The 5 buy to let investment essentials that nobody ever told you.
After doing your research, crunched the numbers and selected a buy to let property, it’s time to take the plunge and make that property yours! But to avoid getting burnt, it may be a good idea to note and understand these 5 buy to let investment essentials;
1 It’s your offer
A property is purchased when one party (the willing and able buyer) makes a written presentation of his offer to purchase the property to a willing and able seller. By law in South Africa, property can only be sold by written contract. A verbal contract is invalid and if you do negotiate a deal verbally, the terms of the agreed deal must be reduced to writing and signed by both parties.
..no such thing as “a standard offer”
Do not look at the developer or estate agent’s contact and believe their words, “it’s just a standard contract with standard conditions” – there is no such thing as standard! Make the offer your own, and change clauses therein to your satisfaction.
Every agency will produce their best rendering of an offer to purchase that should contain all the essentials, but all agencies are not equal. And pay special attention to a potentially one-sided document drafted by the seller (or in many cases the developer).
My first hard lesson in property occurred when I bought a timeshare unit directly from a developer and signed the pre-printed “standard contract”. I lost all my money – but that is another story for another time.
If you cannot understand the language (especially the legal terms), then do not sign the document until you do understand what you are agreeing to. I would advise running an offer past your property coach, be he (or she) a friendly experienced investor, agent or property advisor.
2 Suspensive conditions
It is fairly normal to include at least one “subject to”, otherwise known as “suspensive”, condition in a contract. This is your back door to use if the property is not what it was made out to be by the seller or agent.
To understand a suspensive condition, consider your offer suspended in mid-air over the table. Only when the suspensive condition is met, does the contract fall onto the table and become a contract. Until that point it is merely an offer that binds the parties to proceed with the deal if the suspensive conditions are met.
Your suspensive conditions can be virtually anything, for example;
- This offer is subject to Mr J Bloggs approving the deal within 2 working days.
- This offer is subject to the buyer obtaining bond finance in the amount of R xxx within 14 working days.
3 Latent and patent defects and the voetstoots clause
Voetstoots: is an Afrikaans word that means “as is”
Patent defect: a defect that is easily identifiable upon inspection of property
Latent defect: a defect that is not apparent after ordinary inspection by a ‘reasonable man’
Defects can cost you !
Where there is some defect in the property which is not apparent on a careful inspection, the seller is liable for those defects if he or she knew about them. The voetstoots clause in the agreement of sale will not take away the seller’s liability.
The seller has a duty to reveal to the buyer any latent defects. And if he doesn’t can be held accountable to refund part of the purchase price, repair the damages or even to accept cancellation of the sale.
Make it your business to investigate the tenant’s payment history and behaviour since you will be inheriting him/her. The lease agreement carries a higher authority than the sale agreement, and you will be bound by the terms of any existing lease. (by law – “Huur gaat voor koop”)
Once happy with the tenant and the lease agreement, make sure you specify how the rental and deposit are to be handled on transfer.
On transfer of the property, the seller is likely to be holding your proportionate share of rental for that month plus the deposit. Avoid having to chase the seller for this money after transfer. You are likely to hear stories like, “Sorry, the tenant was in arrears and I used his deposit”.
The solution is simple, add a clause that instructs the transferring attorney to withhold the pro rata rental plus the full deposit (without deductions) from the purchase price, and pay it over to you on transfer.
Danger – verbal lease ahead
While on the subject of leases, a verbal lease is a very dangerous to an investor. If one exists on the property you are buying, make it a condition of sale that the current verbal lease is reduced to an acceptable signed lease agreement before transfer can proceed.
5 Watch the cash
It may not be that intuitive, but when you do the cashflow analysis it will become very obvious that the less cash you invest in a buy to let investment, higher returns
Agents will often insist that you pay a deposit, and this argument does have merit in that it strengthens your offer. I normally suggest that you offer a 10% deposit with a 90% bond.
Offering a deposit does not stop you applying for a 100% bond. Should you obtain 100% financing, a simple addendum to the contract will be all that is necessary.
To make all this possible ensure that your deposit is payable to the transferring attorneys (not the agent) after your bond has been approved.
Careful attention to these 5 points will go a long way towards ensuring successful buy to let investment. Please feel free to ask questions or comment below.
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