of the property owner.

The attorney acting on behalf of the bondholder/creditor will be listed in the notice of auction, they will provide some info on the property including the amount of outstanding municipal accounts.

 

Terms of the Auction

The terms of sale and all the possible costs involved in the auctions will be known before the auction.

On or before the auction, all bidders will have to register and pay a refundable cash deposit, the exact requirements to register for the auction differ from Sherriff to Sherriff, as do the requirements to bid on behalf of a company or another person.

Although it is possible to bid on behalf of another person, this is not advisable, as the Sherriff can, under certain circumstances, hold the person placing the bid responsible for all terms of the Sale Agreement, even when acting on behalf of someone else.

Outstanding rates, levies, and municipal accounts must be paid by the purchaser, these amounts will be available before the auction, the Sherriff will provide an estimate of the outstanding accounts on the day of the auction, it is incumbent on the bidder to verify the exact figure of outstanding accounts by contacting the relevant local municipality, or the attorney representing the creditor/bondholder, before the auction.

The Sherriff will read out all the terms of sale before the auction starts.

After the auction is concluded, the Sherriff allows for a period, usually 7 days, when a higher bid can be made by any registered bidder. Only after this period will the Sale agreement be signed between the Sherriff and the successful bidder.

The successful bidder will have to pay a deposit of 10 % of the bid amount, plus the Sheriff’s commission. The cash deposit paid before the auction will be deducted from these amounts.

In most cases, the successful bidder has between 15 to 21 days to settle the outstanding purchase amount.

It is possible to settle the outstanding purchase amount by obtaining a bond, but it’s advisable to have cash available for the purchase. as the 10 % deposit will be forfeited if the balance of the purchase amount is not paid in the 15 to 28 days after the auction.

Sherriff auctions are non-suspensive, meaning that they do not allow for time to arrange mortgage finance after the fall of the hammer.


Current Occupants

These properties can have a tenant or the original owners as occupants.

If a rental agreement is in place, the tenants will have a right to continue with this agreement, even after the transfer of the property to the new owner.

In South African law, a rental agreement always supersedes a Purchase agreement.

If the occupant is the previous owner, they can be given the notice to vacate the property (usually the notice period will be the expected transfer date), unless they are willing to rent the property after transfer.

If the occupant is unwilling to vacate the property or continue with the existing lease agreement, it is up to the buyer to obtain vacant possession. This means that the buyer will have to apply to the High Court for an eviction order.

Evictions are regulated by the Prevention of Illegal Eviction and Unlawful Occupation of Land Act, so procedures must be followed carefully, giving special consideration to certain categories of people: the elderly, children, the disabled and households headed by women.

The process of evicting a tenant can be frustrating and costly, and represent the biggest risk to buying a property at a Sherriff auction, doing complete due diligence on the tenant/occupant, before the auction, of the property, will mitigate the risk.

The exact cost and time needed to evict a tenant will depend on each case.


Property in possession (PIP)

If the Bank’s reserve price is not met at the Sherriff auction, the Bank has the option to buy the property at the auction for the outstanding bond amount. These properties are then resold to the public.

These properties are advertised on the bank’s websites. It is possible to view these properties before making an offer and the Buyer can buy these properties using a bond.

Outstanding rates and taxes, levies, and municipal accounts are not paid by the Buyer.

Buying a Property in Possession is less risky than buying at a Sherriff auction, but the cost of the property can be higher.


Distressed Sale

These auctions take place before Sherriff auctions.

These auctions take place when the owner of the property willingly puts the property up for auction, to settle his/her outstanding debt to the bank.

These auctions operate on similar terms as Sherriff auctions.

These sellers of these properties can also be individuals emigrating, divorcing, or disposing of an unwanted inheritance.


Insolvent estates

An insolvent estate is an estate in bankruptcy.

A person can be declared insolvent after going through the sequestration process.

or

A deceased estate can become insolvent if the owner of the estate passed away and left behind a greater amount of debt than equity.

In both these cases, the estate must be sold off to repay debt.

These auctions are usually conducted by the local Sheriff, but the curator of the insolvent estate can appoint a private auctioneering company to conduct the auction.

These private auctioneering companies operate on the same principals as sheriff auctions, i.e. the buyer is responsible for outstanding levies, municipal rates, and taxes, water and electricity accounts, and the terms of sale is like that of a Sheriff auction.

Insolvent auctions offer the same opportunities and risks as Sherriff auctions.


Voluntary auction

These auctions are conducted when the owner willingly sells the property, the owner is not insolvent or has a judgment against them.

The commissions paid to the auctioneer tends to be higher than the commissions at sheriff auctions. Typically, this is around 10 %.

Since the seller has mandated the auctioneer to sell the property, it will not be necessary to evict the occupants of the property.

The terms of sale for these auctions differ from auctioneer to auctioneer and will be available before the auction. The terms of sale usually state that a 10 % deposit has to be paid after a successful bid has been placed, and in most cases allow for a period where any party registered for the auction, can place a higher bid, even after the fall of the hammer.

The properties can be viewed before the auction, and rates, levies, and municipal accounts will be up to date.

These auctions don’t offer quite opportunities Sheriff auctions do, but the risks to these auctions are very low.

 

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