Property ownership Guide

Description:

South Africa Guide: Property

Introduction:

It is always wise to do extensive research, study the possible pitfalls and be prepared to rent for a period before buying.

What to take into account

The advantages are:

• Guaranteed summer sunshine in most areas and a pleasant climate for much of the year in many parts of the country;

• Good value (provided you avoid the most fashionable areas), particularly if you want a country house with a large plot or an urban property in an upcoming part of town;

• The solidity and spaciousness of rural homes;

• Impressive design and a huge variety of architectural styles;

• A buoyant property market;

• Safe purchase procedures (provided you aren’t reckless);

The few disadvantages are:

• The high purchase costs associated with buying property in comparison with some other countries;

• High inflation (currently almost 10 per cent per annum);

• A high crime rate in some urban areas;

• Traffic congestion and pollution in some towns and cities and a high road death rate in the country as a whole;

• Cool, wet, windy winter weather in some regions;

• Overcrowding in popular tourist areas;

• The duration and cost of flights to South Africa from Europe or North America, although prices are coming down.

Buying for investment:

In recent years, South African property has been an excellent investment, particularly in the most sought-after coastal regions, where prices have risen fastest.

There are various kinds of property investment. Your home is an investment in that it provides you with rent-free accommodation. It may also yield a return in terms of increased value (a capital gain), although that gain may be difficult to realise unless you trade down or move to another region or country where property is cheaper. Of course, if you buy property other than for your own regular use, e.g. a holiday home, you will be in a position to benefit from a more tangible return on your investment.


There are four main categories of investment property:

• A holiday home, which can provide your family and friends with rent-free accommodation while (hopefully) maintaining or increasing its value; you may be able to let it to generate supplementary income.

• A home for your children or relatives, which may increase in value and could also be let when not in use to provide an income.

• A business property, which could be anything from a private home with bed and breakfast or guest accommodation to a shop or office.

• A property purchased purely for investment, which could be a capital investment or provide a regular income, or both. In recent years, many people have invested in property rather than shares or savings to provide an income on their retirement.

• A property investment should be considered over the medium to long term, i.e. a minimum of five and preferably 10 to 15 years. Bear in mind that property isn’t always ‘as safe as houses’ and investments can be risky in the short to medium term. You must also take into account income tax if a property is let and property taxes. Capital gains tax is charged at normal income tax rates in South Africa and you may be liable for tax on any profit made if the property isn’t your main residence. You also need to recoup purchase costs of 10 to 12 per cent when you sell.

When buying to let, you must ensure that the rent will cover the mortgage (if applicable), running costs and void periods (when the property isn’t let). Bear in mind that rental rates and letting seasons vary with the region and town, and an area with high rents and occupancy rates today may not be so fruitful in the future. Gross rental yields (the annual rent as a percentage of a property’s value) are from around 5 to 10 per cent per year in most areas (although gross yields of 15 per cent or more are possible) and net yields (after expenses have been deducted) 2 to 3 per cent lower. Yields vary considerably with the region or city and the type of property.

Land & Title:

According to the law:

The right to property is enshrined under section 25 of the Constitution of the Republic of South Africa Act, 1996. It states (somewhat evasively) that nobody may be deprived of property except in terms of law of general application, and no law may permit arbitrary deprivation of property.

There are various kinds of property investment. Your home is an investment in that it provides you with rent-free accommodation. It may also yield a return in terms of increased value (a capital gain), although that gain may be difficult to realise unless you trade down or move to another region or country where property is cheaper. Of course, if you buy property other than for your own regular use, e.g. a holiday home, you will be in a position to benefit from a more tangible return on your investment.

A property investment should be considered over the medium to long term, i.e. a minimum of five and preferably 10 to 15 years. Bear in mind that property isn’t always ‘as safe as houses’ and investments can be risky in the short to medium term. You must also take into account income tax if a property is let and property taxes. Capital gains tax is charged at normal income tax rates in South Africa and you may be liable for tax on any profit made if the property isn’t your main residence. You also need to recoup purchase costs of 10 to 12 per cent when you sell.

When buying to let, you must ensure that the rent will cover the mortgage (if applicable), running costs and void periods (when the property isn’t let). Bear in mind that rental rates and letting seasons vary with the region and town, and an area with high rents and occupancy rates today may not be so fruitful in the future. Gross rental yields (the annual rent as a percentage of a property’s value) are from around 5 to 10 per cent per year in most areas (although gross yields of 15 per cent or more are possible) and net yields (after expenses have been deducted) 2 to 3 per cent lower. Yields vary considerably with the region or city and the type of property.

Legal Advice

Why you need a lawyer

It cannot be emphasised too strongly that anyone planning to buy property in South Africa must take expert, independent legal advice.

If you aren’t prepared to do this, you shouldn’t even think about buying a property! Some people who buy a home in South Africa don’t obtain independent legal advice and most of those who experience problems take no precautions whatsoever. Of those who do take legal advice, some do so only after having paid a deposit and signed a contract or, more commonly, after they’ve run into problems.

Never sign anything, or pay any money, until you’ve sought advice from a lawyer who’s experienced in South African property law.

You will find that the relatively small cost (in comparison with the cost of a home) of obtaining legal advice is excellent value, if only for the peace of mind it affords. Trying to cut corners to save a few rand on legal costs is foolhardy in the extreme when a large sum of money is at stake.

Your lawyer will carry out the necessary searches regarding such matters as ownership, debts and rights of way. It isn’t wise to use the vendor’s lawyer, even if this would save you money, as he’s primarily concerned with protecting the interests of the vendor.

Enquiries must be made to ensure that the vendor has registered title and that there are no debts against a property. It’s also important to check that a property has the relevant building licences, conforms to local planning restrictions and that any changes (alterations, additions or renovation) have been approved by the local authorities and have planning permission. If a property is owned by several members of a family, all owners must give their consent before it can be sold.

A lawyer’s fees may be calculated as an hourly rate (e.g. R1,000/£87 per hour) or as a percentage of the purchase price of a property, e.g. 1 to 2 per cent, with a minimum fee of R2,000 (£175) to R4,000 (£350). You could employ a lawyer just to check the preliminary contract before signing it to ensure that it’s correct and includes everything necessary, particularly regarding conditional clauses.

Be careful who you engage, as some lawyers are part of the problem rather than the solution (overcharging is rife)! Don’t pick a lawyer at random, but engage one who has been recommended by someone you can trust.

Cost of Property

One of the major considerations for anyone contemplating buying a home in South Africa is whether they can afford to buy there and, if so, what kind of home can they afford and where?

Foreign buyers have traditionally been attracted by the relatively low cost of property compared with that in many European countries. However, prices have risen considerably in the last few years, particularly in the cities and coastal regions, and property in the most popular areas is no longer as much of a bargain it once was, which can come as a surprise to newcomers.


In fact, there are few bargains left, except in remote areas.

Nevertheless, property in South Africa remains good value compared with that in many other countries (sometimes very good value), particularly rural properties with a large plot. A slice of South African sunshine style needn’t cost the earth, with the average house price at the end of 2003 estimated by the Cape Argus newspaper to be R418,000 (£36,350), although the average price in the desirable areas of the cities and coastal stretches favoured by foreign buyers was considerably higher.

According to the same report, the average price in Durban was put at R451,000 (£39,000) and much higher in the best areas of the city. Whereas a modest, detached property in a quiet coastal area two hours’ drive north of Cape Town can cost as little as R240,000 (£21,000), you will have to pay a minimum of around R2,170,000 (£190,000) for a similar property in a trendy marina area of the city. And for those with the financial resources the sky’s the limit, with large, luxury apartments and houses in the best areas of South Africa costing many millions of rand.

If you’re seeking a holiday home and cannot afford to buy one outright, you may wish to investigate a scheme that provides sole occupancy of a property for a number of weeks each year rather than buying a property. Schemes available include part-ownership, leaseback and timesharing.

Don’t rush into any of these schemes without fully researching the market and before you’re absolutely clear what you want and what you can realistically expect to get for your money.

Community Properties:

All you need to know about Community Properties

In South Africa, apartments and townhouses are sometimes part of what are known as sectional title schemes or sectional title development schemes, in accordance with the Sectional Titles Act No 95 of 1986.

This means that properties are part of a community, where individuals own their own apartment or house but share common areas, e.g. driveways, gardens, swimming pools, corridors, gardens, lifts (elevators), entrance foyers, parking areas, outer walls, foundations and the roof. In South Africa, a sectional title development is called a ‘unit’ and an individual property is called a ‘section’; to avoid confusion, however, developments will be referred to as ‘schemes’ and individual properties as ‘properties’.

Parts of a scheme are sometimes designated as ‘exclusive use areas’. These include gardens, patios, parking bays, garages and storerooms. If this is the case, you don’t own the area concerned but have exclusive use of it. Under the terms of the 1986 Act, an owner can sell the use of an exclusive use area to another owner in the scheme but not to an outsider. This doesn’t apply to owners in schemes registered under the previous (1971) Act.

The common property of a sectional title scheme is controlled and run by the scheme’s ‘body corporate’ – the collective name given to all of the owners of properties in a scheme. But the everyday running of the scheme is entrusted to ‘trustees’, who are appointed by the body corporate. People familiar with Spanish urbanisations will recognise this way of doing things: residents of a group of apartments and/or townhouses appoint a committee with a president (from their own number) to run common affairs.

Trustees are almost always owners of properties in a scheme. The minimum number of trustees in each scheme is two, but the Act doesn’t specify a maximum number. To be a successful trustee, you should have knowledge of at least some of the following (in which case you may save the scheme money on professional fees): the law, accountancy, electrical and mechanical devices and problems, bookkeeping and general administration. Trustees often receive no payment for their work (except expenses), although the body corporate will sometimes agree to pay a trustee or trustees.

Major decisions concerning sectional title schemes are made by the body corporate at an annual meeting, usually called the Annual General Meeting (AGM), or at a Special General Meeting, presided over by the chairman of the trustees. These gatherings are held to approve budgets, appoint trustees and consider changes to the rules (provided that these aren’t contrary to the intentions and spirit of the Sectional Titles Act). Discussions on these occasions are sometimes lively, occasionally confrontational, and all members of the body corporate are entitled to vote (unless they’re in arrears with fee payments or in serious breach of the rules). Unless otherwise decided, an individual owner’s voting power is determined by his percentage ownership of the entire scheme (for example, he might own more than one apartment or townhouse) – known as his Participation Quota (PQ).

Managing Agents

Running a large sectional title scheme can be complicated and time-consuming and, unless the body corporate is particularly well supplied with people with a wide range of specialist knowledge and experience, it can prove impossible to do successfully. As a result, some bodies corporate appoint a managing agent to carry out some or all of the work – usually a company that specialises in sectional title administration. A managing agent must be registered with The Estate Agents Board and hold a fidelity fund certificate issued by the Board.

The managing agent sends out monthly statements of work and accounts, carries out bookkeeping, recovers unpaid debts, arranges quotes for maintenance and repairs, and helps the trustees with the many tasks involved in administering the scheme. A good managing agent can save a body corporate a lot of time, trouble, stress and expense. On the other hand, a frequent criticism of sectional title schemes is the low standard of managing agents.

Fees

Payment for the administration and running of a sectional title scheme is shared among the owners. Costs incurred include insurance premiums, repairs and maintenance charges, the wages of cleaning, maintenance and gardening staff, and water and electricity used on the common property. These are paid for by a monthly levy, which every owner must pay. Any costs incurred in the upkeep and maintenance of exclusive use areas are recovered from the user of the area.

As well as dealing with these expenses, the body corporate must establish a fund to pay for future maintenance and to cover unexpected expenses. The Sectional Titles Act doesn’t specify a size for this fund and doesn’t allow any part of it to be refunded; any surplus must be used to subsidise future levies or to improve the common property. In an emergency, the trustees can impose a special levy to cover unforeseen expenses.

Before every AGM, the trustees prepare a budget for the following year and this determines the size of the levy. The budget is sent to all members of the body corporate before the meeting for their consideration and discussed and approved at the meeting. Once this is done, the total cost is divided into monthly amounts and split among owners according to their PQ.

Insurance

The Sectional Titles Act requires the body corporate to ensure that the buildings are insured for their replacement cost. This insurance must cover all properties and improvements to the common property but it covers only buildings; individual owners must insure their contents. The premiums are included as part of the monthly levy.

Rules

Owners in a sectional title scheme must obey common rules. If an owner fails to maintain his property or exclusive use area, the body corporate can carry out the necessary maintenance and repairs, and charge the owner. A body corporate is even allowed to apply to the Supreme Court for an order instructing an owner to comply with a scheme’s rules. Most disputes, however, are settled without recourse to such measures: it’s in the interest of all owners that the scheme runs smoothly.

Advantages & Disadvantages

The advantages of owning a community rather than an individual property usually include:

• Increased security;

• Lower property taxes than detached homes;

• A range of community sports and leisure facilities;

• Community living with lots of social contacts and the companionship of close neighbours;

• No garden, lawn or pool maintenance;

• Properties are often situated in locations where owning a detached home would be prohibitively expensive, e.g. a beach-front or town centre.

The disadvantages of community properties may include:

• Excessively high community fees (levy);

• Restrictive rules;

• A confining living and social environment and possible lack of privacy;

• Overuse of communal facilities, especially in a large section or at peak periods: a large swimming pool won’t look so big when 100 people are using it, and getting a game of tennis or booking a fitness room may be difficult;

• Noisy neighbours;

• Limited living and storage space;

• Limited covered or secure parking (or insufficient off-road parking);

• Time-consuming and stressful administrative duties if you’re a member of the body corporate (critics of sectional title schemes argue that it’s impractical for ordinary homeowners to manage often multi-million rand schemes themselves, in their spare time);

• Acrimonious owners’ meetings, where management and factions may try to push through unpopular proposals (sometimes using proxy votes).

If you’re planning to live permanently in a scheme, you should avoid buying in a section with a high percentage of rental units, i.e. units that aren’t owner-occupied, as these they may be filled with rowdy holidaymakers and the owners may be unconcerned with the running of the section.

Checks

Before buying a sectional title property, you should check (or ask your lawyer to check) the following:

• That the seller owns the property he claims to own by asking the trustees to show you a copy of the registered section plan. You should also check the exclusive use areas to which you will be entitled.

• If the section has been extended or altered, that the work had the requisite consent and has been registered;

• Whether a Section 25 Right To Extend The Scheme has been registered, meaning that the developer has reserved the right to add extra buildings or extend existing ones. A Section 25 Right is quite rare, but you should know about it if it exists, as it might change the nature of the scheme you’re thinking of buying into.

• The condition of the common property (e.g. brickwork, paintwork, plaster, gardens, driveways, lifts, swimming pool). If these are in poor condition, it’s a sign of poor management and high future expenses.

• Whether satellite TV is included. If not, it can be difficult or impossible to obtain agreement to introduce it and you cannot install your own dish.

• How good the security is;

• The rules of the scheme. Is there anything you would find difficult to comply with, or don’t want to comply with?

• The monthly levy. You should also ask to see a copy of the latest audited accounts, paying special attention to the financial reserves for future maintenance and repairs. A healthy reserve fund is often a sign of a well run scheme.

• If you’re planning to buy an apartment above the ground floor, whether the building has a lift. Note that upper floor apartments are both colder in winter and warmer in summer and may incur extra charges for the use of lifts. On the other hand, they offer more security than ground floor apartments. An apartment that has other apartments above and below it will generally be noisier than a ground or top floor apartment. Under-roof apartments may also have temperature control problems (hot in summer, cold in winter), although they enjoy better views. If the building has lifts, check whether they’re covered by a full maintenance contract, as lift repairs can be very expensive.

• Whether there’s any pending legislation against the body corporate.

• You may also wish to check on your prospective neighbours!

• If you’re planning to buy a community property, it’s important to ensure that it’s well managed and that there aren’t any major problems with the common property. If there are, you could be liable to contribute towards the cost of repairs, which could run into many tens of thousands of rand.

Transfer Fees

Extra costs when buying property in South Africa

A variety of fees (also called closing or completion costs) are payable when you buy a property in South Africa, including those detailed below.

Before signing a preliminary contract, check exactly what fees are payable and have them confirmed in writing.

In addition to the fees associated with buying a home, you must also take into account the running costs. These include local property taxes, building insurance, contents insurance, standing charges for utilities, community fees for a community property, garden and pool maintenance costs, and a caretaker’s or management fees if you leave a home empty or let it. Annual running costs usually average around 2 to 4 per cent of the cost of a property.

Transfer Duty

Transfer duty is a tax levied on the transfer of ownership of fixed property. If you’re buying as a company, a close corporation or a trust (sometimes called a ‘legal entity’), transfer duty is levied at a flat rate of 10 per cent of the purchase price. If you’re buying as an individual (officially termed a ‘natural person’!), duty is calculated on the following scale: If you buy a home in South Africa, you must pay transfer duty on the value of the property above R140,000 (£12,173). Duty is levied at 5 per cent on the value between R140,000 and R320,000 (£27,826), and at 8 per cent on any value over R320,000. For example, on a property costing R500,000 (£43,500), you will pay R31,700 (£2,756) in stamp duty.

Value (R)                 Duty Rate (%)              Cumulative Duty (R)

Up to 150,000

150,001 – 320,000     5                               8,500

Over 320,000             8

Legal or Conveyancing Fees

These are calculated on a sliding scale and amount to between 1 and 2 per cent of the purchase price, depending on the value of the property.

Bank & Mortgage Costs

Bank inspection fees are around 0.2 per cent of the valuation, and the mortgage arrangement fee is around 1 to 1.5 per cent of the loan amount.

Utility Fees

If you buy a new property, you must usually pay for electricity and water connections (and occasionally gas, but it’s little used in South Africa) and the installation of meters. You should ask the builder or developer to provide the cost of connection to services in writing. If you buy a resale property, you must usually pay for the cost of new contracts, particularly water.

Other Fees

Other fees may include surveyor’s or inspection fees, architect’s fees and the cost of moving house.

Note that stamp duty was abolished in the 2004 budget but is still (erroneously) mentioned on many websites dealing with buying property in South Africa.

Agreement of Sale:

What it should include

Once you’ve agreed a price with the vendor, you must make an ‘agreement of sale’, which is normally done through an estate agent.

Once you’ve agreed a price with the vendor, you must make an ‘agreement of sale’, which is normally done through an estate agent.

The terms ‘agreement of sale’ and ‘offer to purchase’ are sometimes used interchangeably in South Africa, although they aren’t quite the same thing. An agreement of sale is a written agreement signed by both the buyer and the seller (and also by the seller’s spouse if he’s married or subject to the laws of a foreign country), whereas an offer to purchase may be either oral or written. If it’s in writing and signed by the buyer and accepted by the seller, an offer to purchase constitutes a binding agreement of sale, whereas an oral offer isn’t binding.

Note that the payment of a deposit isn’t mandatory in South Africa, but is a gesture of good faith by the buyer and an indication to the seller that he’s serious and is in a position to buy the property.

• An agreement of sale should include the following:

• The name, address, identity numbers and marital status of the buyer and seller. If a company is buying the property, details of the position or capacity of the signatory must be provided.

• A clear description of the property; The selling price and the form of payment. If a deposit is to be paid, the agreement must specify that it be held in trust by the named conveyancer or estate agent.

• When the sale is subject to the buyer obtaining a loan, the amount of the loan, the institution applied to and the date by which the loan must be approved;

• When the sale is subject to the sale of the buyer’s property, a description of the property, the amount for which it is to be sold and the date by which it must be sold;

• Confirmation that the buyer must pay all transfer costs, taxes and municipal charges on the property from the date of possession;

• The dates on which the transfer of ownership is to take place and the buyer is to take possession. If occupation is to take place before the transfer of ownership, the buyer must pay interest or rent from that date, in which case the amount and method of payment must be specified.

• That the property is sold ‘voetstoots’(meaning ‘as is’ or ‘in the condition in which the property is found’), i.e. without a guarantee by the seller that it has no defects (although the seller must tell the buyer about any faults that the seller knows about).

• Property surveys aren’t standard in South Africa but they can be carried out and their results included as a condition of purchase.

• The name of the conveyancer who will deal with the transfer;

• Confirmation that commission is due to a named estate agent and the amount due;

• Whether a certificate has been obtained confirming that all accessible parts of the property are free of infestation by designated beetles (sometimes known as a ‘borer-free’ certificate), who must pay for the inspection – generally the seller – and details of any work required;

• Who will pay for the electrical certificate confirming that the electrical installation meets statutory safety requirements – generally the seller – and details of any work needed;

• A list of fixtures and fittings included in the sale;

• Confirmation that no amendments to the agreement of sale are valid unless in writing and signed by the buyer and seller.

Conveyance

Conveyancing (or conveyance) is the legal term for the process whereby a person, company, close corporation or trust becomes the registered and legal owner of immovable property and ensures that this ownership cannot be challenged. It also covers the process of the registration of mortgages.

Conveyancing in South Africa can only be carried out by a licensed conveyancer, i.e. a lawyer (the term attorney is also used in South Africa) who has passed the National Conveyancing Examination.

After an agreement of sale has been made, a conveyancer is appointed (invariably by the seller, who must also pay the fees) and instructions are sent to him by the estate agent, including the names of the buyer and seller, a copy of the agreement of sale, and the passport numbers and marital status of the buyer and seller. The conveyancer then drafts the following documents:

A power of attorney to pass transfer– This must be signed by the seller because it allows the conveyancer to transfer the property on his or her behalf.

Declaration in respect of marital status, identity number and insolvency – The buyer and the seller must sign an affidavit in which they confirm their marital status and passport numbers and that they’re solvent.

Transfer duty and value added tax (VAT) declaration – The buyer and seller must sign this to confirm the purchase price, which is conveyed to the Receiver of Revenue for the calculation of transfer duty (normally paid by the vendor). VAT is applicable only if the seller is VAT-registered, in which case he must sign a VAT declaration. If VAT is payable, no transfer duty is payable.

Mortgage (bond) documents – If you’re obtaining a mortgage from a financial institution, the lender will require you to submit your identity document, marriage certificate and, if applicable, pre-nuptial contract in order for his own conveyancer to draw up the necessary documentation.

The conveyancer should then do the following:

• Contact the seller’s mortgage holder (bondholder), if there is one, to request the title deed and mortgage cancellation figures from his attorneys (lawyers) or conveyancers (note that there can be three conveyancers involved in a purchase).

• Obtain written confirmation of the buyer’s mortgage from the relevant financial institution;

• Ask the seller to pay any outstanding taxes, utility bills or levies so that a clearance certificate can be obtained from the local municipality (or managing agent in the case of a sectional title scheme) and lodged at the Deeds Office. A clearance certificate is usually valid for three months.

• Draft the transfer documents and the new title deed;

• Send the draft deed and guarantee requirements to the buyer’s lender (or the lender’s lawyer) for him to draw up the title guarantees.

The buyer and seller must then sign the transfer documents and the buyer must pay the transfer costs; the Receiver of Revenue will issue a receipt for the transfer duty. The seller must consent to the cancellation of his mortgage (if applicable), the new deed is lodged at the Deeds Office, where it’s registered 8 to 14 days later, the seller’s mortgage is cancelled and the balance repaid (less any commission and penalties that apply).

Final Checks

The final step

Property is sold subject to the condition that it’s accepted in the state it’s in (‘voetstoots’) at the time of completion, so you should be aware of anything that occurs between signing the agreement of sale and the transfer of ownership.

Before signing the transfer documents, it’s imperative to check that the property hasn’t fallen down or been damaged or altered in any way, e.g. by a storm or the vendor. If you’ve employed a lawyer or are buying through an agent, he should accompany you on a final inspection visit.

You should also take an inventory immediately before the transfer of ownership (the vendor should already have vacated the property) to ensure that the vendor hasn’t absconded with anything that was included in the price or purchased separately, e.g. carpets, light fittings, curtains or kitchen appliances, and that any appliances you’ve bought are in good working order where applicable. You should also check that expensive or valuable items (such as kitchen apparatus or antique fittings) haven’t been substituted by inferior (possibly second-hand) items. Any garden ornaments, plants and shrubs present in a garden when you viewed it should still be there when you take possession, unless otherwise stated in the contract.

Some vendors will go to amazing extremes, for example removing not just light bulbs, but bulb-holders, wiring (flex) and even ceiling roses as well as bulbs, plants, shrubs and trees from the garden!

If you find that anything is missing, damaged or isn’t in working order, you should make a note and insists on immediate restitution such as an appropriate reduction in the amount to be paid.

Although you or your lawyer should already have checked that there are no encumbrances, e.g. mortgages or loans, against a property or outstanding debts, it’s important for you or your lawyer to go to the land registry and check ALL entries up to the day of the completion (this could be done a few days earlier and then you need only examine entries since the last check on the day of the transfer of ownership).

You should refuse to go through with a purchase if you aren’t completely satisfied, as it will be very difficult or impossible to obtain redress later.