Banks can assist you to get a loan - Market News, News
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Banks can assist you to get a loan

15 Mar 2012

Banks can make a contribution in the property market by giving home buyers relevant information about loan offers and suitable finance options.

Better information with regards to property investment decisions and what finance is suitable for individual customers is bound to improve efficiencies in the residential market, says John Loos, FNB Home Loans property strategist.

Better information with regards to property investment decisions and what finance is suitable for individual customers is bound to improve efficiencies in the residential market, says John Loos, FNB Home Loans property strategist.

Loos points out that this will also assist a greater number of people to adjust their aspirations in line with the resources available to them.

He explains that banks offering home loans represent the buyer, however, these banks do not have a good history of pro-actively supporting customers to improve the quality of their home investment decision-making, nor in improving their ability to enter into property trades due to increased certainty regarding the level of funding availability.

Banks most often get criticised for negatively impacting the residential market by turning down home loan applications, and people often refer to demand for homes for  being there, but banks do not want to lend.

The reality is that much of this demand is not real demand, he says.

“It is people punching far above their weight in terms of their home search, under the mistaken impression that they will get the required finance, and they waste the agent’s time.”

Home buyers often lack the knowledge and information related to the home and the buying process.

Banks work for the buyer, and can both inform their clients’ decisions to a far greater extent, as well as increase their bargaining power.

While estate agents represent the seller, banks represent the “other party” in the residential property transaction, not with all aspects of the transaction, but in the important area of providing the finance to qualifying buyers.

This does not mean that the bank and the estate agent are adversaries, both parties work together to enable the property transaction to take place.

Loos notes that in the residential market for most home buyers and sellers, trading a property is a very infrequent occurrence.

According to the FNB Estate Agent Survey for the first quarter of 2012, 87 percent of total residential buying was for primary residential purposes.

This means, the seasoned property investor who buys to-let or to speculate, makes up a very small percentage of the total residential number of buyers.

“The infrequent nature of residential buying/selling means that aspirant home buyers/sellers generally have very limited knowledge and often little information at their disposal with which to make a good decision.”

He says the challenge is made more significant by the fact that many consumers lack knowledge of how much property finance they qualify for.

Loos says banks sit on a wealth of property and market information, collected over a long period from financing hundreds of millions of property transactions and conducting valuations on as many properties.

Banks have an important property information role to play with consumers and the service they have provided in this regard has been disappointing.

Loos says banks sit on a wealth of property and market information, collected over a long period from financing hundreds of millions of property transactions and conducting valuations on as many properties.

“Not only do we possess transaction values of properties, but also many of the characteristics of the properties financed.”

This information, regarding suburbs and sales values of comparative suburbs can assist would-be buyers gain a more educated view of how much to offer on a particular property.

As an example, he says to support this information need, a buyer seeking to obtain pre-approved finance through FNB’s Property Leader offering will have access to free property and area reports regarding the targeted property and area.

Report information including area characteristics such as age profile of buildings, the dominant soil types on which homes are built, stand and building sizes in the area, bedroom numbers and the percentage of properties in the area with “add –ons” such as swimming pools.

Age demographics of home owners and buyers entering the market as well as recent sales values of other homes in the area are included for comparison.

If you were looking to buy property and obtain finance from the bank, using comparable sales values give the buyer an idea of the offer they should make.

Loos says the asking property price and characteristics of properties in the area enable the buyer to get an idea of the investment value of the property.

“This could be very useful in informing the buyer as to whether the property is over-capitalised or not.”

An over-capitalised property is one in which the level of investment in the property is too high for the type of market that a buyer seeks to buy into in that area, he says.

As an example, Loos says if the property is the only one priced at R2 million in an area where the general price level is about R500 000 and possesses the only swimming pool and tennis court in the entire area, the chances are that re-selling it may be difficult given that the income category of people generally seeking to buy in that area are not looking for such luxury.

Over-capitalised homes generally underperform in terms of price growth while under-capitalised properties have a greater potential to outperform the area in terms of price growth over time.

Property and area information can be very useful in obtaining this picture of a property, he says.

“Banks can improve the negotiating power of consumers with both area and property information and by turning consumers into “cash” buyers.”

If you were looking to buy property and obtain finance from the bank, using comparable sales values give the buyer an idea of the offer they should make.

The FNB Estate Agent Survey Q1 2012 reveals that 66 percent of survey respondents said cash buyers had much stronger bargaining power, while 19 percent said cash buyers had slightly stronger bargaining power.

The report also noted a question asked relating to the bargaining power of pre-approved home loan buyers compared to buyers who have yet to obtain home loan finance.

Results showed that 23 percent claimed they had much stronger bargaining power, 41 percent had slightly stronger bargaining power, while only 36 percent said it made no difference or that banks don’t do pre-approved loans.

The group of respondents estimated that the average discount that sellers are prepared to grant cash buyers was 8 percent and a lesser 5 percent for pre-approved home loan buyers.

Loos says this means buyers with pre-approved home loans do have improved bargaining power, but that this is not quite as strong on average as that of cash buyers.

“We believe this is because many pre-approved home loans are subject to a variety of terms and conditions or may not have required sufficient information to acquire, and are thus often far from a done deal.”

He points out that the challenge for banks is to turn pre-approved home loan applicants into effective cash buyers by attempting to demand as much information up front so as to limit the number of terms and conditions attached to a pre-approved home loan.

The National Credit Act makes this significantly more onerous than in years gone by, because banks are not merely required to look at a household’s income in determining the amount that it qualifies for.

They also need to assess the households’ expenditure and other debt commitments before approving a loan.

And then, for its own security, the bank needs to value the home being purchased to see that it holds sufficient value.

He says FNB provides the Passport to Purchase, a pre-approved loan with as few terms and conditions as possible.

A full credit assessment is done on the would-be buyer, including income, expenditure commitments, other debt and a credit record check.

It is valid for 90 days and the buyer can use it as a strong negotiating tool with the seller, although still subject to the targeted house being valued at an acceptable value so as to provide security for the home loan.

While banks represent the buyer, a large percentage of would-be buyers are also sellers.

There is the repeat buyer, the person who plans to sell their home either in order to upgrade, downgrade or to relocate for a variety of reasons.

The challenge is that the seller can never be sure what price they will get for the home being sold and whose proceeds may form a large portion of the funding of the home they are about to buy.

He says very often this homeowner is in a predicament, wanting to put in an offer for a new home, but not always knowing whether his financial situation allows it because they have to sell their current home.

The challenge is that the seller can never be sure what price they will get for the home being sold and whose proceeds may form a large portion of the funding of the home they are about to buy.

The FNB Estate Agent Survey indicates that an estimated 29 percent of repeat-buyers actually make an offer on a new home prior to selling their existing home.

By comparison, 44 percent wait for the sale of their existing home before making an offer on a new home, while 27 percent simultaneously market their home while searching for a new one.

According to the survey, 54 percent of home sales were unconditional sales and 46 percent were subject to sales.

Loos says the FNB Property Leader programme assists the seller-buyer in this instance.

The seller can be pre-qualified for finance for their next home, obtaining a Passport to Purchase and secondly, avail the bank’s professional valuers in support of the estate agent, for a valuation of the seller’s home.

He says although it is never possible to exactly predict what the ultimate sale value will be, the seller counselling is an attempt to get a professional valuer to set the price at an appropriate “market-related” level.

This prevents the home sitting on the market for longer periods and being sold unintentionally at a discount.

Pitching the seller’s property at the correct price results in significant cost savings by reducing property holding costs associated with holding onto a property for a lengthy period due to unreasonable asking price.

Loos adds that when banks manage to communicate effectively with consumers regarding information, it will reduce buyer frustration on whether or not they will be granted a home.- Denise Mhlanga

About the Author
Denise Mhlanga

Denise Mhlanga

Property journalist at property24.com

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