Introduction
Our last issue featured an introductory article on the process of purchasing a property, and underlined in broad terms the various aspects of the process, as well as the prospective purchaser’s rights.
That article emphasised the fact that once you have made the firm decision to submit an offer on a particular property, your estate agent should assist you in drawing up what is known as an “Offer to Purchase”.
This document will include such details as the purchase price; payment of the purchase price; date of occupancy; occupational rental; whether the property is being purchased voetstoots or not; handover of housekeys; vacation of the property by tenants or domestic workers; and any of a host of other matters deemed necessary.
In this and ensuing articles we will examine and discuss these various details, starting today with the first-mentioned aspect – that of the purchase price.
How to determine your purchase price
Your offer to purchase must contain a proposed price for the property. So we will begin by looking at the various elements relating to the determination of what the prospective buyer should offer as an appropriate price for the property concerned.
The most important aspect is that you need to ensure that the price you pay for any property is genuinely market-related. You dare not adopt the sentimental or romantic approach that you have found your dream house and you have to have it at any price – even if it does not make economic sense. The purchase of a property is a significant financial investment, and you must not allow your emotions to dominate economic reality.
Also bear in mind that the asking price of a seller is is not caste in stone. No matter what the seller’s asking price for the property is, you, as the purchaser, are not compelled to offer that price. You are perfectly entitled to make any offer you believe to be practical and reasonable. And you never know, your offer may turn out be reasonable enough to tempt the seller into acceptance.
There are various factors which can influence the determination of the purchase price you offer.
- Obtain agreement from the seller to have the property valued for yourself. The seller does not have to allow this, but it would be pretty pointless to refuse. Then secure the services of a reputable, reliable, efficient and effective valuer, sworn appraiser, or even estate agent, to handle the valuation
- Study the reputable property publications to assess, evaluate and compare the prices of similar properties in the same or similar areas
- This might sound unfair, but it is not the least bit unethical. If you have the means or ability to do so, determine the extent of the seller’s need or desperation to sell. For example, determination of the period of time that the property has been on the market is an effective measure of the seller’s urgency. If the property has been on the market for several months, that would mean that the seller has been unable to realise the desired price
- Find out why the seller is selling. This may be a good pointer towards determining whether he/she is desperate to sell. You may gather that the seller is in financial difficulty, and is likely to accept an offer below the asking price.
- Before making your decision on which property to purchase and how much to offer for it, bear in mind the importance of purchasing in as affluent an area as possible.
Rather buy a less attractive home in a more expensive area than a palace in a mediocre part of town. Everything being equal, it would be a better financial investment.
Payment of the purchase price
The first important factor is when payment of the purchase price is due. Please note that the seller is not paid the purchase price in advance, and a succession of events has to occur before payment takes place.
The first phase involves your offer to purchase, and until this offer has been signed by the seller, you are merely a “prospective purchaser”. The moment the seller signs the document, it becomes an agreement of sale, and at this stage – now that an official agreement is in place – you become the purchaser.
Now the process begins for the registration or transfer of the property into your name as the purchaser. Only once this has been completed – and you are registered as the purchaser – do you become the owner of the property, and only then is the seller entitled to be paid.
The first scenario is that it could be a “cash sale” – in other words you have the funds available to pay the full purchase price. In such a situation, you would have to pay the purchase price either to the estate agent or the conveyencer involved within the period of time stipulated in the agreement of sale. Either way, the funds are held in the applicable trust account.
Normally, the conveyencer or estate agent concerned will then invest the amount paid into an interest-bearing account on behalf of yourself as the purchaser. In other words, the interest earned in that account would be credited to you.
You – as the purchaser – must understand that once this money has been invested in an interest-bearing account, it is no longer trust money, and accordingly is not protected by the Law Society’s or the Estate Agents’ fidelity funds.
Monies in an attorney’s or conveyencer’s trust account are protected, secured, and literally guaranteed by the fidelity fund. If for some reason those monies disappear, the fund would make good for the lost funds. But once the monies have been invested in an interest- bearing account, that protection does not apply.
So there is a risk in that your funds could be misappropriated and you would then lose the money. It is for this reason that an estate agent or a conveyencer has an obligation to advise you or any purchaser of the fact that this money will not be protected once invested in an interest-bearing account. He or she must also obtain your written consent, acknowledging that you were informed that this protection does not apply, and that you nevertheless consent.
How to avoid any risk
The solution, therefore, is often the following: rather than paying the money to the conveyencer or estate agent, arrange with your own bank to issue a bank guarantee for payment of the purchase price on registration of transfer.
If this course of action is taken the agreement of sale must read that the purchase price will be secured by a bank guarantee to be delivered to the seller’s conveyencers within the specified period. This way you – as the purchaser who has to pay the money – still earn interest on the funds, which remain in your bank account. You simply guarantee that the funds will remain available, and your bank undertakes to pay the seller from these funds.
This whole discussion has revolved around the first scenario where you have the funds available to handle payment of the full purchase price as a cash deal.
The second scenario – and by far the more common situation – is where the whole purchase price is not paid in cash. The purchaser does not have sufficient funds to pay the full amount. In such a case you would apply for a loan secured by mortgage bond.
Alternatively, you may have part of the purchase price available, in which event you would pay the amount you have available as a desposit, and would apply for a loan for the balance. In such a case, the deposit you have available would similarly be paid into the trust account of the conveyencer or estate agent, unless you chose to have your bank provide a guarantee for the amount you have available as a deposit. For that part of the purchase price funded by the mortgage bond loan, a bank guarantee will be issued to the seller by your bank.
In drawing up an offer to purchase a property, one of the key factors is the purchase price.
Hopefully this article has helped you develop a clear picture of the two main aspects you need to understand and apply in regard to your purchase price: how to determine a practical and realistic figure for your offer to purchase and – once the deal is through – how to pay that purchase price with minimum risk.
Good luck and happy house hunting!
Disclaimer: This article is for information purpose only and does not constitute legal advice. Call on our attorneys for legal advice, rather than relying on the information herein to make any decisions. The information is relevant to the date of publishing.