The 5 steps to the doorstep: 5 practical tips for purchasing a property
Buying your first property (or any property for that matter) is a very daunting and stressful task. It is also very capital intensive and a substantial financial undertaking that requires careful thought and understanding on the various elements involved, most importantly the costs. Even more so now in an unprecedented cost increase environment where the price of petrol and cooking oil changes every week - blink and frying an egg could cost you a kidney. Never mind needing to perform a cash in transit heist each time you fill up your tank.
Fear not, here’s a few practical and hopefully, useful tips to consider to help you make a better informed decision:
- Prepare, prepare, prepare
- Check your credit report
- Affordability assessment
- Negotiate everything
Preparation is the key to success, well so they say. Purchasing you first property or any additional property for that matter, should not be a spur of the moment decision. So much can go wrong: location, price, build quality.
It is therefore imperative to take your time before making a purchase to properly prepare yourself not just financially but also emotionally. Take at least 6 months to give yourself enough time to prepare. You want this process to be as predictable as possible. You can never be ‘over prepared’ not to be confused with indecisiveness.
Your preparation starts with searching for the right property, understanding your affordability (which is different from what you qualify for) and what level of financing you will require, amongst other things. Affording something and qualifying for something are two different things, you make qualify for a certain amount but not be able to really afford it, especially if you take into account all of the other hidden costs that come with owning property, like homeowners insurance, rates and taxes and levies if you have bought in a complex or estate. Make sure your affordability is realistic rather than focusing on what you have qualified for.
If you will require financing, it is important to know and understand your credit report. Your credit report provides a history of your financial behaviour and banks will look to it in order to formulate an understanding of your spending patterns, debt repayment and overall affordability. Check your credit report, make sure you score is high enough to be considered for financing and that the report is clear of any impediments (no adverse findings, judgments or late payments) as this will inform whether you are a ‘risk lend’ and the interest rate you will likely receive. Taking time to prepare will give you an opportunity to remedy any impediments on your record if you have had a few wobbly moments. Banks will certainly check this to form a view on your historical relationship with credit. Most credit record companies have a free registration system that allows to view your credit information – a good place to start: (https://www.clearscore.com/za/ / https://www.experian.co.za/)
As a rule of thumb, banks will fund loan repayments not exceeding 30% of your gross monthly income for a primary residence.
This is however all dependent on your income and expenses, you do not want to be at the high end of that number. 20% or less is a good place to start, it will also give you a bit of breathing room if there is a change in your financial circumstances, unexpected cost that may arise or even substantial increases in interest rates – remember kids, buying because interest rates are low is not a good idea as these will most certainly come up. Not only is this more affordable, but it will also allow you to build ‘equity’ in the property quicker – by having a bit of extra money you can make extra payments into your bond as and when you can. Also generally, spending to your maximum affordability on a property and becoming ‘house poor’ is not a good idea – many unexpected costs can creep up and your budget needs to be flexible enough to absorb these and even create a surplus fund over time. Doing a sensitivity analysis is important in this regard input various assumptions that may change over time and ‘mock budget’ those changes especially increases to interest rates and see what that does to your affordability in a year or so and what percentages of increase it would take for you to start feeling the pressure – because when things get bad cutting coffee is not going to solve the problem.
In performing your affordability assessment, the best thing you can do, is to be brutally honest with yourself and not be overly optimistic in respect of what you can afford, the related expenses (electricity, rates, levies, security etc.) and in the context of an investment property, what you can expect as rental income.
In order to help simplify things and to keep a good handle on costs, create a monthly income and expenses spreadsheet detailing all your income and expenses (be honest). Include a simulation of all cost associated with the property (electricity, rates, levies, security etc.) and not just the loan repayments and for an investment property, the rent to be received (be conservative). Keep in mind that the banks will usually discount the amount to be received as rent by up to 30%, meaning if you expect rent of R5000 p/m the bank will include R3500 in your affordability calculation as a start. This does not mean you must overstate the rent to counter the discount. This will only get you into trouble further down the line and banks are likely to know where amounts have been inflated for a particular area in any event.
An income and expenses spreadsheet will also help you understand your finances better and see where you can cut out ‘unnecessary’ expenditure.
Note: Banks like predictability – KEEP your spending consistent. No erratic clubbing nights with mates or expenditure that cannot be explained.
Purchasing and owning property is costly. There is no magic or secret to this purchasing or investing in property, it is sadly capital intensive. Use the preparation time to save for all the associated purchase costs including the deposit (banks generally require 10% of the purchase price), bond registration costs, transfer duty (applicable to properties over R1million), renovations (if required), moving costs and even the cost of furniture (not all developers or sellers will give you expensive kettles and appliances etc).
Note: Speak to your bank and get them on board as you go along. Nothing should come as a surprise to your bank when you make an offer. The online pre-approval process provided by many banks is a good start but is not guaranteed.
The costs associated with buying a property are very expensive don’t be shy. Negotiate EVERYTHING, the purchase price, the interest rate, the transfer cost and the bond registrations costs. It’s amazing what difference a 0.5% decrease in the interest rate can do over time even more so a drop in the purchase price (this is the ultimate OG win – have no shame) as not only will this reduce your monthly repayments but your overall cost of funding including the amount of transfer duty tax to be paid and lawyers transfer fees and bond registration costs as those are all based in the ultimate purchase price.
Ultimately preparation and negotiation are the winning combination. Preparing includes doing research on the property, understanding the average price in the area, the security of the neighbourhood and the proximity of various amenities including schools, hospitals, highways etc. More importantly do not be afraid to negotiate – after all you miss 100% of the chances you don’t take.