Can’t sell? Rent with an Option to Buy

Private Property South Africa
Private Property Reporter
In the current economic climate, many properties are being sold on auctions and the lenders, being the financial institutions, end up being forced to write off millions of rands. These shortfalls, in most instances, cannot be collected from the defaulting mortgagors.

Two products combined can assist both buyers and sellers of property, and can also assist mortgagors and banks prior to a sale in execution.

The concept is Rent with an Option to Buy, supported by Rental Insurance.

  • The Seller/Mortgagor sells his property to a purchaser, who perhaps cannot obtain a bond, but may be able to do so in one year from now (the option period).
  • During the Option Period, the Purchaser will have the opportunity to build up an affordability track record under the NCA and will thus be able to qualify for a loan, and can exercise his Option to Buy.
  • Pending the Option Period, the Purchaser will rent the property and assume the responsibilities of a property owner and he will:
    1. Pay the bond installments, based on the new purchase price (the bond is still registered on the name of the Seller);
    2. Pay the rates and taxes, levies etc.

The rental to be paid by the Purchaser can then be insured via Rental Insurance, whereby a national insurance company underwrites residential rental, which will assist mortgagors who rent out their properties. This is how it works:

  • On the first day of each month the rental is paid into the account of the Landlord, notwithstanding the day the tenant pays;
  • Rental income is guaranteed for 3 months, should the tenant default;
  • The Insurance covers all legal costs on eviction.
  • The insurance premium is 4,56 % plus a monthly administration fee of R50.00.

Considering this option in comparison with the Installment Sales concept, we would propose this option as the more preferable one to sellers who cannot sell their properties. Buyers then don’t need to obtain and of the following:

  • Upfront bond
  • Upfront deposit
  • Upfront payment of transfer duty

The Rental Insurance forms part of this concept as the Mortgagor and the Financial Institution receives a three month rental guarantee.

Workshops and supported material are available to provide the required training in this regard.

For more information, please contact Christian Fourie or Meyer de Waal.

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