Why sellers should avoid bad debt

Private Property South Africa
Lea Jacobs

Buyers are often told that they need a clean credit record in order to qualify for a bond, but financial fitness is important for sellers too.

it's obvious that those who want to buy a home need to keep their noses clean and be in good financial standing in order to qualify for a bond, but what about sellers? How important is it for them to have a good credit record? The answer is very, if they want to reinvest in the property market or enter into other future financial agreements.

It is becoming easier and easier to fall behind with financial commitments. The rising cost of electricity, bond repayments, food and other necessities is putting strain on the average South African household.

Things are tough economically at the moment and will more than likely continue to be for some time. Aside from the increasing cost of food and fuel, interest rates and electricity prices are also expected to increase this year

says Debbie Justus-Ferns, divisional manager of Renprop Residential Sales. “These economic conditions mean that more and more property owners, particularly those living in sectional title complexes, are falling behind on their levies and municipal accounts."

You cannot wish bad debt away and money owed for levies, arrear bond amounts and municipal debt have to be settled before a sale can go through. Obviously, this is going to eat into the seller’s profits if these two ongoing expenses are in arrears when the sale goes through. The problem will become even worse if the cumulative profits on the property sold are insufficient to settle these outstanding debts.

“In this case, a seller will have to sign an acknowledgement of debt with the financial institution that holds their bond and instead of walking away with some profit from the sale, will end up walking away owing money on an asset they no longer own. This situation also negatively influences the seller’s chances of obtaining finance again in the future, whether for a car, property or any kind of personal loan,” she says.

It is highly recommended that anyone who is experiencing financial difficulties contact the relevant institutions in order to plan the way forward. Simply ignoring the problem in the hope that it will resolve itself or having unrealistic expectations as to how the debt will be settled will, in general, nearly always backfire. Sitting down and drawing up a payment plan with the creditors concerned is going to be a win-win for all involved.

It is very important for sellers who find themselves in a financial bind to remain realistic, to work within a budget and to make a firm commitment to paying off existing debts.

Keep track of your spending and cut back on any luxury or unnecessary expenses. This might mean having to cancel that holiday, or having to wear the same clothes for a longer period of time. Permit yourself a weekly allowance and be strict: when it runs out it runs out. Prioritise your financial commitments – you need a roof over your head so pay your bond first. South African public transport is not that fantastic, so keep the car if you can. Next, favour school fees and medical bills over luxury items like cable TV, club memberships and magazine subscriptions.

If you lose control of your debts, you are bound to take a financial pounding. Failing to communicate with your creditors by remaining silent is surely going to lead to tears.

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