08 Nov 2012
Although there is a general interest throughout South Africa in investing in commercial property, a high proportion of those wanting to do this are deterred from doing so because they cannot get bank finance, says Jason Lee, national head of Rawson Commercial.
Lee explains that they come across cases where a potential investor has gone about things the wrong way.
Having decided to invest in commercial property, he has travelled around until he has found a property which he regards as suitable.
He then makes an offer, subject to getting a bond for which, usually 20 to 30 days are allowed.
During that time he rushes desperately from bank to bank, but all too often fails to get their backing – and then has to opt out of the deal.
What many such potential investors do not realise is that there are alternative ways of financing a commercial property and, these have proved effective throughout most of the developed world.
In times like the present where business failures are frequent, Lee says there will be many sellers who, because they are in financial difficulties, or for other reasons, are prepared to consider entering into an instalment sale agreement with the buyer.
Such deals enable them to dispose of a property that might otherwise not find a buyer in today’s market. Although they do not get an upfront all-in-one payment for it, they do receive satisfactory monthly instalment payments over a specified period.
There are three ways in which such deals are usually put through:
1. The Alienation of Land Act
Lee says this allows sellers and buyers to draw up an agreement in which the buyer is required to pay in at least two or more instalments over a period of one year or more.
If they comply with certain minimum statutory requirements, the parties can structure the payment of the purchase price any way they want and over almost any period.
“This method of payment is well suited to deals where a broker is involved because in most cases the deposit, which is payable upfront, is sufficient to cover the broker’s commission.”
Lee says such deals are also well suited to those buyers who, although they may have blemished credit records, now have a healthy cash flow.
From the seller’s viewpoint, the arrangement is beneficial because the eventual sales price has been agreed upfront and because the monthly repayments are in most cases usually set at a level that will adequately cover the bond repayments – and the seller’s monthly outlays are diminished because the purchaser takes on responsibility for the rates and tax payments.
He says although transfer is delayed until the final payment is made, the seller knows that the property will be well cared for because the current occupant knows that one day it will be his.
A further advantage of this type of deal is that, as the agreement is registered against the title deed, the seller cannot sell the property or take on another bond without the buyer’s consent and the current bondholder is required to issue a certificate confirming the amount still to be paid on discharging the bond.
In this type of arrangement, transfer duty must be paid by the buyer within six months of the signing.
If this is not done, the South African Revenue Services will add 10 percent per annum to any outstanding amounts.
What happens, however, if the buyer defaults on his payments?
Lee says the arrangement works by-and-large to the seller’s advantage because in South African law, non-payment even over a short a period, automatically results in ownership of the property again reverting wholly to the seller, who then, in addition, has the right to evict the defaulting buyer.
2. WRAP system
Taking all instalment arrangement payments to new levels is a refinement of the system known as “WRAP”.
This system has been particularly popular in Australia and is especially suitable when the seller insists on the full purchase price being paid upfront, according to Lee.
He says in these cases, an opportunity arises for an independent investor to act as the banker.
This means that he/she will buy the property from the seller (in most cases at a big discount) and then will raise a bond on the property.
He/she then enters into an instalment payment agreement with the buyer, the interest on the monthly instalments usually being some 2 to 3 percent higher than the interest on the bond repayments.
“This system enables the investor to make a profit each month from day one, the investor’s interest rate being considerably higher than that of the banks.”
A third option open to investors is to enter into a rent-to-buy arrangement.
This usually runs from 24 to 36 months, at the end of which the buyer has the option of buying the property at a pre-agreed price.
Again the buyer is responsible for rates, taxes and maintenance during the renting period.
In most agreements of this kind, the seller also allows a specific percentage of the monthly payments to count towards the building up of a substantial deposit on the sale, thereby enabling the buyer to take out a smaller bond – for which he/she will probably now qualify.
In these deals, transfer duty is not paid until the property is actually sold, explains Lee.
He says although the alternatives all have merit and have saved many a deal, financing a bond through a bank is still the cheapest and most hassle free way of buying a property other than paying for it in cash, provided the buyer can meet the banks credit requirements.
Lee encourages investors to take another look at commercial property which, at today’s interest rates, is almost always a very good proposition, the returns being considerably higher than those of residential property.
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