Finding the right home
Whether you are looking to buy a property for the first time, upgrading, downsizing or purchasing as an investment (for a regular income by letting) or speculating (to sell at a profit) - the right property is waiting for you to make it yours. Of course, the reason behind your purchase will have a major effect on what the "right" property is going to be.....
The best route to take is to decide what it is that you require from the property you wish to purchase. List features that are essential to you. This should include those things that you would prefer to have, as well as those that you definitely do not want. The location is, of course, a very important consideration. It is always better to buy the poorest house in the best area, rather than the nicest house in a 'not so good' area. The second option of the 'nicest house' may prove to be a temptation, especially to the novice, but it is onethat should be resisted. The house can nearly always be improved, but the area can hardly ever be bettered. An important aspect to keep in the back of your mind is that ofresale. The best location at the time is there where buyers are eager to buy and where the supply is limited. Other important things to consider are affordability, proximity to amenities and the availability of money.
Different forms of property ownership
There are two main forms of property ownership prevalent in South Africa, being freehold and community schemes.
- Freehold is the simplest form of ownership - the entire property belongs to the owner who is responsible for it. The owner is responsible for paying the rates and taxes, and for the services required (such as water, sewerage, refuse removal and electricity) as well as for maintaining and/or improving the property. When purchasing a freehold property, the owner is given a title to that property and ownership is registered at the Deeds Office that officially records ownership and other rights relating to the immovable property.
- A community scheme is any scheme or arrangement in terms of which there is shared use of and responsibility for parts of the property, inclusive of land and buildings. These include, but are not limited to, sectional title development schemes, share block companies, a home or property owners' association (HOA) which is established to administer the property owners' association, a housing scheme for retired persons and a housing co-operative as contemplated in the South African Co-operatives Act, 2005. The right to exclusively use a specific portion of the common property like a parking bay or private garden area, may be registered in favour of a particular section in a sectional title development scheme.
In Which Legal Entity Should You Purchase Property?
The purchaser's choice as to the purchasing entity will rely mainly on the objective for which the property is required. Before purchasing a property, the buyer must seriously consider the best structure to use. Factors to consider when making a choice of entity would include costs of purchase and ownership, personal estate planning, the security of ownership, taxation when acquiring the property, future disposal taxes, possible future creditor claims, etc.
The possible entities include a single individual owner, two or more joint owners, two to twenty partners in a formal partnership, private companies, existing close corporations and trusts.
The answer to the initial question pertaining to which legal entity one hould purchase a property in, therefor lies therein that each individual must research and weigh up all the pros and cons of each option and base an informed decision on personal preferences and position. A good tax consultant should be consulted if the answer is not obvious to the individual.
Financing your property purchase
It is, of course, imperative that potential property purchasers first ascertain what amount they can afford to spend on their home. If it is necessary to obtain a loan from a financial institution, it is always a good idea not to spend more than 25-30% of monthly gross income on the repayment of the loan. It is also advisable to firstly provide for as large a deposit as possible so that the loan amount does not constitute more than 80% of the purchase price. Provision should be made for fluctuating interest rates as our country has a reputation of relatively unstable interest rates.
In order to facilitate the process have the following documents handy when applying for a mortgage loan:
- a certified copy of your identity document
- your marriage certificate or divorce decree
- a copy of the sales agreement that has been signed by all the parties
- proof of your gross monthly income
- your most recent personal financial statements
- a Z573 Government Guarantee Form if you are employed by the government
- a copy of your permanent residence certificate if you are not a South African citizen
- a utility account as proof of address
Transfer Duty and other costs
When purchasing a property, the principal cost is obviously the purchase price, which may or may not include Value Added Tax. If the Seller is a registered VAT vendor and the property is being sold as part of stock in trade, VAT of 15% will be included in the purchase price. In the event that the transaction does not include VAT, Transfer Duty will be payable by the Purchaser.
- Transfer duty is calculated as follows for individuals and legal entities:
0 - 900 00: 0%
900 001 - 1 250 000: 3% of the value above R900 000
1 250 001 - 1 750 000: R10 500 + 6% of the value above R1 250 000
1 750 001 - 2 250 000: R40 500 + 8% of the value above R1 750 000
2 250 001 - 10 000 000: R80 500 + 11% of the value above R2 250 000
10 000 001 and above: R933 000 + 13% above R10 000 000
- The transferring attorney who has been appointed as the conveyancer, charges the Purchaser a conveyancing fee for registering the transfer of the property from the Seller’s name to the Purchaser's name. These fees are calculated on a sliding scale and are subject to VAT.
- If the purchaser makes use of mortgage bond finance, the attorneys that register the bond will charge a mortgage bond registration fee.
- Banks charge a fee for issuing bank guarantees.
- The Deeds Office levies a charge for property registrations as well as mortgage bond registrations and cancellations.
- The transferring and bond registration attorneys will also charge a fee for Post and Petties and other costs.
- The purchase price normally includes the estate agent's commission (normally thus payable by the seller). This is the fee payable to the estate agent that has performed the mandate by the seller of the property, negotiated the sale and ensuring a valid sale agreement. Law does not set the fee, but the general rate, which is used in the trade, is 7,5%. The amount is then normally paid out of the purchase price to the agent on registration of transfer. If the estate agent is registered for VAT, 15% VAT will be charged on the commission amount.
- In the event that the Purchaser takes occupation of the property before the date of transfer, a consideration for occupation (also known as occupational rental) can be agreed on.
- The banks charge an administration and initiation fee to a maximum amount of R5 700 (incl VAT) when a mortgage bond is registered.
- A rates clearance certificate fee is payable
- The purchaser may have to reimburse the seller for rates and taxes that have been prepaid by the seller until date of transfer.
- Local Authorities require deposits for the connection of water and electricity.
- Connection of and deposit on a fixed line telephone would also need to be paid.
- Provision has to be made for life insurance in the event that the buyer is making use of mortgage finance as well as short-term insurance to secure the property and its contents.
- Relocation costs must also be considered
What to look for when viewing a house?
Homebuyers often base their decision on which house to buy on their “gut feel”. Some even buy after a single visit. This is clearly unwise when considering the value of the investment to be made.
Here are some suggestions to minimise the possibility of the all too familiar “buyers remorse”.
Try to view the property that you have set your heart on during the day as well as at night-time. Also try to view during the week, at the weekend and during rush hour. We all know the importance of location, but what may seem to be perfect in the morning, may be a whole different kettle of fish at night!
Consider the following:
- Is it in your price range?
- Is the area appropriate?
- Does the size of the erf suit your life-style?
- Is the location in keeping with your needs? (proximity to schools, shops, sport
- facilities, attractive surroundings, pollution, noise, security etc.)
- The condition of the other properties in the area.
- North or South facing?
- Noise? Highways and busy roads. Near local nightspots?
- Future developments in the area.
- Rezoning for business or industrial use
- Public open spaces
- The general condition of the area
- Why is the owner selling?
- How long ago did the current owner purchase the property?
- Is the property mortgaged and what is the outstanding balance on the mortgage loan?
- Layout and position on the site
- Is the structure sound?
- General condition, repairs and maintenance required
- Fitted cupboards
- Security features
- Fixtures the seller intends to remove
- Movables (curtains) to be included in the sale
- State of the garden
- Does the property lend itself to alterations or extensions?
Always enquire from your agent whether the owners have disclosed, in writing, all the defects known to them. Remember that it is always better to discuss these issues before committing to purchasing a property. In the event of the owner agreeing to rectify any defects, it is wise that a written undertaking to this effect be embodied in the agreement of sale.
The Agreement of Sale and other documentation
All agreements of sale containing the material terms and conditions of the sale must be in writing and signed by the parties to the agreement or their authorised representatives.
The REDZetc Agreement of Sale will be explained to the purchaser by the estate agent before signature. The first signature on the document (normally that of the purchaser) constitutes a valid offer, which on acceptance by the other party (normally the seller) becomes an agreement/contract that binds both parties. The seller’s chosen conveyancer will contact you to sign all the other relevant documentation in order to facilitate the process in which the property will be transferred from the seller into your name.
Purchasers are also entitled to request an Option to Purchase or a Right of First Refusal from the seller. The Option offer must be in writing, contain a price and termination date and be signed by the grantor of the option. A Right of First Refusal must also be in writing and signed by both parties and can be registered against the title deed of the said property in order to ensure compliance.
Questions and answers for foreign buyers
Foreigners are referred to as non-residents in South Africa. A non-resident can be a natural person or a legal entity whose normal place of residence or domicilium falls outside the common monetary area, which consists of South Africa, Lesotho, Namibia and Swaziland. All property transactions by non-residents have to be routed through the South African Reserve Bank.
Can non-residents purchase property in South Africa?
- They can, but they cannot be granted a loan for the full purchase price.
To what extent can a property be financed by means of a South African loan?
- A non-resident may borrow up to a maximum of 50% of the purchase price. The other 50% of the funds have to be brought into the country by the buyer.
How does one go about applying for mortgage bond facilities to the Reserve Bank?
- All requests for foreign purchases of South African property must go through a local bank.
How long does it take for the Reserve Bank to process an application?
- It normally takes one to two weeks.
What happens once approval has been received?
- A non-resident bank account must be opened in South Africa from which the bond repayments must be made.
How can a non-resident bring funds into South Africa?
- Once the non-resident account is opened locally, the money is transferred into the account electronically. Cash may also be paid into the account, but needs to be converted into South African Rand and requirements of the Financial Intelligence Centre Act (FICA) must be observed.
Can a non-resident take funds out of South Africa when the property is sold?
- Funds brought into the country by a non-resident may be repatriated at any time, but capital gains on immovable property will be taxed.
Which taxes are payable on purchasing a property
When purchasing a property the buyer has to pay Transfer Duty on the purchase price.
In the event that the seller is a registered VAT vendor, then the buyer is exempt from paying Transfer Duty because VAT of 15% will be included in the purchase price. The buyer therefore only pays Transfer Duty if the seller is not a VAT vendor.