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Here's how to buy a property without a home loan

19 Sep 2020

Given the fact that few people have the resources to buy a property for cash, and almost half of bond applications are still declined by banks despite the low interest rates, many South Africans have likely wondered if there is another way of buying property.

READ | Mortgage Bond vs Home Loan | Two parts of your land asset whole

The buyer must take transfer of the property anytime from one year after the date on which the contract is signed, and can settle or secure the full amount outstanding and take transfer of the property.

The good news is, there is - it is called an instalment sale and about 5 percent of property sales are currently concluded in this way.

“Essentially, an instalment sale is simply an agreement, documented in a water-tight contract between a buyer and a seller that the buyer will pay off the purchase price in monthly instalments over a period of time,” says Meyer de Waal of MDW INC Attorneys.

'Alienation of Land Act'

“This method of buying property is made possible through a lesser-known piece of legislation called the Alienation of Land Act no. 68 of 1981, which provides solid protection for both the seller and the buyer.”

The Alienation of Land Act (ALA) enables a buyer to acquire a property by paying the seller in more than two instalments (in usual bank-financed transactions there are two instalments: the deposit and the final settlement amount) and over a period longer than one year. The perception was that the repayment needs to finalized within 5 years, but the parties can agree on any time frame, as long as is a period longer that one year.

SEE: 'Luxury coastal property boom' as Atlantic Seaboard apartment sells for R41.4m 

Once a buyer and a seller have agreed on a price, the payment arrangements and the terms and conditions, a special purchase contract is drawn up by attorneys that specialise in ALA transactions, which meets all the requirements of the ALA to ensure the transaction is legal and protects the interests of all parties.

The ALA purchase contract is registered against the title deed by the conveyancers, formally noting the rights of the buyer over the property, and if there is a bond on the home, the bond holder (usually a bank) is informed in writing. The property remains registered in the name of the seller, but the buyer is protected by the ALA and, after the contract is signed, the seller cannot take out a further loan against the property.
 
'Pay off the purchase price in instalments'

The seller usually remains responsible for maintenance, rates and taxes and utility costs, but this is often taken over by the purchaser to pay as part of the negotiable between the parties. The parties also agree on other issues such as the date of occupation.

The buyer pays off the purchase price in instalments as agreed in the contract. Sometimes the buyer simply takes over the seller's monthly bond repayments plus an extra upfront deposit or makes extra instalments every month to reduce the balance of the purchase price still outstanding. Unlike bank-financed transactions in which transfer duty is payable upfront, the buyer in an ALA agreement can pay the transfer duty within six months to avoid a penalty for late payment of transfer duty imposed by SARS. At the moment all property sales under R1 million are exempt from transfer duty.

The buyer must settle the balance of the purchase price and then take transfer of the property within the time frame as agreed in the deed of sale, however, the buyer can settle the full amount outstanding earlier and request transfer of the property earlier. The buyer can also arrange a mortgage/home loan to settle the balance of the purchase price due on transfer.

'Quick and efficient solution for distressed and keen sellers'

If the buyer is in breach and does not fulfil the obligations once given a 30-day notice period, the seller can terminate the contract and such cane become null and void. The buyer forfeits all payments made and the seller retains ownership of the property, providing solid protection for the seller. Furthermore, both the seller and the buyer's respective rights and interests are protected by ALA in the event that one of the parties should become insolvent or pass away during the contract period.

“For buyers who have been unable to obtain a home loan or bond to acquire their dream home or an investment property to build wealth, instalment sales are a practical alternative to securing a property at today's market value, and taking occupation while paying the property off without mortgage finance,” says de Waal.

“Instalment sales are also a quick and efficient solution for distressed and keen sellers who are struggling to sell their properties, because potential buyers cannot obtain home loans. As there are no suspensive conditions - such as the buyer obtaining a bond or selling another property, it is a quick and certain solution for distressed sellers.

“Sellers who need to relocate for work purposes or those who are selling due to death of a spouse or a divorce will also find an instalment sale attractive when their main priority is to conclude the deal swiftly and with certainty, so they can move on with their plans and new lives."

READ | Why you should apply for your maximum bond value, even with a deposit

Instalment sales are a legal alternative to the difficult, time-consuming and expensive common practice of obtaining a home loan or mortgage bond to acquire a property.

An instalment sale agreement is regulated by the National Credit Act as well and it is best advised to obtain the correct legal advice how such act will impact on the seller and purchaser before entering into such an agreement.

Property buyers who are interested in exploring this alternative can visit www.mdwinc.co.za for more information, and are well advised to rely on the expertise and experience of attorneys who specialise in ALA contracts, to ensure the legal requirements are fulfilled and that the interests of both parties are protected.

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