Investing in property is often viewed as a good means of growing personal wealth for individuals, and as a viable source of income for investors. In addition to the typical buyer considerations, there are a few additional factors that play a part in the success of the venture.
Investing in property
Timing and location are without a doubt the two most important considerations when it comes to investing in fixed property.
Successful property investors often buy in locations where the demand is low, or starting to increase, with the intention of improving its value before selling it on for a profit when the market indicates better prices. Another approach would be for investors / speculators to purchase property and immediately sell again in order to realise a profit. Timing in this process is crucial in terms of determining the right time to sell.
Property is typically seen as a long-term investment due to the liquidity and the return-on-investment cycles being lengthy. Due to legislative constraints and the registration process that is required as part of a property transfer, speculation in property is less commonplace than in stocks, where liquidity is high and turnaround times are short.
Timeframe from buying to selling
Legally, it is not possible to transfer more rights than one has, which means that only the owner of a property, as registered in the Deeds Office, can transfer rights relating to this property. It is, however, possible to “on-sell” a property, provided that the necessary conditions are included in the relevant contracts of sale.
As such, a second contract of sale may be entered into, with/without the required clauses that stipulate that the first contract of sale and transfer must be unconditional in order for the second sale to proceed. The registration of transfer of the property in terms of the first and second contracts will then take place simultaneously in the Deeds Office (i.e. one immediately after the other).
While the aim of such a transaction is often for a quick turnaround, it should be noted that the typical timeframe for transfers is 90 days, as per Law Society guidelines. However, this should not be relied on, as there are many factors that can alter the turnaround times, especially in the instance of “linked” transfers.
Multiple transfers, multiple legal requirements
Although it is possible for transfers to take place simultaneously, in effect, there are two separate transfers taking place, i.e. the property is first transferred to the original buyer and then it is transferred a second time to the final buyer. Because each transfer must be dealt with separately, according to Section 17 of the Deeds Registries Act, all legal requirements must be met separately for each transfer. This includes all relevant documentation and transfer fees associated with the property transaction.
When it comes to costs, if the original buyer (broker) was able to sell to the second buyer at a higher price, the difference will constitute the profits of the sale, and this is where the potential benefits lie for investors or speculators. An original buyer in such a scenario will simply act as a conduit / broker who will buy and on-sell to a third party purchaser who will effectively provide finance for both transactions. This is often the case with repossessed properties where brokers or agents buy on Sheriff auctions and immediately sell to third parties at a marginal profit.
When calculating the possible return on investment, remember to take Capital Gains Tax into account.
Written by Wessel de Kock