Property need-to-knows 2
This is part two of a two part series (read part one) in which Gawie Venter discusses eight things you must know before buying or selling property
Financing mistakes can sink a deal
Financing property in the wrong way will make you pay more in the long run and can put unnecessary strain on your cash flow.
With the help of some creative financing I have been able to buy commercial property and finance it fully, without the use of other properties or securities. I have also bought property for 'free' using only the banks money as my rent covered the bond and rates and taxes from day one.
I have seen that using the correct people, channels and structures have led me to be able to negotiate a better rate and give me better terms on the financing side.
For example: getting a better rate of only 0.5 percent on a R1-million bond with a 15 percent interest rate will lead to a saving of about R305.70 every month over a 20 year period. If this saving was invested on a monthly basis, yielding 15 percent (either by putting it back in the bond which saves 15 percent or investing elsewhere) for the whole 20 years the total amount would be an extra R457 706.11 after 20 years. Not too bad if you do this on two, three or four properties over this period!
One of the biggest 'clichés' that I have found to be true is that your own bank is your friend and because of the 'relationship' they have with you they will give you the best rate.
My dad banked with a specific bank (for his whole life as far as I know) and they also graciously allowed me to study all my years at Stellenbosch University by giving me a student loan. I also opened up my first 'real' non-student account with them and just knew that they would obviously credit me with the Venter generations commitment to them. When it became time for them to prove their commitment back when I bought my first property, they did not perform according to plan and were not keen to help.
In following property deals I have approached them directly and since then they have been very willing to lend me money. I guess that once youve bought your first property they believe you can do it again. The only thing was that the bank across the road was really looking for my business and was willing to give me a better rate, which I was very glad to accept.
I then started working through bond originators who were sharp and understood the system. They were able to determine which bank would give me the best rate and if I wasnt pleased with the rate, the originator just logged the already compiled documents with another bank.
Banks have realized that their customers dont like admin and don't understand the system; they would rather just accept the first bond offered to them by their own bank than go through the whole administrative process again.
This has led many banks to not quote their absolute best rate if an individual approaches his/her own bank directly rather than through an originator.
I have tested this and found that the rate my originator was able to negotiate with my own bank was better than the rate I was able to negotiate myself. At first I wanted to feel sentimental about this, but I soon realized that the feeling was not mutual and that my bank was only in it for one thing: to make money!
Since that day my originator has been very helpful when I buy a property by saving me money and loads of time and frustrating administration.
A good bond-originator therefore acts as an agent between you and the bank and negotiates on your behalf with a bank or banks to get you the best possible deal, saving you time and money because they understand the system.
They charge no fee and will not cost you a cent, because the banks pay them an amount for the administrative and business function they fulfil.
In order to get the most for your property, you must price according to the market
Establishing what the market is willing to pay for your house is essential in getting the most for your property in the end. Determining this price is possible through data from the deeds office. This makes it possible to determine what properties in your area have been selling for in the recent past. Any seller must take this into consideration when pricing his property to sell within a reasonable time. Most buyers will be using this same data when buying a property to make an informed decision on what the market price for a property is.
Remember that there is a difference between your property and the properties that have sold in that area. This difference can be with regards to three factors that also determine whether your home will sell for more or for less than the last few properties that have already sold.
The three factors that determine your price (in order of importance) are location, size and amenities. Of these three, location will always be the most important because it is permanent and cannot be changed.
Size will be second and amenities will account for the least. One of the reasons for amenities being less important is because people are different and they have different styles and tastes. I have seen in my work how people have changed or revamped a property only to have the new owner come in and change it again.
How did you determine the value of the home you are living in right now when you bought it? You compared it with other homes for sale and that have sold. Buyers still determine value by comparing your home for sale with other homes for sale at the same time and also with homes that have sold in the recent past. The internet has made this task a lot easier today than 10 years ago and it is likely that more information will be available to buyers in the future.
To see whether a property will sell within a reasonable time or not, I have a system in place which shows a seller what the selling price should be and what the financial and practical effect would be of not pricing in that range.
This has proved to be very valuable to sellers in setting an objective standard against which they can measure their price and thereby sell within a reasonable time. Not being able to sell within the desired timeframe leads to many other hindrances such as emotional stress, friction and a lot of time and effort which cannot always be quantified in rands and cents.
The right property with the wrong tenant is the wrong property
To illustrate my point best Ill share an example from my own life. I bought a property in the North West Province in a little mining town called Stilfontein some years ago. I was very pleased with the price and the rent was able to cover my bond.
I was still reasonably new to being a landlord and had no system in place to determine whether the tenants I placed in my property were good tenants. They appeared very nice, seemed to have good, stable jobs and even kept the place in a reasonable condition without me asking. They even paid on time!
However, my problems began when either the police or my dad who lived in a town close by phoned me (I cant remember who phoned first, because one tends to forget bad experiences!). My dear tenants have decided to leave overnight and without telling anyone.
Until today I am still not sure where they are. With me not living close to the property I had no idea they were gone and nobody would have noticed until some local people thought that they had better use some parts of my house that stood all by itself.
I had no idea that a house could be broken down into so many parts (if one can use the word 'parts'). They helped themselves to a good working geyser, a toilet, taps and even the little copper-like things that kept the windows in place. The electrical system also had value to them as well as anything that looked like a handle or door.
I have no idea how some of those little things could add value anywhere else, but I am convinced that if they were able to they would have broken down the bricks and sold them one by one. The damage amounted to about R30 000 if I remember correctly and after a lot of administration my insurance paid most of this amount. This was, however, only the start of my problems.
As soon as I had fixed the property I found new tenants. While waiting for them to move in our entrepreneurial friends saw another opportunity, this time with brand new items to pick from the tree and sell to their same customers.
They repeated their crimes and I had to go through the same building project all over again. I had to employ a fulltime security guard that cost me a small fortune during the building period before my tenants could move in. (I think I had to find new tenants again and also spent about R10 000 extra to increase the security on the premises.) Why this long story? All of this could have been avoided if only I had some very basic systems in place when it comes to finding, screening and contracting with new tenants.
Today I have a basic set of rules and procedures that I follow which has made my life as a landlord an absolute breeze and the risks absolutely minimal.
Tenants are usually creatures of habit and tend to repeat what they have done in the past. Determining their history has been priceless in my screening process when determining which tenant to allow in my property.
Even if I work through a rental agency I still have some basic screening procedures in place to verify that they check the credit rating of my prospective tenants (and their spouse!), their salary amount, employment time and references from previous landlords they had.
Work with people who practice what they preach
I have made a decision to work primarily only with people who practice what they preach. A doctor that is always sick due to an unhealthy lifestyle will probably not be able to keep me healthy. In the same way, a financial advisor who is broke is not the one who is going to get my money.
Whoever wants to get my business in a specific area must first have shown themselves to be faithful and successful in the very area which they say they can help me in. That they in fact have something to offer out of an overflow and not out of a need.
The property attorney I use when buying or selling property is a property investor herself. The person I get my health advice from (my wife) is a successful and very healthy (and very good looking!) biochemist. The person who does my tax could retire at the age of 38; he's a brilliant businessperson and doesn't hand SARS 'n cent more than he has to.
Wherever it is possible, I enjoy buying property through an agent who understands property, talks property and also walks property.
Warren Buffet says he'd be worried if the CEO of a company is not buying his own company's shares. I believe if someone is trying to sell you something they are not buying themselves, be worried!
In property it is important to have a team around you when buying or selling.
Only allow competent and trustworthy people to advise you. My wife is trustworthy, but should I be in need of someone to take out my tonsils, using her would mean suicide!
Both competence and trustworthiness are required. Competence is usually shown by a proven track record of success in a certain area and trustworthiness by getting to know someone personally or finding out about them from other people.
There are many different areas where it helps to tap into the expertise of professionals and I have built up a trusted team of advisors that supports me when I buy or sell a property. This includes an attorney, a bond originator (financing agent), a handyman, a town planner, an architect, a short term and life insurance agent, a good tax advisor plus a few other critical contacts.
Id advise you to build up your own team of people whom you trust.
Article by: Gawie Venter - www.iafrica.com