Affordability is becoming the main reason behind the temptations of unconventional housing finance. Generally, frustrated sellers and buyers view the riskier option of instalment sale agreements as effortless, when compared to that of retail banks.
Facilitated by the Alienation of Land Act (ALA), this method of property finance has gained popularity since implementation in 1981. Assumed to be a cheaper and more flexible alternative by the legally wise, its true value came to light in 1990, when the prime rate reached a crippling 25.5%.
Industry professionals say that this option currently provides approximately 5% of all buyers with a more flexible and affordable solution. The latest National Credit Regulator quarterly report shows a decrease in mortgage values, while “non-banking financiers” represent 5.63% of all credit providers, and “other” credit providers 9.52%.
However, when a residential property changes hands without the help of a mortgage lender, legal specialists say that your word as a seller or a buyer is only as good as the contractual agreement which binds you.
Contracts against title deeds of residential properties require buyers to pay the purchase price to the seller, by way of more than two instalments, over a minimum of one year and maximum of five years. Buyers commonly take over outstanding debt of sellers, such as monthly bond repayments and deposits, which may also substitute agency commission.
The main benefit of this sales method is that sellers retain ownership until the final payment is received. This enables distressed sellers to pay off their bonds while avoiding bank repossessions and poor credit records. While buyers are saving on bond finance during this period, they can accumulate deposits to qualify for bonds when payment on the outstanding amount becomes due upon registration of new ownership.
By acting within the confines of the ALA and the National Credit Act (NCA), both parties are empowered to negotiate the most favourable terms and conditions of a sale. However, the ALA requires that sellers of properties worth more than R500 000 are registered as credit providers, who automatically become party to a credit agreement as specified in the NCA.
When sellers doubt the credit worthiness of buyers, the most important questions to ask are: “Why should sellers afford credit, if banks to not extend bonds, and why do banks not want to afford bonds to buyers?” says Magnus Steenkamp of Magnus Steenkamp Dykes van Heerden Attorneys.
Most essential to this process is that financial investigations on the credit records of purchasers are completed by professional bankers or auditors, prior to the approval of credit. In omitting to do so, sellers who need to act against purchasers, can be charged with a defence of reckless lending when a court changes the terms and conditions of a sale agreement.
While alternative means of finance remain tempting, buyers and sellers are urged to employ specialist legal advice before entering into potentially costlier agreements.