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How to buy property without home loan

04 Apr 2014

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

The buyer must take transfer of the property within five years of the date on which the contract is signed, but at any time during the five years, the buyer can settle 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 within five years,” says Meyer de Waal of Oosthuizen & Co Meyer de Waal Attorneys.

“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, but not longer than five years.

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.

The seller usually remains responsible for maintenance, rates and taxes and utility costs, but this is negotiable between the parties, as are other issues such as the date of occupation.

The buyer pays off the purchase price in instalments as agreed in the contract. Most often, the buyer simply takes over the seller's monthly bond repayments. Unlike bank-financed transactions in which transfer duty is payable upfront, the buyer in an ALA agreement can pay the transfer costs within six months or over a period of time, at a 10 percent per year interest rate.

The buyer must take transfer of the property within five years of the date on which the contract is signed, but at any time during the five years, the buyer can settle the full amount outstanding and take transfer of the property.

If the buyer does not fulfil the obligations once given a 30-day notice period, the contract becomes 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."

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.

Property buyers who are interested in exploring this alternative can visit www.oostco.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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