How to buy property
I’m often asked how to go about buying investment property. How and where do you look for the bargains?
I think it’s important to understand first off that the bargains are the result of distressed sellers (that is, owners who for one reason or another have to sell).
A distressed seller can arise from
– a death where the executor of the estate needs to liquidate the assets in order to distribute them equitably,
– a divorce where the asset has to be split between two parties
– a re-location where the owner(s) are moving to another town/country
– a bankruptcy where the liquidator has to liquidate the asset in order to distribute the proceeds to the creditors
– financial stress where the owner is unable to pay his/her bond
The first four of these will usually be dealt with by public auction which you can find in the national or local press, whereas the last one undergoes a series of steps, each of which presents a buying opportunity –
Step 1 The bank may offer to help the owner to sell the property. They’ll give it to an estate agent and a normal sale will ensue.
Step 2 The bank applies to the courts and gets a judgement against the property to the extent of the amount owed. The property will go up for auction by the sheriff and notice of the auction is given in the Government Gazette. If you’re quick, you can approach the owner and make an offer. The offer must be equal to or greater than the judgement amount (usually greater as a sweetener for the owner). If the owner accepts, then the bank also has to approve the sale. Why would the owner agree? Simply because if the property is auctioned below the judgement amount, then he/she remains liable to the bank for the shortfall whereas this way the owner at least comes out with something. If the deal is agreed upon, then the rest of the process is pretty much like any other sale of property.
Step 3 The sheriff auctions the property. Often, though not always, the banks have a representative there and he will start bidding if the highest bid is below the judgment amount. Once the bids have reached the judgment amount, he stops bidding and the property goes to the highest bidder thereafter. This is where you can pick up the real bargains, but you have to be patient – it may be months before you land the perfect buy. You must have done your homework before the auction – visit the property, interview the occupants (you do not get vacant possession, so if you can’t keep them as tenants, you may have to evict them and evicting a family with a baby or aged person can be difficult), determine the outstanding rates and electricity accounts (for which you will be liable), determine the expected rental income and from there work back to your maximum bid. You need to get to know the other regular bidders, so that you don’t bid against each other and this also only happens over a period of time. With care and patience you should be able to pick up properties for about 40% of their normal market value, but there are significant risks involved. You may find that the outstanding electricity and rates are even more than you paid for the property. You may not raise a bond in time (you only have about 10 days, although this can be stretched if you’re bull headed enough).
Step 4 If the bank’s representative is the highest bidder, then the bank will have bought the property and it becomes a PIP – Property In Possession. The bank then endeavours to sell it, often offering a 100% bond to an approved buyer. The prices are usually not that great, but at least you don’t have the risks that I mentioned above. You can find PIPs by contacting the banks themselves or going to www.privateproperty.co.za
Be aware that if you are building a property investment portfolio, then you would normally want to buy in the name of a company that is, in turn, owned by a trust (never one owned by you). We can help you with all those things.