Economists refer to South Africa’s economy as ‘recovering’, ‘stagnant’, or ‘fragile’. Their observations are warranted. Debt levels and unemployment remain high, work is scarce, construction inflation is high, estate agents are struggling and the road to 2014’s national elections is paved with political debate. Despite these negative pointers, homes continue to be bought and sold, daily. In fact, in the past year alone over 100,000 residential properties found new owners. The answer lies embedded within just two reasons: CHANGE and OPPORTUNITY.
CHANGE:
Everyday life-changing events happen around the country that serve as catalysts and may prompt someone to either sell or buy a home. For example, each day for the past 10 years, on average, 478 smiling couples are joined in matrimony while on the other hand, 84 couples get divorced. Each day 3,069 babies are welcomed into the world while 1, 871 people die.
In addition, each year thousands of graduates join the work force and need a place to settle either to rent (from a buy-to-let investor) or to purchase outright. At the same time thousands retire from their working career and decide to downsize. Thousands more relocate within the country’s borders for economic reasons and hundreds of foreign tourists fall in love with our sunny skies and decide to buy a home here. Last but not least, each year a few hundred South Africans pack up and sell their homes to emigrate to Canada, the USA, New Zealand, the UK and Australia.
OPPORTUNITY:
The sad fallout from a struggling economy is retrenchment, unemployment and repossessions. When an owner finds himself in a financial pickle his property may ultimately provide fodder for auction houses, Sheriff of the Court sales and bank property portals to offload homes – often at bargain prices.
A repossession involves three phases:
Distressed Sale (DS), Sale in Execution (SIE) and Properties in Possession (PIP).
Here it is in brief: An owner defaults on the home loan to the extent that the mortgagee (the bank) has no alternative but to recover the debt via repossession. Generally, debt recovery will begin with client intervention with the bank aiming for an equitable solution for all concerned. Failing this, the courts may be approached in order to obtain a default judgement, consent to judgement or other judgement in terms of which the immovable property may be sold after the movable assets is auctioned off. During this process the owner still has the right to sell the property himself – a Distressed Sale. If he is unsuccessful, the property is auctioned by the Sheriff to the highest bidder – a Sale in Execution. However, should the mortgagee’s reserve price not be met, it may decide to buy the property back – a Property in Possession.
Thus, investors with sufficient resources can benefit from the misfortune of others and are often found procuring such properties at auctions or from the bank. These acquisitions come with significant benefits. In most cases there is no transfer duty, home loans easily approved as these properties have an inherently lower risk since the purchase price may be way below market value. Naturally each transaction is assessed on its own merit and the loan is subject to various terms and conditions. Still more benefits exist: The property may be further discounted by the bank due to neglect and disrepair. This offers an ideal opportunity for those investors seeking a ‘fix-n-flip’ home. After doing necessary repairs and renovations, the property is ‘flipped’ – sold for a profit. It should be noted, though, that properties auctioned off or with negative equity do not absolve the original owner from repaying any difference between the sale price realised and the outstanding mortgage balance.
Clearly both CHANGE and OPPORTUNITY remain key drivers behind tens of thousands of homes exchanging hands each year. Either way, before a successful purchase is done, all the risks should be considered – to that end property data statistics helps both first-time buyers as well as seasoned investors make the right choice – and that’s why houses continue to sell.
Dieter Deppisch
Insight* Analyst
