While it is not always recommended, an instalment sale can in some instances be a useful option for completing a property transaction.
As the old adage goes, ‘there's more than one way to skin a cat’, which basically means there are usually several ways to get things done. In this instance we are talking about buyers who want to purchase a property but who don't qualify for a bond for a certain amount even though their financial situation is secure and in good standing.
Instalment sales generally become more popular during periods of economic slowdown
says Alison van der Merwe, principal Falcodor Estates.
“This is because this method of selling doesn't necessarily require a bond as the buyer pays for the property by means of instalments. In most instances, the purchaser should be in a position to pay a substantial deposit, mitigating the sellers’ risk. Ideally the purchaser will be in a position to sustain above average monthly rental instalments. Buyers would also need to prove affordability as well as confirm that they would be able to conclude the transaction with the full purchase price being paid at the end of the agreed upon time period.”
She adds that although she wouldn't recommend this form of sale in every instance, there are definitely times when this method is recommended.
“We recently had a buyer who performs contract work overseas for relatively short periods of time via an international agency. Although his earnings were exceptionally good, the banks wouldn't consider a bond simply because he didn't have a 12 month work contract in place. In this case the buyer was able to put down a deposit of 50% of the purchase price and will be paying the balance in monthly instalments over the next 36 months.”
Of course this option isn't ideal for those who need the cash from the proceeds of a sale to fund their next purchase, but it could be a lifesaver for sellers who are struggling to pay off their bonds and who run the risk of having the property repossessed. Likewise, it's often a good choice for those selling a holiday home in an area where the market for second homes has slowed.
Obviously, buying a home in this way is a little more complicated than buying a second hand car from a friend.
First: The buyer and seller have to agree on the purchase price and the deposit required, as well as on the monthly instalments. Much will depend on how long the two parties agree the instalment period will run (between 12 and 60 months). Issues such as who is liable for the rates and taxes on the property as well as other legalities also need to be agreed upon. A conveyancing attorney has to be used in order for the contract to be drawn up and it's highly recommended that if you are using the services of an estate agent, you deal with someone who is an expert in the instalment sale field.
Next: Once an agreement has been reached, the attorney will draft a contract that meets the criteria set by the Alienation of Land Act 69/61. He or she will then inform the current owner’s bank (the bondholder) of the conclusion of the agreement. It's also noted at the Deeds Office that an instalment sale is in progress. This offers offers protection to the purchaser, stopping the vendor from selling the property on to a third party.