Property need-to-knows 1

This is part one of a two part series in which Gawie Venter discusses eight things you must know before buying or selling property...

Price growth likely, not guaranteed.
Over the past eight years I have seen properties in most areas performing phenomenally and many people have said you cannot go wrong. Being involved as an agent, though, I see many properties that cannot sell in the current market for what was paid for it a few years earlier.

Many disheartened sellers are looking to blame someone, but it remains a fact that you make your money in property when you buy the property and not when you sell. Buying at the right price still remains the most important factor. You should therefore make sure that when you buy you are paying a market related price and that you are able to pay the bond repayments should the interest rate rise significantly for a few years.

I have seen capital growth of 40 percent in three months and I have also seen negative capital growth over a period of two years.

My advice would be to work with an agent who buys property him-/herself and who can give hands-on advice and not just 'book knowledge', because they practice what they preach.

This is my recommendation even if you are not buying primarily as an investment, but also as a house to live in, because your home could ultimately help you to become wealthy or, if you are uninformed, poor. Book knowledge is important, but it is only the starting point!

Some areas have better growth than others.
Knowing which areas have grown well in the past is a good basis to start from. Most up-to-date realtors (estate agents) in town will be able to give you these figures as a print out which would give you a basic indication.

Current trends and developments in, and perceptions about, the city or town you're interested in will also have an effect on prices. This should only be used as a starting point and not as an absolute for what the future holds.

Cash flow can make or break you.
During the past few months I have spoken to many anxious sellers that have bargained on massive capital gains which did not realize. Instead their monthly cash flow was placed under tremendous strain. For some the only alternative was to sell at a price where they had to cut their losses and move on. Some were not that fortunate as the banks had to take back their properties.

I have only been around in the property industry long enough to see one upswing and one downswing, but through literally tons of courses that I have done I have gained valuable insight from people that have been around through various cycles in the market.

It is certain that property prices grow in cycles and have been growing in value literally for centuries. The way to capitalise on this growth is to buy property for the long run and to hardly ever sell.

Attending some of the latest bank execution auctions has made me realise that cash flow (or the lack of it) can definitely make or break a property investor or owner. When doing sums before buying a property I advise clients to be very conservative in their approach.

Take the highest interest rate over the past 10 years and see whether you’d be able to keep on paying your bond should interest rates rise to that level again. Personally I do not think they will go that high again, but then again there are no guarantees.

The highest interest rate in this period was in 1999 when interest rates made a turn at an incredible 25.5 percent. To those whom this is not news, I know that you were influenced by this.

To the rest of us I believe it is important to look and learn from history and never to over-commit financially. The current economic crisis (2009) was caused and fuelled primarily by one thing: greed!

When calculating whether or not you can afford a property, remember to take into consideration all expenses. This will include rates and taxes, levies, insurance (long term and short), home owner’s association fees if applicable and a portion for general repairs as well as maintenance. Also allow a conservative vacancy rate of at least one month a year.

It is important to do a calculation of the tax that will be payable if the property is bought to be sold for a profit, either income or capital gains tax depending on your situation.

There are opportunities to buy properties well below market value.
Some of the properties on auctions are currently selling at about 60 percent or less of the outstanding bond amount.

As an example, let’s suppose that someone owes R1-million on his property bond and he falls into arrears. The bank will in some areas allow the property to be sold for about R600 000.

This results in a serious opportunity to buy below market value, if you know beforehand how the banks are doing their calculations and at what price they’d be willing to sell the property.

There are a few things that must be incorporated into your calculation if you are buying at bank auctions. (Please note that these auctions that I’m mentioning are not the auctions that big companies are advertising in the newspapers on weekends. They are properties that are still in the name of the owner and are about to be sold in execution. They are also not 'properties in possession', which means that the bank decided to buy an execution property back and are now trying to sell it at a price that is either market related or very close to the market price.)

I know of people that went to execution bank auctions uninformed and have burnt their fingers really badly, not knowing what extra costs they should have incorporated in their sum of whether they should buy or not. Some even bought property bidding for the maximum price and only realized afterwards that they only bought a 50 percent share in a property with the other 50 percent partner being someone they really don’t want to be involved with in a business sense.

I am currently buying these kinds of properties myself and am using a skilled person who understands the system and who provides me with valuable information that is crucial in the decision making process.

Because of differing rules in different areas in South Africa I cannot see myself doing this without his help.

  • Keep a look out for part two of this two part series in which Gawie Venter discusses eight things you must know before buying or selling property…

Article by: Gawie Venter -