Buying

4 Questions to Ask Yourself when Buying a Distressed Property

Story Highlights
  • 1. Is the property occupied or empty?
  • 2. Does the distressed property have any outstanding municipal rates?
  • 3. In what type of neighbourhood is the distressed property located?
  • 4. Are your finances in order?

Buying a distressed property in South Africa requires comprehensive research and serious consideration. Buyers need to be aware of all the pros and cons before making an informed decision.

Repossessed properties are often in a suboptimal state because the owners experienced financial difficulties and couldn’t afford to maintain them. However, buyers commonly find enormous bargains and have managed to turn these properties into their dream homes.

Before delving into it, here’s a brief look at what determines a property in distress:

  • First, the owners are trying to sell the property before the bank repossesses it.
  • Second, it can be a ‘sale in execution’ property. This happens when the borrower defaults on payments and there is a judgement against their name. The borrower’s movable assets are auctioned off to cover the mortgage arrears. If this does not happen, the property is auctioned off.
  • And third, the property is possessed by the bank and the money from the sale is used to cover the payment arrears. The bank then puts the property back on the market for a higher price. 

That said, here are a few key questions to ask before buying a distressed property. 

1. Is the property occupied or empty?

The first thing that you need to consider is whether the distressed property is occupied or empty. If the property is empty, you might pay a little bit more because the previous owners have already been evicted. If it is occupied, however, the time-consuming process of eviction still has to occur.

Eviction is by no means simple. It can take up to a year to evict the occupants. During this time, the new owner must pay the necessary rates and taxes if the property is already in their name.

Unfortunately, only one in ten distressed properties are unoccupied and many of these properties are damaged by the occupants residing in them.

2. Does the distressed property have any outstanding municipal rates?

Chances are good that if the previous owner could not afford their mortgage or bond repayments, they also would not have been able to afford their rates and taxes.

For this reason, distressed properties often come with outstanding municipal rates. As a potential buyer, you might be responsible for settling these rates and taxes.

This can make it difficult to determine what the actual cost of the property is. Several buyers have been caught off guard by huge municipal bills when the property has been transferred into their name.

If the property is part of a sectional title, you also need to consider any outstanding levies.

These need to be paid back to the body corporate, too. 

3. In what type of neighbourhood is the distressed property located?

When buying any type of property, the magic words are always: location, location, location.

Be careful of getting over-excited about the low price of a house without inspecting the neighbourhood. It might be a beautiful house situated in an unsafe area.

A good idea would be to drive around the neighbourhood before buying it to get a feel for the area and determine whether it would be a good fit.

You should also make sure that you inspect the house itself. If the distressed house is vandalized or damaged, then you will have to factor in the cost of repairs and maintenance. 

4. Are your finances in order?

Before you start your hunt for a distressed property, ensure that your finances are in order. Your credit score should be healthy and you should know exactly how much you are willing to bid on the property.

When bidding, the potential buyer must put down a R25 000 deposit which is refundable if nothing is bought. On the other hand, if a property is bought the offer to purchase must be signed straight away and 10% of the bidding amount must also be put down. A 5% commission is also payable to the auction house or the sheriff of the court.

Being financially prepared will ensure that you navigate the bidding process with confidence.

These aforementioned questions serve as a basic guide when it comes to buying a distressed house. But, potential buyers should also consider the advantages and disadvantages of buying this type of property.

The advantages of buying a distressed home

  • Low purchase prices: Many buyers/investors have bought homes way below market value. This is because distressed homes are the last resort to recoup the money that the previous homeowner couldn’t pay. 
  • No transfer duty: Buying a distressed home means that there is no or a very low transfer duty and significantly lower bond costs. The buyer must, however, still pay transfer fees and attorney registration fees. 
  • Outstanding rates are settled: If the house was not bought at a sheriff’s auction then the bank will settle outstanding rates. The rates associated with a house bought on a sheriff’s auction, however, will be payable by the new owner. 

The disadvantages of buying a distressed home

  • The house is sold ‘voetstoots’: One of the major pitfalls is that the house is sold in its current condition. It could, potentially, become a huge financial burden if the buyer is unable to inspect the property before buying it. 
  • Limited viewings: Unless the previous owner has vacated the property, it isn’t always possible to view the house. This makes it difficult to do a thorough inspection and to see what the actual condition of the house is.
  • Transfer issues: The transfer of this type of property generally takes longer than a property sold by an estate agency. 

The more you know about the distressed property before buying it, the better. Make sure that you have all your questions answered and that the advantages outweigh the disadvantages before taking the plunge.  


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