The Hazards of Speculation

The Hazards of Speculation

Private Property South Africa
Lea Jacobs

Many assume that speculating on a property is a sure-fire way to make money and generally speaking it is, but things can go horribly wrong and end up costing the investor a great deal of money.

There are times to speculate and there are times to hold back. Property markets fluctuate and investing with the idea of turning a quick profit must be carefully thought out and all market conditions seriously considered.

There is no such thing as a quick buck and most - if not all- speculators have a thorough understanding of the current market trends, have a clear understanding of what buyers are looking for and, perhaps the most important aspect of all, know what the average buyer is willing to spend.

The desire to speculate is understandable. There is a wealth of reasonably priced property available, including bank repossessions and the properties of financially stressed sellers who are being forced to sell below market value. You can almost hear the minds of some thinking, ‘If I buy at that price and make a few improvements, I’ll be able to rake in an enormous profit within a very short time’.

Although it is impossible to gauge how much a speculator will make on any individual deal, it is worth remembering that while overcapitalising poses huge risks, so too does undercapitalising. Buying a run-down home for R500 000, spending a fortune turning it into a palace before putting back on the market for R1.2-million is nine times out of ten going to end in disaster. Similarly, buying a property for R400 000, making a few cosmetic changes and then expecting to sell the property for R800 000 is also more than likely going to fail.

Another thing worth remembering is that speculators make the most money during a property boom. This makes perfect sense as the demand for property is high during these periods. When the market slows and the demand for property falls, the number of people selling generally increases, essentially making the property market far more competitive. Under these conditions, buyers have a far greater choice of market stock, but have less access to finance and are forced to drop any highfalutin ideas they may have and buy something more affordable. Anyone who has poured vast sums into a project simply can’t afford to lower the price too much and this is generally when speculators get into trouble.

The construction industry around the world has taken enormous strain over the past few years. Building costs remain high (it was recently estimated that the cost of building a new home was somewhere in the region of 30 percent higher than the cost of buying an existing property) leaving less room for price manoeuvring.

While buyers can afford to be far more selective in today’s market, they also have to stretch their Rands and cents as far as possible. Banks have also entered the fray and have become increasingly reluctant to finance a deal in which they themselves can’t find value. Many sellers have found that although there may be willing buyers out there, many cannot raise the necessary finance via the banks and unless the purchaser can afford to finance the deal themselves, the sale falls through.

Most who do not speculate for a living and are reliant on a single transaction in order to get into the big time generally do not have the time or money to waste waiting for crucial deals to go through. Speed is of the essence here, and in these uncertain times, nothing is guaranteed.


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