Aspirant buyers are at a disadvantage – but banks can help

Private Property South Africa
FNB

Buyers often lack knowledge and information related to the property purchasing process. But banks work for the buyer and can both inform their clients’ decisions and increase their bargaining power.

Whereas estate agents arguably represent more the residential property seller, banks represent the “other party” in the residential property transaction – not with all aspects of the transaction but in the important area of providing the finance to qualifying buyers. This does not mean that the bank and the estate agent are adversaries. To the contrary, both parties are crucial in enabling the property transaction to take place.

But, whereas good estate agents work closely with their client, providing advice and information, the same involvement with the client cannot always be seen by the banks, despite having a wealth of expertise, and despite the fact that many buyers could do with some assistance.

Infrequent deals

The infrequent nature of residential property transactions means that buyers/sellers often lack the required knowledge. The residential property market has some unique characteristics that are not always as common in other asset markets. These are brought about by the nature of the asset as well as the make-up of its role-players.

Investors in share and bond markets are arguably more often frequent buyers and sellers of these assets. By contrast, in the residential market for most home buyers and sellers, trading a property is a very infrequent occurrence.

According to the FNB Estate Agent Survey for the first quarter of 2012, 87 percent of total residential buying was for primary residential purposes. In other words, the seasoned property investor, who buys to let or to speculate, makes up a very small percentage of the total residential market.

Buyers have limited knowledge

The infrequent nature of residential buying/selling means that aspirant home buyers/sellers generally have very limited knowledge regarding it, and often very little information at their disposal with which to make a good decision. Their challenge is made more significant by the fact that every home is different, so to have a feel for its value is difficult, and then for many there is the added challenge for many of not knowing how much property finance they qualify for.

In this regard, banks have an important role to play, and the role that they have played to date has perhaps been somewhat disappointing. Banks sit on a wealth of property and market information, collected over a long period from financing hundreds of millions of property transactions, and conducting valuations on as many properties. Not only do we possess transaction values of properties, but also many of the characteristics of the properties financed.

Reports

This information on suburbs and sales values of comparative suburbs in a particular area, can greatly assist the aspirant buyer in gaining a more educated view of how much to offer on a particular property. To support this information need, a buyer seeking to obtain pre-approved finance through FNB’s Property Leader offering will have access to free property and area reports regarding his targeted property(ies) and area(s).

Such reports include a wealth of information regarding area characteristics, including age profile of buildings, the dominant soil types on which homes are built, stand and building sizes in the area, bedroom numbers and the percentage of properties in the area with “add-ons” such as swimming pools. Age demographics of home owners and buyers entering the market are also included. And importantly, recent sales values of other homes in the area are included for comparison and “reality check” purposes.

How should an aspirant buyer be using such property and area information? Probably in two key ways. Firstly, the comparable sales values in the area should give the buyer an idea of the offer he should make. Secondly, the asking price of the property being targeted by the buyers, along with the general characteristics of properties in the area, enables the buyer to get an idea of the investment value of the property.

Over-capitalisation

For example, it could be very useful in informing him as to whether the property is over-capitalised or not. An over-capitalised property is one in which the level of investment in the property is too high for the type of market that a buyer seeks to buy in that area. For instance, if the home is the only R2-million priced home in a suburb where the general price level is nearer to R500 000, and possesses the only swimming pool and tennis court in the entire area, the chances are that re-selling it may be difficult given that the income category of people generally seeking to buy in that area is not one looking for such luxury.

Over-capitalised homes generally underperform in terms of price growth, over time, relative to the area that they are in, while “under-capitalised” properties have a greater potential to outperform the area in terms of price growth over time. Property and area information can very useful in obtaining this picture of a property.

Banks can improve the negotiating power of their clients, not only with area and property information, but also by turning them into “cash” buyers.

Survey perceptions

The FNB Estate Agent Survey for the first Quarter 2012 includes a question regarding the “bargaining power” of cash buyers versus those buyers who still need to obtain home loan finance. 66 percent of survey respondents said that cash buyers had “much stronger bargaining power”, while 19 percent said that cash buyers had “slightly stronger bargaining power”. Only 19 percent believed that there was no difference.

A second question related to this topic refers to the bargaining power of pre-approved home loan buyers compared to buyers who have yet to obtain home loan finance. 23 percent of respondents claimed that this group had “much stronger bargaining power”, 41 percent had “slightly stronger bargaining power”, while only 36 percent claimed “no difference” or “banks don’t do pre-approved loans”. The group of respondents estimated that the average discount that sellers are prepared to grant cash buyers was eight percent, and a lesser five percent for pre-approved home loan buyers.

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