Imagine being in a predicament where you would like to buy a new property, but could miss out on the opportunity due to receiving a less-than-desired offer on your existing property? Do you accept the low offer in order to secure the necessary finance in time for the new property, or do you risk losing out by waiting for a better offer on your existing property?
According to Gary Palmer, CEO of Paragon Lending Solutions, home owners often find themselves in these situations and either sell at a lower value, or miss out on purchasing a new property altogether, as they are unable to put down a substantial deposit in time.
“The cost of home finance in South Africa has increased, and with difficulties in managing personal debt, many potential property buyers do not have the additional finances to purchase a new property before the sale of an existing property.”
He adds that this situation is further compounded by banks taking much more time to complete a loan due to their focus on unsecured lending (due to regulations like Basel 3), which means that long-term loans held by the banks would become more expensive.
“Tighter regulations have forced the banks to shorten the terms on their lending books and this has added a significant time burden to the process of applying for a loan, sometimes taking longer than six weeks.”
According to Palmer, as a result of the banks’ conservative lending practices and their slow turnaround times, many property buyers are not meeting their deadlines to issue guarantees for the purchase of properties. “If they are in the position to pay a deposit on a new property, they stand to risk losing their down payment if the loan agreement isn’t finalised within the timeframe allocated to secure the purchase. Should the deal fall through and the seller then sells the property for a reduced value elsewhere, the defaulting purchaser may be liable for the shortfall.”
He adds that sellers often reject an offer that has been made to purchase a property subject to the sale of an existing property. “Sellers in this market then require unsuspensive offers so the purchaser will have a greater chance of purchasing the property at a good price if the offer is not subject to the sale of the purchasers existing property.”
Palmer says that high net worth property owners should investigate the option of obtaining asset-backed funding from a private lender, which allows them to hold on to their property until a more desirable offer is made, thus giving them the finance required to secure the transfer, while holding off for a higher offer on their existing property.
“For example, most reputable private lenders could issue a buyer with a formal bank guarantee within seven days, providing them with short-term liquidity, which they can then use to secure the new purchase. It also affords them the opportunity to negotiate a better offer on the sale price of their asset. Once the transfer occurs the private lender can also work with the client and the bank to secure long-term bank financing. This form of lending bridges the gap between buying and selling property, and puts the seller / buyer squarely in control of their situation.”
He says that home owners and property buyers should seek advice from an asset-backed lender who specialises in the property industry and who can assist with, among others, advice, costs analysis, bond origination and can also liaise with the banks with terms of the long-term loan and ensure that they have the necessary paperwork in order.
“It is also essential that the homeowner is kept abreast of the movements within the market to ensure that they match the timing of their sale with the purchase of their new property.”
Palmer explains that the minimum requirements needed to qualify for asset-back finance from a private lender typically include:
· The borrower must be a juristic person in terms of the National Credit Act
· Maximum transaction value not to exceed 60% of valuation
· Valuation of property to be done at client’s expense
· Minimum advance of R1 500 000 (no maximum)
· A first bond is to be registered over the property
· Maximum loan term of 12 months