banking

Guide to buying property (in South Africa)

My fiancée and I recently bought our first property, which was an interesting experience. It is a fairly complicated process, and many people don't understand how it works or the costs associated with it. So I thought that I would document it to help anyone else looking to purchase property for the first time.

Deciding what you need

The first thing I suggest you do is decide what you need and what you want. Make a list of hard requirements, and another list of nice-to-haves. Consider things like: number of rooms, secure parking and garages, automatic gates, baths and showers, flat or townhouse or freestanding, garden, pool, balcony and appliance space.

Determining what you can afford

Work out how much of your income you could put into a bond each month, and use an online calculator to calculate the loan amount which that represents. Note that the maximum monthly repayment is usually limited to 30% of your income. If you are buying with your partner, your combined income can be used. Interest rates are usually linked to the prime lending rate set by the Reserve Bank. When we applied for our bond we were offered +1.2%, +0.2%, +0.05% and -0.62%, so I'd suggest working with an interest rate of prime or slightly above.

Work out what deposit you can afford, which is payable when your offer is accepted. Bear in mind that there are significant other costs which you will also need to cover (up to 5% of the purchase price). Your deposit will affect the strength of your offer, as well as your bond applications. Aim for at least 5%, and ideally 10%.

Estate agents

Most properties are sold through estate agents. The seller will approach one or more estate agents and grant them mandates to try to sell the property. The estate agent will usually perform a valuation and help the seller to choose an asking price. If (and only if) the agent manages to sell the property, the seller pays them a commission. The going rate seems to be 7.5% of the selling price (excluding VAT).

Visiting properties

The best way to discover properties still seems to be the property section of the newspaper, although some of the estate agents have semi-decent website listings. We spent four Sundays visiting showhouses listed in the newspaper, as well as a few others which we made appointments to see. We probably visited about 25 properties in total, which is fairly good going. I would suggest visiting at least 10 properties before putting an offer in — it takes a while to be able to judge the value of a property.

Inspection

When you find a property you really like and are seriously considering putting in an offer, I suggest that you go back for a more detailed inspection. I'm not suggesting that all these conditions be met, but that they should be considered when determining how much the property is worth to you.

  • How much cupboard space do the bedrooms have?
  • What state is the bathroom in?
  • How old is the geyser?
  • What's the water pressure like?
  • Do the taps work properly?
  • How big is the kitchen?
  • How many appliances is there space for (washing machine, tumble dryer, dishwasher)?
  • What state are the oven and hob in?
  • What state are the kitchen and bedroom cupboards in?
  • How new is the distribution board, plugs and light fittings?
  • Is the electricity prepaid?
  • Is there an alarm?
  • Do all the windows have burglar guards?
  • What condition are the doors and windows in?
  • Are there security gates on the doors?
  • What condition is the wall and ceiling paint in?
  • What condition is the roof in?

Ask why the owner is selling, and what crime in the area is like. Check what the monthly rates are (preferably get a copy of the latest rates statement).

Sectional title

Check how many units there are (the fewer the better), and how many have live-in owners versus tenants (more live-in owners is better). Ask what the body corporate is like and how effectively it operates. Get the latest financial statements of the body corporate and check that they are financially sound. Get and read the conduct rules of the scheme (are pets allowed?). Get the latest levies statement and check what the levies are1. Ideally get the sectional title plan (a diagram showing the units) and check that the unit number is correct.

Making an offer

Once you've found a property you want to buy, you make an offer to the seller. This is a formal process where you draw up an Offer to Purchase which sets out the details and conditions of the offer. The seller will have a certain amount of time in which to accept the offer (usually about 2 days), and once they have signed the document it becomes the Agreement of Sale. The seller could also come back with a counter offer.

Remember that the asking price is simply a guide, and also that the agent wants to sell the property for as much as possible (since their commission is linked to the selling price). You need to decide how much the property is worth to you. In most cases it's worth starting with a lower offer and raising it if it's rejected.

The offer defines when occupation is handed over, either on a specific date, or when transfer goes through (i.e. when you legally own the property). If occupation is handed over before or after transfer, then the party with occupation will owe the owner an occupational levy (rent, basically).

Applying for a bond

Once your offer is accepted you will need to apply for a bond. It's worth applying to multiple lending institutions in order to get the best deal. The recent trend is to use a mortgage originator, who applies to numerous institutions on your behalf. They earn commission from the institution if a bond is accepted, so theoretically2 there's no cost to you. What we did was apply directly to the bank which we bank with, and got the mortgage originator to apply to the other institutions. This process usually takes about 2 weeks.

The lending institution charges an initiation fee on the bond, and there is usually a monthly service charge as well. The institution will require that the building is insured, although with sectional titles this is done by the body corporate.

Conveyancing

Conveyancing is the process of transferring ownership of the property, and is performed by a legal firm. The buyer is usually liable for the attorneys' fees3, as well as various costs they incur (rates clearance certificate from the municipality, levy clearance certificate from the body corporate, and deeds office fee). The conveyancers also collect transfer duty from the buyer, which is a tax levied by the government. The legal firms agree on a recommended fee structure for their services, but are not obligated to stick to it. This process usually takes about 8 weeks.

Traditionally the conveyancers are chosen by the seller, which is a pretty stupid system since the buyer pays them. You may get a better deal if you shop around for conveyancers before hand and nominate them in your Offer to Purchase.

Bond registration

The mortgage bond needs to be registered against the property, and this is also done by a legal firm. Similar to the conveyancers, the buyer is liable for the attorneys' fees and associated costs. The bond attorneys are usually nominated by the lending institution. Like the conveyancing, there is a standard fee structure, but firms are not obligated to actually use it.

Transfer

The conveyancers and bond attorneys lodge the various papers at the deeds office simultaneously, and it then takes a week or two to process the transfer. All in all the whole process should take about 3 months to complete. You will be liable for all rates and levies from the date of transfer.

Tools

Ooba have an affordability calculator to calculate what bond you can afford, and a bond and transfer costs calculator to estimate the purchase costs. Fin24 have a good bond calculator which graphs the capital and interest components of the bond.

I have also written my own purchase costs calculator and bond calculator, which should give similar answers.


  1. We were burnt by this. 

  2. Some argue that the banks offer you a higher interest rate in order to cover the mortgage originator's commission. 

  3. You can theoretically make it a condition of your offer to purchase that the seller cover the conveyancing costs. 

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