Property Investment in South Africa

Clever Thinking: Offer To Purchase Amendments

  Oh wow… another can of worms! The “Standard” Offer To Purchase plonked in front of most buyers to “urgently sign” in order to secure this “limited opportunity” from a “desperate seller” who will soon be “inundated” with other offers from buyers with deeper pockets than your own… haven’t we all heard this story?? In short the “default” OTP presented by most estate agents is far from considering to the needs of the buyer (the one actually making the offer) and sometimes not even those of the seller (their client). With this in mind I would like to share a few points regarding OTP’s in general and what to look out for…  

1. Vetting your Agent

Check out the agent’s credentials. The agency must be registered with the EAAB and their Fidelity Fund Registration must be up to date. This information is available electronically in a searchable fashion on the EAAB website. It is best to always deal with a registered agent when an agent is involved. A good quality up to date estate agent will also have a Previ-Seal located in/next to his email signature. This seal is continuously updated to let the buyer know they are working with a credible agent. If the agent is not registered it may in fact even invalidate their agreement with the seller due to misrepresentation and allow you to go directly to the seller negating the need to pay sales commission to the rogue agent. Just be careful.

2. Body Corporates, Estates & their Rules

When buying sectional title or estate property or property where a registered ratepayers / residents association is operating make sure that you obtain a copy of the rules before you sign the OTP. Ensure that the rules allow for everything you want to be doing with the property. If for instance you want to be storing a boat on the property but it is specifically disallowed by the estate rules it may be a problem to you and better to find that out up front than when you’re turned away at the gate. The same goes for running certain businesses etc. There may even be things like renovations not being allowed during weekends or after hours that may in fact become a hindrance to you or mess about your timelines, especially when purchasing a property with the intent to renovate and flip.

3. It is YOUR offer

The clauses in these “default” OTP’s presented by an agency generally are there to protect the interests of the agent first, the seller second and the buyer last. Recognize that the OTP is YOUR offer. You and you alone should as such determine the content of any offer extended by YOU. Of course you should also always keep in mind that the offer needs to be sufficiently attractive to the seller in order for them to accept it. This is not just limited to the amount offered but also the terms of the agreement and playing “hard ball” might not always be the best strategy. You are allowed to scratch out anything you don’t agree with in the OTP and add in anything you feel has been left out. Of course removing a clause relating to the agent’s commission for instance (when the property is being sourced via an agent), may in fact prevent the owner from even considering your offer because he (the seller) might already have another agreement in place with the agent providing him (the agent) with the rights to market and to expect a commission for the same. With this in mind it is important to look out for a few things….

4. Knowing what you’re buying

This may sound stupid but some people have stepped in the trap of thinking they are buying a farm when in fact they were buying a smaller subdivision of said farm. There are many cases where people have not in fact been entirely sure of what they are getting for the money they are paying and where the description of the property on the OTP actually let them down, selling them less than they expected. I have personally stepped in the trap where an agent told me I am buying in a complex with R200k in reserves available in the bank (which was great back in 2004) and I took their claim at face value. I never checked for myself and didn’t request the complex financials which ended up being a very costly exercise. One month after transfer at the AGM I found out that the managing agent had defrauded the complex and in fact the complex ended up being R100k in the red – part of which I was now responsible for. ALWAYS request a copy of the last audited financials and the current budget as well as the current bank balances. Without this you cannot possibly make an informed decision as to what you’re buying. Sometimes what is registered at the municipality in terms of the plans does not reflect all improvements that has been done at the property. This may result in costs for the buyer in future and may even have penalties associated when it is presumed that the rates and taxes was not charged correctly over an extended period of time. For this reason it would be wise for a buyer to include a clause confirming that the latest plans for all improvements have been submitted and approved by the seller and that the seller will provide a copy of said approved plans before the property may be transferred.

5. Gazumping Clauses

Already I hear most of you ask what a Gazumping Clause is… In short it is the clause that allows a seller to entertain higher offers from new buyers after they have already accepted verbally or in writing an offer from a buyer. It may also refer to the practice of where a buyer is offering the published asking price, the seller then comes back and asks a higher asking price despite the original asking price being met.

Such a clause essentially means that until the pre-conditions of the sale (such as the sale of another property or obtaining a bond) has been met the deal itself is not secure and can be overturned by a higher offer. It is only once the deal has moved to the transferring attorneys that higher offers are typically no longer entertained. Gazumping may also occur if you have for instance placed an offer subject to the approval of a bond or sale of another property and another buyer comes along offering the same as a cash deal. The agent will then usually return to the your original accepted offer and request that you relax your terms to no longer be subject to certain conditions if possible or make a higher offer. The clause gazumping is better known in Australia and the UK largely due to the practice having actually been outlawed in those economies. It is however still commonplace for this to be allowed in South African OTP’s and is regularly seen in the “standard” OTP’s most agents present to their buyers. It is completely within the buyers’ right to scratch such a clause from their OTP.

6. Selection of Attorneys

Whilst it is common place for the OTP to designate the right to appoint an attorney to the seller this is by no means law and the buyer can actually specify which attorney they want to use if they do have a preference. In reality the agents are typically the actual ones who recommend an attorney as most sellers don’t have such a relationship established either. I regularly utilise attorneys who are willing to give me a discount on their fees. Since the buyer is the one paying for these fees it is completely within his right to designate the attorneys they wish to use for transfers and if the attorney is on the bond registration panel of the financing bank even for the bond registration. It provides the selector with an additional measure of control over the transfer process which should not deliberately be delayed or it may become grounds for the cancellation of the deal.

7. Pre-Conditions of Sale (Suspensive Conditions)

In order for the sale to go ahead there must typically be a willing buyer offering an amount that has been accepted by the seller under conditions that are acceptable to said seller. It is important for these terms to be fair, transparent and achievable if the deal is to go ahead. Any condition can be written into the OTP as a pre-condition that needs to be met in order for the sale to go ahead. This could include things like when the deposit would be available, the sale of another property, maintenance and/or financial due diligence, obtaining a bond etc. Many of these clauses entered by estate agents are unnecessarily vague and can cause issues for especially the buyer if not paid careful attention to. It is for instance not enough to specify that the pre-condition of the sale is that the buyer must obtain a bond. Whilst it is better than not stating anything it is (at least in my mind) a necessity to specify at what level (how much should be covered by the bond) and at what rate (what interest the funding institution would expect) and over what minimum period (10 years, 20 years or 30 years typically) in order for the bond to be acceptable to the buyer. Pretend for a moment that if the agreement only stated that a bond should be approved for the buyer… This would imply that even if only a 10 year bond for 60% of the value at a staggering 18% interest per annum is approved the buyer could be forced into proceeding with the deal as “a bond was approved”. Be specific as to what the minimum acceptable levels would be as well as how long you should be allowed to secure the same within reason.

8. Fixtures and Fittings

Again a hairball of note… This becomes an issue specifically when people are in disagreement as to what constitutes a fixture/feature or fitting. To be on the safe side, specify anything that may be a contentious issue. Make mention of the stove/oven, built in microwaves, adjustable shelving, mounted candle holders, even large potted plants or mounted pool cleaning tools that you would consider features of the property rather than movable property to be included with the sale. This way there is no nasty surprises later on. Some people are funny and would even replace light fixtures with cheaper ones, remove external solar lighting and CCTV systems etc. I’ve even heard one person remark that they considered blinds as fixtures but curtain rails not as it is part of the curtains…??? Ridiculous. Be specific and it will save you some grief later.  

9. Occupational Rent & Occupation

Occupational rent is the rent payable should the buyer move in before the property is transferred to his name or should the seller remain in the property after transfer had already taken place. At what level exactly this is set would typically be dependent on the specific situation but as an investor I frequently buy properties that are empty and waiting to be rented out. In such cases I negotiate a very low occupational rent with the proviso that I can get keys immediately to clean and renovate and that occupational rent will only start once a suitable tenant is placed. This allows me to immediately find a tenant (on the seller’s time), make a placement and only pay rent once I start receiving rent. This way it also doesn’t matter how long the transfer takes because I would be making money regardless and once the transfer is done I already have a tenant and have reduced risk of the unit being empty for a month or 2. Of course if the scenario dictates differently then it would be done differently but the point is that occupational rent is completely negotiable. When exactly occupation would be given is also extremely important as having a seller remain in the unit for too long after purchase is also not ideal. When I know that it is seller occupied and the seller has no idea where he is going yet I would set a very high occupational rent as I know I won’t get early occupation and I want him to move out as soon as possible at or after transfer. If I know he wants to give occupation on a fixed date I can set a very low occupational rent if I know the specified date will in all probability be before the transfer date and he would expect me to take early occupation. It is all about what works best for you. You may also specify that you want VACANT occupation but keep in mind that it also means that the occupation cannot be on transfer date if there is a tenant currently in occupation. “Huur gaat voor Koop” is a principle which means that a rental contract will always override a purchase contract. If the tenant has signed a 12 month lease and the property transfers in month 2 you will be stuck with him for a further 10 months unless either the buyer or the seller negotiates an early exit. Some tenants are more than willing to move early if you are willing to pay for their move.

10. Rental Occupants & Contracts

Ok – So you have decided to buy a unit with an existing tenant. You may want to keep renting the unit as an investment OR you may not be too terribly troubled by the tenant seeing through their lease OR you may actually prefer them to do so as it matches with your personal timelines. Great! Problem though is that since “Huur gaat voor Koop” you are essentially stepping into the shoes of the original landlord AS IF you were the one that originally signed the contract by the simple act of buying the property. You may want to re-negotiate the lease and cancel the old one (which the tenant may be open to or not). The point is that you are bound by the terms, timelines and conditions of the original lease unless there is a law that overrides them (ie. portions of the lease was not legal in terms of the Rental Housing Act or any other act). One of the things that such buyers frequently forget is to ask for the deposit held by the original owner/landlord (with interest). This contractually needs to be refunded to the tenant by the landlord. So what if you don’t have the deposit… you are supposed to have it and keep it safe and refund it with interest and can be held liable. Make it a condition of the OTP that the rental deposit be refunded to you with interest on transfer AND that the original signed lease be provided to you so that you may see what you’re bound to. The terms and conditions of such a unknown rental contract could be anything… It may even state that the tenant may remain in the unit indefinitely (with no option for the landlord to cancel) as long as it does not commit any breach. It may state that the rental will never increase for the duration of their tenancy… Whoever drafted such a contract though should be shot on sight. As such, if you’re really paranoid, you may even want a copy of the contract BEFORE you sign the OTP or make the OTP subject to acceptance of the existing rental contract by yourself.

11. Delayed/Installment Sale

Oooh… Trouble. There are some non standard OTP’s where the sale does not happen cash but isn’t immediately financed either. The property is paid off to the seller over a period of time otherwise known as Rent-To-Own agreements. BE Careful! The biggest problem with these agreements is that they typically state that the property remains the property of the seller until the final payment has been made and the securities are in place with the transferring attorney to transfer the property. This holds danger for both the seller and the buyer. What if the buyer pays all the installments but never pays to transfer the property? Who is liable for ongoing rates and taxes, other liabilities and expenses usually attributed to the owner (at this stage still the seller)? At what stage does this shift to the buyer? If the buyer pays at an inflated rate (he is renting AND buying the property at the same time after all) for a number of years but then has to exit the deal, does he get any of the money back he paid in relation to the purchase of the property and what would a reasonable penalty for the cancellation of the deal be? All of these things should be very carefully described in the OTP/Agreement in order to ensure that everyone knows exactly where they stand under any foreseeable outcome, even the ones you may now think is impossible. What if a natural disaster destroys the property before it is fully paid for? What if either the buyer or seller needs to exit the deal for some reason? BE SPECIFIC.

12. Auctions

It is not always as simple as “what is in the OTP is what goes”. Sometimes there is an inferred agreement such as in the case of auctions. These agreements are typically read out before the auction starts and it is imperative that you know and understand these completely BEFORE you dare lift your hand or paddle indicating a bid. Your liability is already determined by your registration and participation and if you’re unable to meet the same you should not be bidding. Don’t think that you can change the conditions of that sale as set out ahead of the auction if it has not been agreed to upfront before the auction. Some people seem to think that when signing the paperwork after an auction they have the luxury to update that OTP and extend themselves some time extensions etc. which is not the case. You will be held liable and it will cost you money if you cannot perform in line with your inferred agreement signed by lifting your bidder’s paddle.  

13. Certification & Inspections

It is law for all transferring attorneys to be in possession of an COC (Certificate of Compliance) for electricity issued within the last 12 months before a property may be transferred to a new owner. Pretty soon I’m sure the same will be required for Plumbing and Gas installations as well. In some provinces, notably the Western Cape and KZN it is also required by law to have certain entomology inspections done, including a home inspection and termite inspection. If as a buyer you’re uncertain about anything make the inspection (and an acceptable result) a pre-condition of the sale. You may have to pay for the same yourself (being your requirement after all) but at least you can walk away from the deal if there is a latent defect OR negotiate a lower price based on the new information OR elect to have the seller fix it at his expense in order for the deal to go ahead. The same goes for structural inspections etc especially if they are not yet required by law. Be careful though… the sale should be subject to the result of the inspection not just the inspection. If it was just the inspection it doesn’t matter what the result is, the sale must go ahead regardless so once again… be specific. The rule of thumb is that the seller is typically responsible at least for the legally required inspections and compliancy but this is by no means set in stone. If you are aware of certain electrical problems for instance you can point them out to the seller and agree to have them fixed at your costs in exchange for a discount on the price offered. This could save you a few rand in transfer fees and duties as these are usually a percentage of the sale but you could also have a substantial saving if you have a contact that can affect the repair at a discounted rate being less than the discount negotiated on the sale.

14. Defects & Disclosure

In the OTP specify the known defects that has been disclosed by the seller and ensure that the agreement notes that such defects were the only defects disclosed by the seller. This could come in handy if the seller is later found to have deliberately not disclosed defects he/she knew about. In such a case the seller could in fact be held liable for the repair without having to resort to a he said she said conversation in court.

15. Ad Hoc Agreements

Many people seem to be complaining online about verbal agreements made during discussions around a property purchase that is not being honoured by either the buyer or the seller. It is always best to reduce these ad hoc agreements to writing as part of the OTP and if agreed only after the acceptance of the OTP to still draw up an addendum to the OTP and have it signed as well including the new conditions agreed upon. If it is not in writing it will result in a he-said, she-said scenario which can only be resolved at huge cost to the affected party. In most cases the cost of resolution is not worth taking the fight any further.

16. Section 118(3) Responsibility

A recent high court ruling found that municipalities may hold the homeowner indirectly responsible for section 118(3) debt on their books. In layman’s terms the Section 118(1) figures are those clearance figures normally obtained during the transfer process and needs to be paid in order for the transfer to be concluded. Section 118(3) relates to historic debt though as old as 30 years for rates, taxes, refuse and sewer and 3 years for utilities. The municipality can in principle collect these fees even if they were owed by the previous owner or multiple owners back against the property itself. This implies that even if the current owner was not responsible for the debt the municipality may try and attach and sell the property to which they accrued to recover the same. Seems odd doesn’t it??   Unfortunately until this decision is challenged in the constitutional court this will be the situation we find ourselves in. Municipal staff is also being put under political pressure to collect on these Section 118(3) debts which may not actually be practical. Since when however have the lack of practicality stopped our government from doing certain things?? This having been said it puts property ownership at risk for most of us as even if you did not accrue a debt you can still be held liable for it. How do we get around it? In short – we actually can’t circumvent it completely but we can mitigate our risk substantially. By adding a clause to the OTP that the seller agrees to settle all Section 118(3) debt prior to the transfer AND that the seller indemnifies the buyer against such debt the buyer is able to know that at least at the stage of transfer there was no 118(3) debt outstanding. The possibility still exist that the municipality can find a 20 year old calculation fault and suddenly the house might be in jeopardy again. It does however imply that should the house be taken away by the municipality (which lets face it is highly unlikely at this stage) the previous seller (if they are still traceable and alive) can be held liable for that loss.

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