04 Aug Prospective first-time buyer? Read this!
This is a great time for a first-time buyer to get on the property ladder. Perhaps you are fortunate to still have a secure job and you’d like to buy a property? With interest rates being the lowest they have been in decades, it’s certainly the right time to consider it.
Add the fact that property prices were already under pressure and that the market favours the buyer at the moment, and it becomes an attractive option.
It is easy to become entangled in the excitement of buying your first home. So, in this article, I discuss some important points to bear in mind when venturing out as a first-time buyer.
Financial considerations for the first-time buyer
Yes, the bond will be much lower than before, but have you considered other costs associated with owning a property? Rates and taxes, levies (for sectional title schemes), electricity and water. Maintenance costs are also important to factor in.
You should ensure that you understand your budget and are as confident as can be that your job will remain secure for the foreseeable future. It is always a good idea to enter the property market with a sizeable deposit and enough cash to cover the costs of purchasing the property.
Another consideration is rising interest rates; interest rates aren’t likely to stay this low forever. When interest rates rise you will be paying more, so ensure you leave room in your budget to cater for this.
When drawing up a first-time buyer budget, add these numbers to your total cost and then look at the affordability. Below I have laid out a practical example, assuming a property of R1,500,000 and a cash amount of R250,000 saved up. Bear in mind that the numbers below are estimates.
Reserved for costs R79,760
Balance to be bonded R1,329,760
*Bond of R1,329,760 at 7% (current prime rate) over 20 years = R10,309
In this scenario, if the interest rate reverts to 10.25%, your bond repayment will increase to R13,053 pushing your total cost up to R16,253. It is therefore vital not to overextend yourself.
How does the process actually work?
Before starting your search as a first-time buyer, apply for bond pre-approval and make sure you are comfortable with the numbers. You should then know how much you qualify for (but rather look at what you can afford based on your budget).
First you are going to need to find a property. If you are entering the housing market now you are more than likely a millennial like myself and as such most of your research will be done online. One thing you will soon find out is that the photos often paint a different picture to reality. It might be worthwhile to approach an estate agent that knows the area and market well and explain to them exactly what you are looking for. Bear in mind, though, that it is in their interest to sell one of their listed properties to you as they will receive commission from the sale.
Once you have found a property that you like it is time to put in an offer. But before doing so, make sure that you have done your due diligence. Ask questions about the property, such as:
- How long has the current owner lived there?
- What are the neighbours like?
- Why are they selling?
- What is body corporate like?
- What comes with the property?
- Is it pet friendly?
- How long has the property been on the market?
- To see a list of defects
- To see the title deed
Buying a sectional title
In the case of body corporate schemes, ask for the latest set of financials, minutes going as far back as possible and the body corporate rules.
- Check that the
- audited financial statements are not years outstanding
- reserves are adequate
- insurance is being paid
- Check if the levies cover the costs and if there’s enough over to go to the reserve fund – if not, they are likely to increase
- Are there any special levies coming up?
- Look for noise complaint issues
- Look for security issues
- Check for any planned expenses coming up (is a special levy going to be raised?)
- Look for how rapidly issued are dealt with
The body corporate rules
- Read through the rules in detail
- If you wish to keep a pet, is it pet friendly?
- What is the rules on visitor’s bays?
- Are there any of the rules that you could not live with?
The title deed
- Check that the title deed meets the description of the property
- Check whose name the property is registered in – is it, in fact, the seller?
At this stage, the estate agent may well push you to make an offer soon as there may be other offers on the table. But these could also be sales techniques to make you buy as soon as possible. Take your time and do not let anyone put pressure on you.
Submitting an offer to purchase
Once you have gone through these details and are comfortable that all is in order, you can submit your offer. This is done by completing an offer to purchase (a legally binding document between you and the seller). Be careful when completing this document: take your time to read through it and understand the terms before signing. If the seller accepts your offer, then you have committed to buying the property. Backing out is not easy and could result in a liability for you.
What to look out for in the offer to purchase
- When the deposit needs to be paid – allow adequate time if the funds are not easily accessible
- When the intended occupation date is set for
- What the occupational rent is set at (if you move in before transfer date then you will have to pay this and vice versa)
- What the suspensive condition says – in the case of a bond application the agreement should only be in effect when a bond is granted
- How long the offer is open for acceptance by the seller – this should be specified in the contract
- A 72-hour ratification clause – this allows the seller to continue marketing the property while you apply for your bond and gives you time to fulfil your commitments within a window of time
Once the seller has accepted your offer to purchase, the next step of the process begins. You will need to apply for your bond, accept terms and proceed with the process of having the administrative issues dealt with to ensure the property is successfully transferred into your name.
These steps involve:
- paying the deposit,
- FICA duties,
- compliance certificates,
- lodgement at the deeds’ office,
- signing documents,
- paying the related costs,
- registration, and
- the final delivery of the deed.
This process usually takes around three months, but due to the Covid-19 pandemic it could well take much longer.
Some things to pay attention to during this process:
- Ensure that you pay the deposit on time. This should be paid into an interest-bearing account held by the conveyancing attorney. Take care to ensure that the payment happens correctly as there have been cases of fraud in the past.
- Ensure that you complete and return documents speedily to avoid any delays.
- Pay the property transfer costs on time as they become due.
- Keep all parties informed of any possible delays.
Apply caution and do your research! This way you’ll minimise the risk of entering into a bad deal and use the current market to your advantage.
Michael Maré CFP® FPSA® is a wealth manager at Netto Invest.