Money and Markets

How to buy a 'distressed' property in SA – while avoiding the many, many pitfalls

Business Insider SA
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    • If you’re thinking of buying a distressed property, or property that has already been repossessed,  you need to do your research.
    • A key factor is whether it is occupied or empty of tenants or (soon to be) former owners.
    • Any prospective buyer of a distressed property should note the extent of arrear municipal rates and levies.
    • It is vital that the property is thoroughly inspected.
    • For more stories visit the Business Insider South Africa front page. 

    You can pick up a substantial bargain when buying a distressed - or repossessed - property, but you need to do your research, thoroughly, or you could be in a world of financial trouble instead.

    There are three different stages during which buyers can purchase a "distressed" property. 

    • Where the homeowner tries to sell their property to avoid having their home repossessed, which is called a "distress sale". 
    • A so-called “sale in execution” property. This is when a borrower continues to default on their home loan and lawyers for the bank will apply to the court for a judgment. Once the bank has received the judgment, the Sheriff of the Court will auction the borrower’s movable assets. If the sale of the movable assets does not cover the mortgage arrears, the property moves into the “sale in execution” phase and the sheriff auctions the property.
    • A bank-possessed property. If the sheriff's auction does not meet the reserve price, the bank has the option to buy the property, and the property is then in the bank’s possession. In effect, the bank buys the property from the owner in default and the money from this acquisition clears part or all of the arrears owed by the former owner. The bank then puts the property in possession back on the market to try and get a better price.

    Here’s what you need to know about buying such property: 

    Check whether the property is occupied or empty

    Key to assessing a distressed property is whether it is occupied or empty. Empty properties sell for higher prices than occupied ones, because it is unpleasant, time-consuming, and costly to evict people from a property. While you do that, the occupants can also damage it, and so diminish its value.

    A regular buyer of distressed property, with 17 years of experience, told Business Insider South Africa in his experience only one out of ten repossessed properties is empty, and the eviction process can take a year from the time a buyer purchases the property on auction.

    Eviction can only start when the buyer has registered the distressed property in their name, and the new owner must pay all the monthly rates and taxes while waiting for the eviction to take place.

    Check what is outstanding in municipal rates

    Any prospective buyer of a distressed property should note the extent of arrear municipal rates, which are often substantial.

    If the property is a sectional title unit, then the extent of outstanding levies owed to the body corporate is also important.

    Inspect the property – and check out the neighbourhood

    A prospective buyer of a property must inspect it. 

    Property owners in distress often fail to maintain those properties, or they could have been vacant and vandalised. That becomes the problem of the new buyer.

    An experienced buyer says he goes to the address of the distressed property before a sheriff auction and either views the property from the street or knocks on the door to see if he could get a better view. 

    Like with any property, location is important too, and familiarising yourself with the neighbourhood is a good idea.

    But don't start your detailed research too early

    Auctions by the sheriff often get cancelled and so your valuable time researching these properties could come to nothing. 

    An experienced buyer says that because of this danger he only does his research a day or two before an auction to avoid wasting his time. 

    Probably the best website to watch for repossessed properties is SheriffHQ.co.za, which provides a comprehensive listing of local property auctions by the Sheriff of the Court.

    The MyRoof.co.za website is another good place to go for distressed property. Other websites that list distressed residential properties include:

    Buying a repossessed property from a bank can have big advantages

    When buying repossessed properties, you often do not pay transfer fees.

    Another benefit is that once a bank repossesses a property and sells it on auction or other means – but excluding an auction by the sheriff – the bank usually settles all arrear rates, levies and taxes on the property due until registration. 

    This is not the case with a Sheriff of the Court auction, where a buyer has to pay all arrear rates, levies, and taxes, and these amounts accumulate until registration. 

    The bank selling a repossessed property often offers discounted attorney fees. 

    But bank-repossessed properties take four to six months to transfer compared to the usual time frame of three months. 

    Here’s what you need to know about the auction itself and any other costs 

    Before registering for an auction, make sure you have the necessary finance. 

    To bid at a distressed property auction, you need to put down a registration fee of R25,000 or more, which is refundable if you do not buy a property. 

    In order to register for an auction, you also need to provide the auction house or Sheriff of the Court with your Financial Intelligence Centre Act (Fica) documents. 

    If you buy a property at an auction, you have to sign an offer to purchase straight afterwards, and you need to put down a deposit starting from 10% of the value of your bid. The balance of the purchase price is due after that. 

    You also need to a pay commission to the auction house or Sheriff of the Court, and this starts at 5% plus VAT. 

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