SA Home Buyer’s Guide
SA Home Buyer’s Guide This essential guide teaches you how home buyers can avoid expensive mistakes and how to deal effectively with sellers, estate agents, banks and attorneys 1|P a ge Buying a house is a huge financial investment and you do not want to make costly mistakes. The HouseCheck SA Home Buyer’s Guide teaches you what to look out for on your home buying journey. It also teaches you how to deal with estate agents, banks and attorneys. Important advice: Make sure that there are no costly hidden defects in your dream hous e Don’t jus t rely on the estate a gent or the seller – do your own homework. A HouseCheck home i ns pection report will alert you to all observed defects a nd provide you with a n estimate of the cost of repa ir. This i ncreases your negotiating power and puts you the buyer i n control of the deal. Make sure that you are not paying too much for the house Don’t jus t rely on the estate a gent – do your own homework. Fa ctual price analyses are easily a nd chea ply a vailable on the internet. This a nalysis takes into account the price history of your dream hous e and also actual sales prices in the vi cinity. Paying too much may hit you hard in several ways: You ma y not be a ble to afford to ma ke the necessary repairs You wi ll need a bigger deposit The cha nces of you getting bank a pproval for a bond are reduced. Your bond installments will be higher than they could be. Apart from a ffordability of the higher i ns tallment, paying too much will cost you a fortune over the bond term. You wi ll also waste money by pa ying extra in tra nsfer duty (ta x) a nd attorney’s fees TOP TIP: Always make your Offer to Purchase subject to a www.housecheck.co.za report The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 2|P a ge Welcome to the SA Home Buyer’s Guide At HouseCheck, we talk to South African home buyers every day a nd we know that most home buyers all wa nt the same s imple things: They want to find the house of their dreams where they can bring up their family and feel secure. They don’t want to be ripped off – many buyers (especially first time buyers) are very nervous. They are suspicious of sellers and people like estate agents, conveyancing attorneys, bond originators and bank officials. The aim of this book is simple. We ha ve written this book to help you the South African home buyer to better understand the ja rgon, complexities, a gendas of the real estate industry a nd to be a ware of the ma ny da ngers and traps which a wait the unwary buyer tra velling the road to s uccessful home ownership. Here’s what this Guide contains: 1. Checking out the House Even before you begin your search for the house of your dreams you s hould have your game plan worked out. And the most important part of the plan is: Don’t believe everything you a re told. Check out everything – a fter a ll you a re spending a l ot of money. This chapter will teach you about the i mportance of a home i nspection; valuation of the house; a nd also the l egal requirements concerning compl iance certificates, zoning a nd s o on. 2. The Financial Part We’ve put this chapter first because it i s the most important. It makes sense to understand what you ca n a fford and how much the bank will lend you. 3. Understanding how Estate Agents work There a re several chapters i n this important s ection a nd once you’ve read through them you will better understand estate a gents and so be a ble to use them to your own a dvantage. 4. The Legal Part Once you ha ve signed for a house then the lawyers spring i nto a ction. This chapter will help you to understand the role of the conveyancing attorney. Bes t wishes on your home buyi ng journey. Pl ease feel free to contact me. John Graham CEO HouseCheck [email protected]. Telephone: 083 3109 766 The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 3|P a ge Checking out the house • • • • • • How to negotiate the best deal Understanding property pricing A home inspection is crucial Consumer Protection Act and “voetstoots” Certificates of compliance Due diligence Once you have decided on the house you want to buy, chances are that you have fallen in love with the property and you can picture yourself and your family living there “happily ever after”. Now is the time to put your feelings to one side and unemotionally investigate all aspects of the property. Failure to do this may result in you making a buying decision which you will come to regret. Negotiating the deal When deciding to make an offer on a house, there are several factors for you, the buyer, to first settle in your own mind. The art of negotiating is deciding upfront which issues are negotiable and which issues are non-negotiable. If you haven’t thought that through upfront, then you are likely to be pushed around by the other parties involved in the negotiation (the estate agent and the seller). Without adequate thought and preparation you may end up making a deal that you will regret later. Here are the issues you need to think through: What is the maximum price I am prepared to pay for this house? This issue is partly decided by what you can afford (see Chapter on” Financial Part”) and partly on what you believe that the house is worth. What you believe the house is worth should be based on information obtained from the home inspection report and from the comparative market analysis. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 4|P a ge Separating the heart from the head. Buying a home is an emotional decision – because this is the place where you will live with your family; this is the place where you will relax with your friends. You need to recognise that your buying decision is clouded by romance – about how cool it is going to be to live in this house. Here is where you need to make a conscious effort to turn away from the heart and think with your head – you need hard factual information on which to base your decision regarding the maximum price you are prepared to pay. You need: Information as to how the suburb/area will really suit you – factors such as resale, crime, traffic, schools and shops should all be reconsidered. See section on Getting to Know Your Suburb. Information regarding the Seller’s asking price. How realistic is this price – or is the Seller just being plain greedy and hoping to take you for a ride? This is the time to take a good look at a Comparative Market Analysis (CMA) – see discussion on the CMA below. Information regarding the true physical condition of the house – see section on Home Inspections below. You need to know as much as possible about all of the physical defects in the house and how much it will cost to fix these problems. Without this information you cannot negotiate a fair price with the Seller. Information regarding the legality of the house. Are all the structures (buildings) on the property shown on the approved municipal building plans? Are there any zoning or servitude issues – see discussion on property due diligence below. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 5|P a ge Home Inspections To avoid expensive mistakes, anyone who is thinking of buying or owning property needs accurate information regarding the property they are interested in. They need answers to questions such as: • How long will the roof last before needing replacement or repair? • Are there any problems with damp in the walls, roof leaks or storm water run-off? • Are there any structural concerns regarding the foundations, walls and roof? • Are the visible cracks in the walls serious – does it mean the house will fall down? • Are the geyser, plumbing and drainage systems all in order? • Is the electrical system adequate and safe? • Have all of the improvements on the property been approved by the local authority? • Has the building been well maintained? • What maintenance and repairs are needed - immediately and within the foreseeable future? HouseCheck is the leading South African home inspection company which provides detailed and objective reports on the physical condition of South African homes. Examples of HouseCheck reports and further information on its services can be found at www.housecheck.co.za . The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 6|P a ge The role of the professional property inspector is to provide common sense, factual answers regarding the actual physical condition of the property. Using his training, extensive knowledge and experience, the property inspector will document all significant observable defects and assess and explain the significance of each defect. In South Africa it is a fact that most people still pay more attention to the condition of a second hand motor vehicle than to the condition of a property they are interested in buying. That doesn’t make sense when one considers the amount of money it takes to build, buy or maintain a property in South Africa. Get your home inspection quote here: http://fs.majesticinteractive.co.za/bf.php?fid=2081 . The Home Inspections industry The need for disclosure has seen the home inspection business grow fast in many parts of the world - thus becoming a vital part of the property industry. The same trend is now occurring in South Africa. According to the Norman Becker (The Complete Book of Home Inspection – McGraw Hill), in the United States of America no more than 1-2 per cent of homes sold in 1971 had a property inspection. Becker says that by 2000, more than 77 per cent of homes sold in the United States had a property inspection. The picture is similar in Britain (where property inspectors are called “property surveyors”). The property inspection industry in Canada, Australia and elsewhere is also growing. It makes sense! In South Africa there has been a very small property inspection industry for about 30 years. Now more and more South Africans are aware of their consumer rights and are starting in ever-greater numbers to make use of home inspectors when buying, selling, building or altering a property. Consumer Protection Act With the implementation of the South African Consumer Protection Act (CPA), from April 2011 property sellers and estate agent are now more aware of the need to be more diligent in disclosing the true condition of the property to potential buyers. This is because the CPA has made it relatively simple and free for aggrieved home buyers, in some cases, to take their complaints to the Consumer Protection Commissioner. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 7|P a ge Previously home buyers who felt they had been cheated had to find the money to pay for expensive legal action if they wanted to pursue a claim against a seller or an estate agent. With the advent of the CPA the notorious “voetstoots” (“as-is”) clause, which is still routinely built into property sale agreements, in theory no longer provides quite the same protection for sellers and their agents. However the CPA specifically does not cover most South African sellers of existing housing (these are the majority of sellers who are not selling in the “normal course of their business). Therefore buyers need to be aware that for practical purposes this “voetstoots” clause still provides effective protection for most sellers of defective property. If the Offer to Purchase (OTP) contains a voetstoots clause (and most OTPs do) then buyers should be very aware of the risks that they face if they do not make their offer to purchase “subject to a satisfactory home inspection”. If the seller does not make a living out of selling houses (and is just selling the family home) then – despite the advent of the CPA buyers of South African houses still have little or no recourse regarding property defects only discovered after the property transfer had taken place. If there is a voetstoots clause in the OTP then the only time a buyer may be protected is if the buyer can prove that a known defect was deliberately concealed and not disclosed by the seller or agent. If, in the court’s view, it was not reasonable to have expected the buyer to have noticed this defect when he/she viewed the property then the courts may award a buyer damages. However, it is difficult , expensive and time consuming for a home buyer to try and prove in a court of law that a seller has deliberately and knowingly ripped him/her off. It is therefore far, far better for a home buyer to avoid the frustration, hassles, stress and costs of legal disputes by ensuring that the home is properly inspected before the sale is finalised. That way the prospective buyer can make an informed decision. Buyers should always make their offer to purchase “subject to a satisfactory home inspection.” Although some agents duck the issue, for South African estate agents the rules of the property game have now changed. This is because the CPA places a responsibility on the estate agent to make full disclosure to the buyer of the actual condition of the property which is changing hands. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 8|P a ge The problem, of course, is that very often the seller and his agent are not even aware of what may be serious defects in a property. This may be because the seller and the agent have not climbed up onto the roof or crawled into the roof cavity. Sellers and their agents generally also lack the expertise to identify structural problems, damp and so on. This is all the more reason for you, the buyer, to get a professional home inspection report, before committing yourself to any house. A home inspection report allows you to buy with your head and not only with your heart. Some estate agents use a Sellers Disclosure to try and escape responsibility under the CPA. But that hardly helps if the seller is dishonest or if the seller honestly really does not know of some of the problems in the house (for instance inside the roof cavity). Better safe than sorry – because what you don’t know can hurt you! Therefore HouseCheck recommends that the prospective buyer should always include the following conditional clause to his/her offer: “This offer is subject to the purchaser obtaining an inspection report on the property from HouseCheck within xxx days of the final signature on this offer and is also subject to the purchaser being satisfied with the condition of the property, as detailed in the HouseCheck report -specifically with regard to defects documented in the HouseCheck report”. Comparative Price Analysis The asking price for a house should be closely linked to the actual prices paid for similar houses nearby. A good estate agent will have researched this information and counselled the seller regarding a realistic asking price. The experienced estate agent should know what is a fair price by understanding local market conditions. This knowledge should be backed up with computerised research on actual prices achieved in the neighbourhood. This research is usually known as a Comparative Market Analysis. However, quite often the seller is greedy (or unrealistic) and the estate agent, desperate to be given a mandate to sell the house, will ignore the research information available and agree to market the house at an inflated price. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 9|P a ge If the estate agent has not already provided you the buyer with a Comparative Market Analysis then you should get hold of an independent market analysis report before entering into price negotiations or actually making an offer. Such reports are available from many companies in South Africa such as www.lightstone.co.za , www.property24.com and www.saptg.co.za . The fee is relatively modest (around R60). If you provide the street address, erf number and the current owner’s details, you should be able to download a report which will show you: Detailed information on the target property including: Erf size, current legal owners, when purchased, purchase price and bond holders. Actual sales of nearby properties, including a map showing the location of these properties, the erf size, the distance of each property from the target property and the date that these properties were last sold. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 10 | P a g e Above are two extracts from a sample Comparative Market Analysis report. The top picture shows a screen shot of the target property information and the picture above is a screen shot showing a map and table of nearby properties including the size of these properties, the dates they were last sold and the sale price. One weakness of most comparative market analysis research is that it does not take into account the improvements on each of the properties – that is the type, quality and size of the house and other structures. This is a HouseCheck inspection report is vital. Certificates of compliance The following certificates of compliance (CoC) must normally be provided by the Seller prior to transfer of the property: Electrical compliance certificate: An electrical CoC is issued after the electrical installation has been inspected by a licensed electrician and all defects corrected. Fraudulent electrical CoC’s are a problem in South Africa. This is because no-one routinely checks to confirm that the electrician issuing the CoC, is licenced to do so and no-one routinely checks that the electrical installation certified in terms of the CoC, is in fact safe and legal. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 11 | P a g e A competent home inspection report should highlight any observable problems with the electrical installation – such as bare wiring, broken switches or unsafe distribution boards. If the Buyer has any doubts regarding the authenticity of the electrical CoC, then the Buyer should demand that the CoC and the installation should be audited by an approved Electrical Inspection Authority. Some “bakkie contractors” are responsible for the growing number of CoC’s being issued for electrical installations. Many of these installations have not been personally and adequately checked by the person registered at the Chief Inspector, Department of Labour. The problem for the Buyer arises because, since March 2009, the law requires owners of properties to have a valid electrical CoC on hand at all times, on change of ownership. This is because faulty electrical installations are life endangering and are also the cause of most house fires. If the property owner, knowingly or unknowingly, has obtained an electrical CoC for a defective installation, then the responsibility for this defective installation passes to the buyer on transfer. If the buyer then resells the house a few years later, he may then have an expensive shock when a properly qualified electrician, called in to issue the new CoC, condemns sections of the electrical installation. HouseCheck is a “general practitioner” and during their inspections of the physical condition of a house, HouseCheck will comment on observable problems with the electrical installation. But HouseCheck does not test the installation for safety and legality. This is left to the “specialist”, the licenced electrician who must issue a CoC. Because many electrical CoC’s are fraudulent the most prudent course for a home buyer is to include in the offer to purchase, a requirement that a “verified” electrical CoC must be provided by the seller, prior to transfer. This means that the local provincial electrical inspection authority will be asked to audit the CoC. This involves a re-check of the entire installation by the authority. If the audit reveals problems, then the authority will require the electrician who issued the CoC, to return and sort out the faults at the contractor’s expense. A re-inspection by the authority, must follow after the faults have been rectified. Costs can be claimed from the seller, who normally is responsible to provide the certificate in terms of the civil agreement. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 12 | P a g e In cases of fraud, criminal prosecution of the “electrician” may also follow. In extreme cases the authority can also require the municipality to shut off the power supply to the house until the faults have been corrected Buyers would be wise to insist on a verified audit of the CoC in order to protect themselves. They should also ensure that once the transfer has gone through, the conveyance attorney hands them the original electrical certificate of compliance. Property owners have a legal responsibility to be in possession of an electrical CoC and must be able to produce it on demand. Under the Consumer Protection Act estate agents can also be held liable for faulty electrical installations and defective CoC’s. In many cases estate agent, as a service to sellers, appoint the electrician to do the CoC. This is sometimes also part of a package deal where the same company provides the electrical CoC and a pest control clearance. It is often common practice for estate agents to receive a commission for referring this work. The best way for buyers to protect themselves, is to ensure that the property is thoroughly inspected prior to purchase and that all inspections and certifications are “squeaky clean” and are carried out by properly qualified, objective professionals who are not beholden to the estate agent or to the seller. Entomologist clearance certificate: As a condition of the bond, banks normally insist on a certificate from a registered entomologist, stating that all timbers are free of wood destroying pests. Tip for Buyers: Ensure that the Offer to Purchase document which you sign includes the phrases "wood destroying insects and organisms". Some estate agent's documentation omits the phrase "and organisms". "Organisms" are fungi which sometimes infest and destroy the timbers of a house in damp coastal areas. "Insects" are wood borer beetles and termites. Plumbing compliance certificate: At the time of writing (December 2011) a plumbing certificate of compliance was only required in the Cape Town metro. In Cape Town the plumbing installation must be inspected by a licensed plumber for compliance to the regulations and to certify there are no leaks and that no storm water is being discharged into the municipal sewers. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 13 | P a g e It is possible that that in the light of the water shortages in South Africa, the requirement for a plumbing CoC will become part of the property transfer process countrywide. Gas installation compliance certificate: A rapidly increasing number of homeowners are reacting to rising electricity costs by installing gas-powered energy systems. However, many Buyers are unaware of pre-sale legal requirements regarding gas installations. Although it is very seldom mentioned in deeds of sale and although estate agent and even attorneys are often not aware of it, an amendment to the South African Occupational Health and Safety Act in July 2009 stipulates that anyone selling a home in which there is a gas installation, has to get a certificate of compliance from an accredited gas authority. A copy of this certificate must be handed to the Buyer. Buyers should insist on getting a copy of the gas certificate before they take transfer and estate agent should start including the requirement for a gas certificate of conformity in their documents as a condition of sale. Due diligence investigation There are a number of potential legal problems involved in buying a house. These include title deed conditions, servitudes and confirmation that the structures (buildings) on the property have been approved by the local authority (municipality). Title Deed Search It is a good idea to appoint a conveyance attorney to conduct a search at the Deeds Office and check the title deed of the property. Title deeds are endorsed with changes in ownership, mortgage bonds and all other property related transactions. The Deeds Offices continually update their records and a conveyancer can obtain a Deeds Office printout which will show the most current information listed against the property, including: The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 14 | P a g e • Servitudes. These are “rights of use” over portions of the property which have been granted to other parties. Servitudes could, for example, allow a municipality to install and maintain a sewer or underground cable across a section of the property. Such a servitude would almost certainly restrict the property owner from building on the section of the property which is subject to the servitude. Another possible servitude may grant a neighbour to drive over a section of the property – traversing rights. Expropriation notices. Sectional title information, such as exclusive use areas • Mortgage bonds Approved plans All permanent structures on a property must have been approved by the local authority (municipality). This is to ensure that all buildings comply with the National Building Regulations and also with local by-laws. In some towns and cities in South Africa controls have been lax over the past decade or so and many houses have extensions and alterations which have not been submitted for approval. This may involve the conversion of a garage into a granny flat or the addition of a new bedroom or bathroom. They may also involve new buildings across the “building line” or over a servitude. Such structures which have not been approved are illegal. If a buyer takes transfer of a property which has illegal structures, the municipality may require that plans be submitted and approved for these structures, or the municipality may require demolition. In either case, illegal structures can become a considerable financial cost to the buyer who may then find it difficult and expensive to sue the seller for damages. It is wise for the buyer to make it a condition of the sale that the seller provide copies of approved plans to prove that all structures on the property are legal. Zoning Zoning is a system adopted by municipalities which allows different uses of property in different areas of the city or town. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 15 | P a g e For example, the area near the centre of town may be zoned “business use”; other areas may be zoned for factories; other areas for residential use. Certain zones may allow for high-rise buildings and other only for single or double storey structures. Zoning can also apply to the “coverage” and “bulk” – this refers to the portion of the land which can be built on and also the number of storeys which are allowed. The municipality has also zoned individual properties as “special use”. For instance, on application the municipality may allow a house in a residential area to be used as a commercial guest house. Such special use departures are almost always only granted if the neighbours give their approval and are often also only for a limited period. The permission may also be granted to the owner and is not necessarily vested in the property. Understanding the terms of the special use departure zoing would become very important if the buyer was buying a guest house as a “going concern” only to discover later that the guest house rights were not permanent. What to watch out for: • Sellers or estate agents who are unwilling to agree to a home inspection report (paid for by the buyer). Remember that a home inspection report should balance the protection which the voetstoots clause gives to the seller. Alarm bells should ring if the seller or agent tries to discourage or forbid a home inspection report. In such a case suspect that there may be something they wish to hide. • Electricians, entomologists, gas installers or plumbers who offer a “one-stop service” of compliance checks through the estate agent. Make 100 per cent sure that the compliance checks are thorough and properly done. Safety (sometimes lifethreatening) issues can be involved. • Insist on seeing a copy of approved plans for any structures or alterations to the house which appear to have been completed at some later date to the original construction. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 16 | P a g e Finding the Right Property Where properties are advertised Getting to know your target suburbs Making contact with suitable estate agents Where properties are advertised So you have decided to buy a home. Where will you find the home of your dreams which also matches your pocket – how much you can afford? Newspaper property supplements and free property give-away magazines have thousands and thousands of properties advertised each week by hopeful estate agents. The challenge is to sift through mountains of print to hopefully find a house which may interest you. Even then: You can’t always trust the estate agent’s description? “Charming cottage – needs tender loving care”. Translation: “Shabby to the point of falling down and which the seller is trying to off-load on some poor sucker!” A better bet is the internet where you can use some of the property websites. Here is a selection: www.property24.co.za; www.iolproperty.co.za and www.privateproperty.co.za to search for houses in suburbs which you are interested in which have houses which you can afford. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 17 | P a g e Using the internet, rather than the printed media helps you to quickly filter out the irrelevant suburbs and houses. An internet search will also give you much more information than a newspaper search. Instead of paging through newspapers and searching estate agency by estate agency, on the internet you can search all available properties by suburb and price band. You can also normally view multiple pictures of each house and sometimes also see a “virtual tour”. A virtual tour is a set of linked photos which lead you through the property. The estate agent usually provides much more information on the internet than is possible to provide in a newspaper advert. You may even be told how much the municipal rates are, local amenities and so on. Getting to know your target suburb You should spend a couple of evenings and weekends browsing the internet property sites. You will start to get a feel for different suburbs, the size and type of houses in each suburb and also the price ranges for suburbs. Take a drive through your target suburb at different times of the day and week. Take note of things such as traffic patterns (especially around schools), parking issues, noise levels and pedestrian access to taxi routes, bus stops and train stations. Buying a house is very, very different to buying a car. A motor car costs about the same whether you buy it in East London, Cape Town or Johannesburg. Not so a house. Estate agents will tell you that the three most important factors for pricing a house are: Position, position, position. This means that prices for similar houses vary hugely - depending on the area. A similar-size house with a view that you could pick up in East London for R2.5-million, will probably cost you R5-million in Johannesburg and maybe R6 to R8-million in Cape Town. In Soweto or Guguletu you could probably buy a house of similar size and quality for R1-million. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 18 | P a g e Making contact with suitable estate agents Once you have a feel for which suburbs you would like to live in – and which suburbs you can afford to live in – then it’s time to do a bit more in-depth research into the suburbs you fancy and also start looking at actual houses. There are sound reasons for using the services of a good and professional estate agent in your search for the ideal house. Therefore your next step is to make contact with one or more estate agents. There are two ways to make contact with the estate agent who will work with you in finding the right house. You can make contact via email or telephone with the agents who appear to have the best housing “stock” in the neighbourhoods which you are interested in. You can also start visiting “show houses” on Sundays to view a sampling of houses in your chosen suburbs and to make contact with estate agents. What to Watch Out For Do your own research on your target suburbs – don’t just rely on the estate agent. Find out things like: Traffic congestion and travel times – between this suburb and where you work and where your children go to school. Neighbours can usually give you this information. Visit briefly the surrounding neighbours so that you can take a view whether you would like to live next door to these people. Do they have barking dogs, how pleasant are they? Crime statistics – is this area safe, or is it a crime hot spot? Talk to the neighbours, local security companies active and also chat to the police. Try and find one or two estate agents in whom you have confidence and who seems to be making an effort to understand your needs and wishes. If possible work through these agents and once they understand your needs encourage them to find you the house of your dreams. Stock: Estate agents are like shop keepers or farmers. Their “stock” is the houses that the agent is working on selling. Normally this means that the agent has secured a “mandate” from the seller. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 19 | P a g e Mandate: Estate agents normally only sell houses for which they have a “mandate” from the Seller. This means that the Seller and the estate agent have agreed to certain conditions – such as price and commission. The Seller has therefore given the estate agent the authority to try and sell the house. “Mandates” can be “sole mandates” (exclusive to that agent); “joint mandates” (limited to two competing agents), or “open mandates” (a variety of estate agents who have been given authority by the Seller to try to sell the house. Show House: Show houses in South Africa are usually held on Sunday afternoons. They are advertised in the weekend newspapers and there is normally also street signage and bunting or banners outside the house. Show houses give buyers the opportunity to walk through houses for sale at their leisure and without pressure. Show houses also help estate agent make contact with potential buyers. Very often, once the estate agent understands more about each buyer’s needs, the estate agent will then attempt to sell that Buyer another house, which more closely matches their needs, rather than the original show house. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 20 | P a g e Dealing with estate agents • • • • What makes estate agents tick? Who are estate agents? Estate Agent’ Affairs Board The estate agent process Most houses in South Africa are sold with an estate agent acting as the “middle-man” between the buyer and seller. It is therefore important for you as the Buyer to understand as much as possible about estate agents and what makes them tick. The more you know about estate agents the better you will be able to look after yourself and to make sure that the buying decisions which you make are actually in your own interest. If you find the right estate agent who clearly has your best interests at heart, it can make an enormous difference on your home buying journey. However, it is always important to remember that most estate agents whom the buyer will meet have been appointed by the Seller. Therefore, unless they prove themselves to the contrary, estate agents should be regarded as “seller’s agents”. While many estate agents are true professionals who operate with high ethical standards, home buyers should be cautious when dealing with estate agents. Buyers should be aware of the possibility that the estate agent has a different agenda. Remember that, although most estate agents are honest, ethical and knowledgeable, there are unfortunately a few estate agents who may be more interested in a quick sale, than really worrying about the buyer’s best interests. The estate agent may be the buyer’s best friend – but not always. The watchword is: Be cautious. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 21 | P a g e Most buyers, who only buy a handful of houses in a lifetime, should also remember that the estate agent is usually much more experienced than the buyer. This can be dangerous if the estate agent has a different agenda to the buyer. In most cases the estate agent has been appointed by the seller who is the agent’s ultimate client. In some cases there will be two estate agents – one representing the seller and the other the buyer. But in most property deals the seller’s agent is often also the person who tries to represent both sides. In some cases this just does not happen and that’s not surprising when it is remembered that most estate agents earn commission only. In other words, they are only paid after the house has been sold. The buyer should always keep in mind that: Usually the higher the price which the estate agent can get the buyer to accept, the higher the estate agent’s commission! Estate agent’s commission: South African estate agents almost always earn commission only – rather than a flat fee per deal, or a salary. These commission rates can be very high – up to 7 per cent for estate agents and even higher for auctioneers – usually 10 per cent. Some sellers will try and force estate agents to negotiate a lower commission rate – especially if the offer price is less than the seller’s asking price. Estate agents often try to avoid disclosing to buyer what commission they will earn from the seller. Actual commission rates for estate agents vary from deal to deal, but usually average between 3 and 5 per cent of the sales price of the house. At a rate of 5 per cent, that translates into R50 000 commission for the estate agent (excluding VAT) for every R1-million sales price. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 22 | P a g e Who are estate agents? Estate agents are mostly self-employed property professionals who work for “principals”. The Principal carries some or all of the costs of running the estate agency business. This includes costs such as office rental, switchboard and newspaper advertising. The estate agent splits the sales commission on each deal with the Principal. Some agents share their commission 50-50 with the Principal, others 60-40. With Remax the split is around 90-10, but at Remax the estate agent carries most of the business costs and pays the Principal a “desk fee”. More experienced and productive estate agent can usually negotiate a more favourable commission split with their principals. The Principal may be a small independent business, but more likely the Principal is the “Licensee” or “Franchisee” of a large brand name such as Remax, Pam Golding or Seeff. The Principal normally pays licence fees or royalties to the brand owner. Most estate agents are at heart freelance property sales consultants – they will work for the highest bidder – namely the Principal. Estate agents sometimes move fairly frequently between agencies. They are lured by the Principal who agrees to the best commissionsplitting deal and who’s brand is most likely (in the estate agent’s opinion) to improve and enhance the estate agent’s standing with potential clients. Estate Agency Affairs Board Estate agents (and their principals) fall under the Estate Agency Affairs Board (EAAB) – this is a government body which exists to regulate and govern the activities of estate agents. By law all estate agents and estate agency principals must buy from the EAAB a “Fidelity Fund” certificate. Without this certificate estate agents are not allowed to operate and (theoretically) to receive commission from property sales. The EAAB has been badly run (written late 2011) and some estate agents have been operating without a valid fidelity fund certificate – either because the inefficient EAAB has not processed their applications or because the estate agent never bothered to apply for a fidelity fund certificate. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 23 | P a g e One function of the EAAB is to regulate and audit the “trust accounts” of estate agencies. By law all estate agencies must operate a “trust account” – this is a bank account which is supposed to be subject to strict controls. Trust Accounts: The Estate Agency Affairs Act (1976) says that all principal estate agencies must operate a trust account with a registered bank. This account has to be identified by the bank as a “trust account established in terms of the Act” and is not supposed to be used for any other purposes than for the holding of client’s money (typically Buyer’s deposits) in trust. The fund must be audited (checked) by an independent registered auditor each financial year and a “clean” audit certificate must be sent to the EAAB, which is not supposed to issue any Fidelity Fund certificates to any estate agent associated with that principal before the annual audit clearance has been received by the EAAB. This means in theory that estate agents can only operate if the financial affairs of their agency are in order. Attorneys also operate “trust accounts” which seem to be better policed than some estate agent trust accounts. Buyers are advised to insist on paying their deposits into the transferring attorney’s trust account, rather than into the estate agent’s trust account. The process is “cleaner” because the transferring attorney needs the deposit money anyway – to pay out to the sellers when the property is transferred. By using the transferring attorney’s trust account the buyer is probably reducing (but not eliminating) the chances that some dishonest person will steal the deposit prior to transfer. The EAAB also regulates the qualification standards for estate agents and is currently in the process of ensuring that all estate agents must re-qualify and prove their competence. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 24 | P a g e Raising educational and training standards for estate agents is a very positive move. But the effect of the new qualification requirements for estate agents is having the effect of driving many older agents – who don’t have the energy or will to re-qualify – out of the industry. While a lot of experience is being lost, this is probably a good thing which will result in the estate agency “profession” being modernised. Fidelity Fund Certificate: This is a guarantee fund established in terms of the law by the EAAB. This fund exists to refund Buyers and any other members of the public who have been defrauded of their money which has been deposited into an Estate Agency’s “trust account”. Estate agents pay into this fund annually via the fees which they pay for their Fidelity Fund certificates. A portion of any excess interest in the “trust account” - which has not been paid out to clients - is also supposed to go into the EAAB Fidelity Fund. What to watch out for: • Watch your back - remember that there are two other parties to the deal – the Seller and the Estate Agent. Both of these parties may have a different agenda to you. They want to sell as quickly as possible for as high a price as possible. Agents and Sellers therefore do not necessarily have your best interests at heart. • Pay your deposit into the transferring attorney’s trust account, not into the estate agency’s trust account. It is cleaner and your protection is probably better. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 25 | P a g e The Estate Agent Process • • • • How agents find stock Aspects of the sales mandate Commission pitfalls Closing the deal There are, of course, many possible variations to the process outlined below, but in general this is how a property deal comes together in South Africa: Step One: Estate agent finds a potential seller This may be done in a variety of ways: Experienced agents, who specialise in an area or suburb, often, sell the same house two or three times during their career. The average period of ownership for a South African home is around seven years, so good agents will often sell a house to a Buyer, then keep in touch with that Buyer and when the Buyer becomes a Seller then the Agent will sell the house on to the next buyer. In this scenario the professional estate agent often knows more about the house that the Seller. Sometimes estate agents find new “stock” by canvassing – knocking on doors, dropping pamphlets in post boxes, or by telephoning likely sellers. Likely sellers are people reaching retirement age or business people who are being transferred to another city. There are also times when estate agents will be contacted directly by Sellers – normally because the estate agent is either known to the seller or has built up a good reputation in the neighbourhood. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 26 | P a g e Step Two: Estate agent secures a “mandate” A mandate is a written authority which the estate agent obtains from the Seller. It is very important for buyers to understand the concept and implications of the estate agent’s mandate. A mandate is a contract between the seller and the estate agent which gives the agent certain legal rights as regards the sale of the seller’s house. These contractual rights, which protect the estate agent, also pose a potential risk to both the seller and to potential buyers. There are basically two types of mandate: A sole or joint mandate which gives one or two estate agents exclusive rights to market the property during the “mandate term”. During this period only the agents holding the mandate may act as estate agent as regards the sale of the property. During this time the agent is entitled to any commission which becomes due as a result of the sale of the property. This means if another agent during the terms of the sole mandate introduces a buyer and a sale is concluded then the seller may be liable to pay out two commissions – one to the mandated agent and a second commission to the agent who introduced the buyer. Multi-listing: Many agents are part of multi-listing agreements where one agent holds the mandate but opens the property to other agents on a controlled basis. This means that the property is exposed to more potential buyers and in the event of a sale the introducing agent and the mandated agent share the commission on a pre-agreed basis. The advantage for the seller is having one agent as a point of contact while at the same time having a number of agents showing the house to potential buyers. If a buyer was introduced to a property by the mandated agent during the mandate period and then bought the property later, after the mandate had expired, through another agent, then the first (mandated) agent may still be able to claim commission from the Seller if this agent can show a court that he was the “effective cause” of the sale. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 27 | P a g e An open mandate where the seller mandates a number of estate agents to try and sell the property. Step Three: Estate agent finds a willing and able buyer The estate agent effectively earns his commission from the seller by introducing to the seller “a willing and able buyer”. In legal terms this means that the buyer shows he is “willing” by making a written offer to the seller at a price which matches the mandated price. The buyer must also be “able” – legally and financially – to fulfil the contract. If the seller, for some reason, rejects the offer of the “willing and able” buyer introduced by the mandated agent, then the mandated agent will almost certainly claim commission from the seller. Reasons for rejecting such an offer may be that the seller has changed his mind and decided not to sell. Or perhaps the seller has received a higher offer from some other party. Even though in the cases discussed above it would be the seller, not the buyer who would fall foul of the mandate and be liable for the payment of commission, it is useful, and important, for the buyer to understand these possible scenarios when using the services of an estate agent. The buyer may find himself liable for a commission claim if he views a house during a mandate period and then subsequently buys the house through another agent after the mandate has expired. A buyer should always tell an agent upfront if he has already been shown a particular house by another agent. If the buyer makes this declaration in writing then the buyer would absolve himself and it would be up to the agents and the seller to sort out the commission. Step Four: Estate agent successfully closes the deal Almost every property deal is negotiated. The seller asks one price and the buyer offers a lower price. The estate agent then acts as the “middle man” and attempts to persuade seller and buyer to agree on price and other terms such as: • Size of deposit and date on which the deposit is to be paid. • Conditions regarding the obtaining of a bond. • Occupation and transfer date. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 28 | P a g e • Occupational rental. • Movable items (curtains, pot plants, pool equipment) and so on which is to be included in the sale. • Who the transferring attorney (conveyancer) will be. If the asking price is being negotiated downwards then the seller may ask the agent to “come to the party” by agreeing to also reduce commission. Such negotiations generally involve a lot of to-ing and fro-ing by the agent with the offer becoming a counter offer and sometimes a counter-counter-offer. It is important for the buyer (and seller) to recognize that every time the written terms of the offer are changed the offer effectively becomes a new offer – which can be accepted or rejected by the other party. Once the deal has been agreed and signed (make sure that all alterations are included and have been signed and counter-signed), then the agent will deliver the document (which is now a deed of sale) to the nominated conveyance attorney. At this point the various issues, on which the deal has been made conditional, are dealt with. These issues would include: • A home inspection – if the buyer has been wise and made a favourable home inspection report a condition of the sale. • Application and granting of bond finance. • Obtaining by the seller (or his agent) the various clearances and certificates of compliance required in terms of the deed of sale. What to watch out for: • You need to try and understand the estate agent’s agenda. How open and transparent are they? Have they shown you a comparative market analysis? Do they recommend that you obtain a home inspection report? The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 29 | P a g e • Check for a voetstoots clause (“as is”) clause in the offer to purchase. You will almost always find a voetstoots clause in the contract. Remember that a voetstoots clause is there to protect the seller (and their agent). You, as the buyer therefore needs to insert a balancing clause to protect yourself . You should always insist that the sale is subject to a satisfactory home inspection report. You as the buyer, who is paying for the report, should be the sole judge as to whether the condition of the house, as revealed in the home inspection report, is “satisfactory”. If the seller or agent objects to such a home inspection clause, then immediately suspect that there may be some condition of the house which they want to hide. • Insist that the certificates of compliance (the responsibility of the seller) have been obtained from reputable people and that the electrical and gas installations have been properly checked for safety and legality. Make sure that the conveyancing attorney hands you these certificates at time of transfer. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 30 | P a g e • The Financial Part • How much cash do you need upfront? • What all will you have to pay for? • What size bond do you qualify for? Upfront cash needed Nowadays banks are very cautious when lending money. This means that unless you have recently won the lottery and can buy the home for cash, it is an important first step in the home-buying route to find out how much money a bank will lend you to buy your house. Apart from the size of the loan you are likely to get from the bank, you also need to know whether the cash you have already saved up is enough to cover your deposit and also quite a number of extra costs which buyers often do not take into account. Deposit: First, of course, is the cash deposit which the bank will want as a condition for granting a loan (bond). It is unusual now for a bank to agree on a 100 per cent loan. Generally, depending on the bank’s risk assessment, a deposit of anywhere between 10 per cent and 25 per cent will be required. Working on 20 per cent, this means that if the price of the house is R1-million then the bank will ask you to put up a R200 000 cash deposit in exchange for the bank lending you R800 000. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 31 | P a g e There are also other costs involved, when purchasing a home. Most bank and estate agent websites will have a “Cost Calculator” on their website to help you work out your extra costs – over and above the price of the house you want to buy. Here is a link to the Absa Bank website to give you an idea. Transfer Duty: This is a tax payable by the buyer of the property to the Government. Transfer duty is calculated on a sliding scale depending on the purchase price of the house. At present this tax only kicks in above a purchase price of R600 000. From o R 600001.00 to R1-million, transfer duty of 3 per cent is payable. For instance on a purchase price of R700 0000 transfer duty will be 3 per cent of R100 000 = R3 000. o Above R 1-million to R 1.5-million transfer duty is R 12 000 plus 5 per cent of the amount above R1-million. So for instance on a purchase price of R1.2million, transfer duty will be R12 000 plus 5 per cent of R200 000 = R12 000 plus R10 000 = R22 000 transfer duty payable. o R 1.5-million and above transfer duty is R37 000 plus 8 per cent on the amount above R1.5-million. Therefore on a purchase price of R3-million, transfer duty will be R37 000 plus 8 per cent of R2-million = R37 000 plus R120 000 = R157 000 transfer duty payable. If you buy the house through a company, close corporation (CC) or a trust, then the transfer duty is now (since February 2011) the same as for an individual. Attorney’s fees: These are fees charged by attorneys for registering the property transfer and for registering any mortgage bond involved. These fees, which are normally paid by the Buyer, can sometimes be negotiated – especially if the Buyer is able to arrange that the same attorney appointed by the bank to register the bond, also handles the conveyancing. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 32 | P a g e Remember that the Seller usually appoints the conveyancing attorney and the bank appoints the attorney who registers the bond. However, it is often possible to arrange that the same attorney does both jobs. Not only does this streamline the legal process, but it also opens up the possibility for negotiating lower legal fees. If you, the Buyer, are able to influence or control the appointment of the conveyancing attorney, then not only is it possible that you may be able to negotiate lower fees, but you will also have peace of mind that this attorney is more likely to protect your interests – because you appointed charged by an attorney for handling the property transfer from Seller to Buyer – that is, registering new ownership details at the Deeds Office. Attorney’s fees to do this work are calculated on a sliding scale, starting at a minimum of R3 200 for a property worth R80 000 or less, and going up to R12 500 for a house worth R1-million and R22 500 for a house worth R3-million – and so on. The conveyancing attorney will also make a charge for “posts and petties” to cover his incidental administration expenses. Bond registration fees: These are fees charged by the attorney who registers the mortgage bond with the Deeds Office. This attorney is appointed by the bank from a “panel of attorneys” who are accredited with the bank to register bonds. These fees start at R2 500 for bonds up to R100 000 and rise on a sliding scale depending on the value of the bond. For instance an attorney will charge R9 400 for registering a bond of R1-million and R13 400 for registering a bond of R3-million. Again, there will be an additional charge for “posts and petties”. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 33 | P a g e Deeds Office fees: These are fees charged by the Deeds Office for registering the property transfer and for registering the bond. Both sets of fees are calculated on a sliding scale – up for a maximum of R1 000 each for the property transfer and for the bond. Transferring a property of R2-million Example: Here is an example of the cash you will need to buy a R2-million house with a 10 per cent deposit of R200 000. Deposit R200 000 Transfer Duty R77 000 Conveyance fees (including sundries and VAT) R20 678 Deeds Office Fee R600 Bond Registration Fees R15 486 Total cash required R313 764 The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 34 | P a g e Getting a Bond Credit Record According to the National Credit Regulator there were 19-million “credit-active” consumers in South Africa in September 2011 and of these only 10-million were in good standing. This means that nearly every second economically active South African has a bad credit record. These people will find it difficult or impossible to convince banks to provide them with a mortgage bond. This is bad news if you want to buy a house and have a poor credit record, but good news if you qualify for a bond. The very fact that so few South Africans can get a bond means that those buyers who still have access to bond finance, have a lot of negotiating power with often desperate sellers. If you have ever borrowed money and failed to pay your debt on time then you could be blacklisted. The credit blacklisting could result from a bank loan, credit card, store card or from a mortgage bond. Information about every South African’s debts is held by credit bureaux who record information about each different account you have opened. This data includes who the lender is, the outstanding balance and a history showing whether you have made your repayments on time and if any have been missed. Late payments or missed payments are ‘red-flagged’ and will count against you when you apply for more credit. The National Credit Act entitles you to access your own credit record by applying to a credit bureau. Before looking for a house to buy you should check your credit record and, if possible, take whatever steps are necessary to sort out any problems. This may involve bringing accounts up to date and then getting a letter from the credit bureau proving that you have done so. Or, if you have court judgements for debt and you have now paid this debt in full, then you can employ a lawyer to apply to have the judgement rescinded (removed from your record). Cleaning up a bad credit record can be an expensive, time-consuming and sometimes impossible process. Therefore, if you have a clean credit history, guard it with your life! The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 35 | P a g e Maximum bond: You need to assess if you can afford to buy. Strict bank lending requirements have made it increasingly difficult for buyers to qualify for mortgage bonds. The banks’ lending criteria vary according to the client, the size of the deposit and other circumstances. Generally however the banks will use 30 per cent of your gross monthly income to calculate the maximum size of your affordable monthly bond instalment. They will also ask for information regarding your expenses. The National Credit Act places a heavy responsibility on banks to ensure that they do not lend more to customers than the consumer can reasonably afford to repay. Because of this the banks have become more cautious with their lending policies and this is another reason why have reject so many applications for bond finance. Using this maximum instalment the bank is then able to calculate the maximum loan which they will offer you by way of a mortgage bond. The monthly bond instalment depends on the interest rate charged by the bank and also the term (period) of the bond. The lower the interest rate you can negotiate and the longer the term of the bond both affect the size of the bond instalment payment. As a rough guide, working on a bond term of 20 years and an interest rate of 9 per cent your monthly bond instalment for every R1-million borrowed will be around R2400. Your Employment If you have a clean credit record, a reasonable deposit and you can prove your income via bank statements or pay slips, then you should qualify for a bond – provided you are employed by an established company or by a State institution. Banks are still very cautious regarding extending credit to self-employed people or people employed by small family-owned businesses. This is because the banks, to comply with the National Credit Act, have to be especially careful about lending money to people who are employed in positions which might be considered insecure. This seems unfair because many self-employed people earn a high income. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 36 | P a g e Banks tend to ask for a lot more financial information from self-employed people before agreeing to grant a bond. This will include financial statements (preferably for the last three years), up-to-date management accounts, bank statements, copy of the lease of the business premises, tax assessments and a signed statement from your accountant verifying the financial information. As a result of the huge drop in bond interest rates over the last few years, property has become much more affordable in most cities in South Africa. In 1997, a R3,000 mortgage bond payment allowed a borrower to take out a R200,000 mortgage. Today, the ability to pay the same monthly amount gets that home owner a R350,000 loan – that is nearly an 80 per cent increase in borrowing power. The Reserve Bank said late in 2011 that it would keep rates at low levels for the short term future. The interest on a mortgage bond in 1997 was about 20 per cent and by 2011, this had halved to 10 per cent. Be careful about over-extending yourself. Sooner or later interest rates will rise again and so will your minimum monthly bond payments – allow yourself some slack for the future by not borrowing to your limit when interest rates are so low. In early 2014 interest rates were increased 0.5%. This may be the start of a long-term upward movement in the interest rate cycle. What to watch out for: • Make sure you have enough cash to pay all your obligations. • Protect your credit record. • Don’t over-extend yourself by getting a maximum loan at a time when interest rates are low. Look into the future. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 37 | P a g e The Legal Part • You should try and get an attorney of your choice appointed to handle both the conveyancing and the bond registration. • Ask for a discount on legal fees. • Make sure all agreements are in writing. • Insert appropriate conditional clauses into the offer • Sort out and be aware of the date on which risk for the property passes from seller to buyer • Do a last minute check of the property before transfer. Once you have found the house you want and you are reasonably certain that you can afford to buy it, then it is time to make an Offer to Purchase (OTP). Usually the Estate agent will produce the OTP in the form of a pre-printed form issued by the estate agency company. Each OTP issued by different estate agencies, contains differences – sometimes significant differences. The usual procedure is that the estate agent assists the buyer to complete the OTP, providing information peculiar to the offer. This would include: The buyer’s particulars and address. The purchase price being offered together with the terms of payment. Size of the deposit and the account into which the deposit must be paid. Guarantees for the balance of the purchase price or confirmation that a bond has been granted for the balance of the purchase price. Date of occupation – date at which the Buyer is entitled to move into the house. Occupational rent Date of possession Date of transfer Special conditions to which the OTP is subject The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 38 | P a g e Dates on which the various payments, including transfer costs are due. Conveyancing is the legal process through which rights in fixed property are registered in the Deeds Office. These rights include ownership, mortgage bonds, servitudes and mineral rights. The registration process officially confirms a person's rights in a particular fixed property. "Fixed property" means any land, whether improved or not such as a house, farm or sectional title flat. A conveyancing transaction begins with the Offer to Purchase/Deed of Sale and continues through to the registration of ownership and payment of money due to the various parties involved in the transaction. These payments include: Payment of taxes and levies, the payment of bond finance from the bank; the payment of commission due to the estate agent; the settlement of the seller’s bond balance and the payment of the net sales proceeds to the seller. The Conveyancer A conveyancer is an attorney who has been admitted as a conveyancer by the High Court after having completed a qualifying examination in the highly technical branch of the law dealing with fixed property. In South Africa, it is usual for the seller to appoint a conveyancer. However, this, like any other aspect of a sale agreement, can be varied as a result of negotiation between the seller and buyer. Entering in a contract to buy The sale of fixed property is achieved by entering into a written contract referred to as a Deed of Sale. The main requirement for the sale of fixed property in South Africa is that the Deed of Sale must be a written agreement which clearly sets out the terms of the deal. To be a valid contract the Deed of Sale must be signed by both the buyer and the seller (and by the seller's spouse and the buyer's spouse in cases of marriage in community of property). More often than not a written "Offer to Purchase" supplied by the estate agent and signed by a buyer and accepted by a seller is used by the conveyancer as the deed of sale. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 39 | P a g e Both the seller and the buyer will be asked to meet with the conveyancer to sign the documents which will enable the conveyancer to register the transfer and the bond in the Deeds Office. The length of time from signature of the offer to purchase to the date of transfer is likely to be at least three months and could be longer. There must be a written contract It is very important to remember that in South Africa an offer to purchase signed by the buyer and by the seller becomes an enforceable contract as soon as it has been signed, without amendment, by both buyer and seller. While a verbal contract for the sale of fixed property is not valid in South Africa, a written offer by the buyer provides a binding contract once accepted by the seller. Both the buyer and seller open themselves to the danger of being sued if they sign a contract and then find themselves unable to “perform”. This means that buyers and sellers should be very cautious about signing an offer to purchase. Each party should be very sure that they can fulfil all of the obligations which are included in the contract. Buyers should also never accept verbal assurances from the seller or from the estate agent regarding any aspect of the sale. Everything should be put in writing in the deed of sale. This includes specifying the fixtures and fittings (curtains, pot plants, pool equipment and so on) which the seller has agreed to include in the sale. It also includes any undertakings by the seller to repair or replace damaged items in the house before transfer. Don’t leave anything “up in the air” in the form of a verbal undertaking. Make sure everything is in the written contract and is also clearly stated. Conditional clauses in the OTP The buyer should always aim for maximum protection when submitting an offer to purchase. The simplest way to do this is to make the written offer “subject to” (conditional on) a number of factors which may expose the buyer to risk. The value of these conditional clauses is that, should any of the conditions not be met, then the buyer is able to “walk away” from the deal and is no longer bound by the offer to purchase. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 40 | P a g e Conditional clauses should make the offer subject to: Granting of bond finance (if a bond is needed) by a specified date. A satisfactory HouseCheck inspection report. The buyer should be the judge as to what is “satisfactory”. This important clause enables the buyer to proceed with the deal; or renegotiate; or walk away once the buyer has seen the inspection report and knows the true physical condition of the property. It is also wise to make it a condition that the seller provide the buyer, prior to transfer, with a copy of the approved building plans, proving that all structures on the property are legal. Depending on the circumstances of the deal, the buyer may choose to add other conditional clauses. Possession, risk and property insurance While “ownership” of the property only passes from seller on buyer when the sale is registered at the Deeds Office, the question of “possession” and “risk” are different matters. You the buyer should ensure that the deed of sale clearly states the date on which liability for damage to the property passes from seller to buyer. The safest course for the buyer is to state in the deed of sale that possession and risk is only passed from seller to buyer on the date of transfer. The agreement of sale should also require the seller to maintain insurance cover over the property up to and including the day of transfer. The buyer should, of course, ensure that he has an insurance policy in force from the date of possession, especially if the agreement allows for possession (occupation) before transfer. If the date of assumption of risk is not stated in the deed of sale there is a definite risk to the buyer under South African common law. Common law is the body of case law – similar cases which have previously been decided by the courts - and which establish a precedent. The common law precedent in South Africa is that, once all suspensive conditions to the sale (deposits, granting of bonds and so on) have been met, then the risk of damage to the property passes from the seller to the buyer - even if the seller remains in occupation or possession of the house. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 41 | P a g e For example, if the house is damaged by fire before transfer but after assumption of risk, in terms of common law, has already passed to the buyer, then the buyer will bear the loss. In fact, the seller could even force the buyer to pay the full price despite the fact that the house is in ruins. (If, however, the damage to the house has been caused by the seller's negligence, then the position is reversed.) It is therefore in the buyer’s interests, to make absolutely sure that the home is properly insured at all times – either by the seller or by the buyer. South African law requires that there must be an “insurable interest” before a valid insurance policy can be issued. An insurable interest exists when an insured has a financial interest in the property insured. A buyer of property (both moveable and immovable) has an insurable interest in such property despite not yet being the owner. It is likely that the seller’s mortgage bank would demand that the seller should keep the property insured until the bond has been settled – at date of transfer. It is possible for both the seller and the buyer to have an insurable interest in the property at the same time. It is safer (and cheaper) in the event of any doubt for both seller and buyer to maintain insurance over the property. Last minute check before transfer A day or two before transfer it is a good idea for the buyer to take a final walk through the property and make sure that it is still in the same condition and that the seller has fulfilled all his obligations under the contract. Don’t take the seller’s word for it that he will fix or replace this or that later. If there is anything you the buyer are unhappy about, then immediately inform the conveyancer and the estate agent in writing (an email will do) and demand that the matter be sorted out before transfer. If this is not done inform the bank granting the mortgage bond of your unhappiness and ask that the registration of the bond and transfer be delayed until the seller has met all his obligations under the contract. It is surprising how quickly a seller (and an estate agent) will react if you threaten to delay transfer until the matter is sorted out. Once transfer has gone through and seller and agent have got their money it is sometimes very difficult to get co-operation over any unresolved matters. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 42 | P a g e What to watch out for: • Obviously a buyer should never make the mistake of making offers on a second house while there is still a valid offer pending acceptance of rejection by a seller. • The offer should be valid for a limited period only and the offer deadline should be stated by the buyer in the OTP. This means that the seller must accept the offer within the time specified by the buyer. If not accepted, in writing by the seller, before the stated date and time the offer automatically falls away. • Unless the buyer is absolutely certain that he has sufficient money available to meet all of his obligations (payment of the full purchase price plus all transfer costs and duties), the offer should be made subject to the granting of a bond within a specified time. This must be specified in the offer to purchase. • It should also be stated as to what the amount of the bond must be and how much time the purchaser will have to obtain the bond. It should be clearly stated that if the buyer is unable to obtain the required bond in time, then the whole deal is to fall through. • Which amounts (if any) the buyer has to pay in these circumstances should also be stated. • The buyer’s offer should be “subject to a satisfactory home inspection report.” • It is safer for both buyer and seller if the buyer’s occupancy of the property coincides with registration of transfer. If occupation takes place before to registration, then the Deed of Sale should state what occupational rent is payable by the buyer until the date of registration. • The deed of sale is only valid if it is signed by all the parties. Ownership does not pass on signature of the deed sale. The buyer only becomes owner on registration of the property in the deeds office. • The buyer should ensure that possession and assumption of risk only takes place on the date of transfer. This must be clearly stated in the Offer to Purchase/Deed of Sale. The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za 43 | P a g e Conclusion: Home buying and home ownership in South Africa should be an exciting journey. Please remember that “knowledge is power”. Be sure you properly understand the many different role players and the agendas of the various people who will walk with you along part of your home buying journey. Be careful….be cautious – and don’t let your dream home turn into a nightmare! My vision is that every South African should aspire to own the home of their dreams. A home becomes a foundation for stable family life, security and growth. HouseCheck’s mission is to help the South African consumer get a fair deal in the homebuying process. A home inspection report remains the best and most practical way of ensuring that you, the buyer, are getting a fair deal. Remember: What you don’t know can hurt you! John Graham CEO HouseCheck 083 3109 766 [email protected] www.housecheck.co.za The HouseCheck Home Buyer’s Guide – Copyright HouseCheck 2012 - 2014 www.housecheck.co.za
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