The savings and hassles of repossessed properties

Most people look for bargains when buying property. One of the cheapest avenues is the repossessed market but be warned.

Savings

The biggest advantage is that you don’t have to pay transfer duties since the bank, as the seller, has to pay VAT on the sale of the property. By not paying transfer duties, you can save thousands of rands but you still have to pay attorney’s fees for registering the property in your name as well as bond fees.

Usually, real estate properties below R500 000 do not attract transfer duties. For anything above that amount you’ll have to pay a transfer fee, which could cost in the region of 5-8% of your property value.

Currently, the big four banks hold around 700 properties in possession (PIPs).

Properties become repossessed when the bondholder has defaulted on the home loan, and an auction failed to attract a bid large enough to cover the outstanding debt.

“There is general confusion about a sale of execution (SIE) and repossessed property,” said Frik van Rensburg, national manager of repossessed assets for Absa real estate management.

As the bank is not the owner of the property, South African law requires that it must acquire the mortgage bond through the process of an auction first, he added

“When a client has not paid his mortgage bond payments for three consecutive months, the bank then calls it a non-performing loan and we start the legal process,” explained Luke Jooste, general manager of credit at FNB home loans.

Most banks encourage homebuyers to ask about repossessed properties. Each bank has a list of repossessed properties, which is available on its website or interested buyers can contact the bank and request a copy of the PIPs to be faxed or e-mailed to them.

“We make use of a number of estate agencies to assist in marketing the repossessed houses in order to obtain the maximum,” explained Owen Sorour, director of secured credit at Standard Bank home loans.

“The properties available for sale are listed on an open mandate and the bank will pay the estate agent’s commission,” said Van Rensburg.

Another advantage of buying a repossessed property is a realistic purchase price.

The bank usually sells the property for the amount outstanding on the existing home loan as well as any rates and taxes that are in arrears. This means it may be less than market value but not in all cases.

“The bank does not intend to make a profit on the sale of the house. Any extra over and above the amount the bank requires to settle the bond and financial costs incurred, will go to the original owner,” explained Jooste

He added that if property prices in the area were escalating then demand would push up the price of the repossessed property and buyers would not pick up a bargain.

Another benefit is that buyers may find the transfer of property relatively quick and easy, as banks are keen to rid themselves of them because the properties are costly to maintain. In most cases, security guards must be hired to protect the vacant home and gardening services have to be paid to maintain the garden.

“The holding costs can be up to R2 500 per property per month. They can depend on whether the house is rented out, illegally occupied or if repairs and maintenance needed to be done,” explained Van Rensburg.

Hassles

If a bank holds a property over an extended period, the maintenance expenses will escalate which will force the bank to push up the purchase price, just to cover its costs.

Despite it being expensive to maintain, the banks stress that they do not relax their lending criteria or offer financial incentives.

Often repossessed homes are neglected and are not in best condition. Some vindictive homeowners may even do unnecessary damage to the house before the property is repossessed.

As the house is sold “voetstoots”, this may frustrate and disillusion the buyer, especially if it causes delays in occupation due to repairs being undertaken.

What is more, quite a few repossessed properties are in bad areas so it is in your best interests to find out why the house was repossessed in the first place.

A big disadvantage is that when you buy a repossessed property, you may be responsible for obtaining “vacant possession”.

Vacant possession refers to repossessed properties that were sold on the condition that the buyer will (after the property is registered in his name) give the occupant notice to vacate or do any legal eviction, should it be necessary, says Van Rensburg.

He said the purchase price was usually renegotiated in these cases.

“Unfortunately the process of going the legal route and getting the courts to evict trespassers is often unsuccessful and the sheriffs are powerless to execute an eviction,” added Sorour.

Buying a repossessed property may offer benefits but you have to decide whether the savings are worth the hassles.

This story first appeared in Moneyweb Business in the Citizen

Article by: Gaylyn Wingate-Pearse - www.moneyweb.co.za