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A Going Home Guide
By Scott Picken
21 November 2005
A lot of South Africans will be going home over Christmas and a lot of them will be actively looking for property. Most people know the property market has done exceptionally well and they want to get involved, but they are scared to get involved as there are so many risks and unknowns. This “mini-guide” can help you if you are one of those that are thinking of buying.
There are 6 steps to investing in property:
Decide
Procrastination and fear hold most people back, largely due to the perceived effort, cost and uncertainty involved. No-one is going to wave a magic wand and remove the uncertainty, or guarantee you a “risk-free” deal. Don’t look for the quick and easy ride. A far better option is to equip yourself with investment nous for a lifetime of property investment. Understand the processes, manage the risks and learn to identify and control your property investments.
However, one can also be guilty of “analysis paralysis”. As Anthony Robbins puts it: “success is the result of good judgement, good judgement is the result of experience, and experience is often the result of bad judgement.” You ARE going to make mistakes; the important thing is to get started as soon as possible!
Strategy
There are many risks involved, but through understanding them you can manage these risks and effectively eliminate many of them. People without a solid strategy are vulnerable to the fluctuations in the property market and are therefore at risk of losing their money.
Find
Dolf De Roos believes that to find a good investment you need to look at 100 properties, make an offer on 10, be accepted for three and buy one. That takes a lot of time! Instead, most people base their judgement on emotion. This is financial suicide, as the logic amounts to little more than picking red or black in a game of roulette.
You need to be very careful about the information you get given. Remember that agents act in the seller’s interest, and are incentivized by commissions based on the selling price. One client was recently told they could use a property for short term lettings in the summer and long term lettings in the winter. Be careful not to believe what you want to believe! Rental forecasts are another area in which your natural instinct is to trust an estate agent: they’re the property professionals, surely? Do your homework on the asking prices for similar rental properties. There is a range of forecasting & analysis tools on the market that can help you evaluate the investment potential.
Finance
Agents and developers always claim to offer a great financing option. They even make it sound like you have no option but the one they are giving you. If you’re clever, you might go to your local bank instead. That’s where you’ll get the best deal, right? Not necessarily. How many overseas applications will your banker have dealt with? Will he know a P45 from a P60? What an umbrella company means? What your council tax payments are for? Being overseas can thus count against you, thus securing a lower Loan-To-Value and higher interest rate. A banker is not going to write a motivation for your application, either!
This is where mortgage originators offer a valuable service. By specialising in overseas mortgages, we have the contacts in the banks with the overseas experience to secure top-quality mortgages; one client was offered a 60% loan at 11% from the bank, which we bettered with a 100% loan at 9%. That makes quite a difference over 20 years!
Purchase
Dealing with conveyancers and getting the right information out of them can also be problematic; many conveyancers are not used to dealing with overseas buyers, which can make the process time-consuming, frustrating, and potentially quite costly.
Public notaries can charge up to £100 to notarise your documents, so you don’t want to have to go back for a second visit! Signing the right documents, in the right areas, even in the right coloured ink, can be more difficult than you think! FICA clearance, certified utility bills and identity documents, bond documents, transfer documents – make sure you have them all!
We’ve also seen inflated legal bills from the attorneys, trying to pull a fast one on an overseas client. Make sure you know what a reasonable legal fee is before you pay it!
Manage
Most people believe that straight after the property transfers they will find a tenant, and only be paying the mortgage shortfall. On new developments there is usually a lead time as there can be a few buy-to-lets on the market. On existing properties, repairs, maintenance and cleaning often needs to take place before a new tenant can be found. It is wise to budget at least 1% for these costs, and for approximately two months worth of initial tenant voids.
Historically, South Africa has not had a “renting culture”, and so letting agents are not as efficient as you might expect. And a reluctance to pay for this service has meant there isn’t much of a service to pay for! (Any budding entrepreneurs take note!). Remember the adage, “you pay peanuts, you get monkeys”, and make sure you know what’s included in the service you sign on for.
Conclusion
Investing in property, especially in the current market, can be rather tricky and it is vitally important to understand the market, the costs, and the process. The more knowledge you have, the more you can understand the risks, reduce them and ultimately ensure you make a sound investment.
Good luck, enjoy, and let us know if we can help!
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